EU's Semiconductor Dilemma: Strategies for Unified Action in the Chip Industry

The European Union is gearing up for a new chapter in its semiconductor strategy, with a focus on bolstering European competitiveness and ensuring strategic autonomy. This shift is marked by the launch of the Semiconductor Coalition, a group of nine EU member states, including Germany and France, aiming to strengthen Europe's position in the global semiconductor industry.

The Semiconductor Coalition, unveiled in March, has set its sights on several key objectives. These include enhancing Europe's competitiveness in microelectronics, fostering innovation in cutting-edge technologies like AI and quantum tech, and securing independence in critical technologies and energy infrastructure for the semiconductor industry.

However, the EU's semiconductor sector faces challenges. The European Commission's mapping of the sector lacks the necessary detail to guide policy due to limited resources. Moreover, financing remains fragmented, with only €3.3bn of the €100bn announced since the Chips Act proposal expected to come from the EU budget. Member states are expected to shoulder the bulk of the funding.

Industry groups within the EU have criticised the 2023 Chips Act for excessive red tape and a focus on manufacturing that neglects other types of companies along the supply chain. However, the Semiconductor Coalition aims to address this issue by highlighting the synergies between semiconductors and the defense sector, making a budget allocation even more relevant and palatable as member states increase their defense spending.

One of the key players in the EU's semiconductor sector is Dutch company ASML, which holds a monopoly on the production of extreme ultraviolet lithography machines necessary to print microchips. German firm Zeiss also plays a crucial role, making optical systems without which ASML's machines could not be produced.

Japan, another major player in the semiconductor industry, refers to these chips as "the rice of industry". Europe cannot afford to rely on defensive, aspirational strategies and should make strategic indispensability the base of its new industrial recipe to ensure it is at the semiconductor table and not on either Washington's or Beijing's menu.

In this regard, Japan is implementing an economic security strategy based on maintaining, boosting, and obtaining strategic indispensability to resist economic coercion. An example of this can be seen in the Japan Investment Corporation's purchase and delisting of JSR Corp, the world's largest photoresist maker, in 2024 to ensure this indispensable company remained in Japanese hands.

The EU's court of auditors has warned that the target in the bloc's 2023 Chips Act to double its share in the world's semiconductor supply is "essentially aspirational". However, the Semiconductor Coalition's focus on building strong public-private partnerships can help Brussels overcome the hurdle of limited policy insight.

The European Commission plans to streamline existing financing for critical technologies under its Competitiveness Fund in the next budget. This move is crucial for the bloc to focus on the cards it holds in the semiconductor game. The Semiconductor Coalition's composition of the biggest EU member states gives it the sway to help shape the bloc's next seven-year budget negotiations.

Meanwhile, the Biden-era US Chips and Science Act aims to accelerate the growth of America's domestic semiconductor industry. This development underscores the need for Europe to step up its game in the global semiconductor race.

In the past, the EU has faced challenges in this area. For instance, Donald Trump initially excluded chips from his 10% import tariff hikes, but later announced plans to investigate the electronics supply chain.

As the Semiconductor Coalition works towards its goals, it is clear that Europe cannot afford to be left behind in the global race for semiconductor dominance. The EU must focus on strategic indispensability to ensure it maintains a seat at the semiconductor table and secures its technological sovereignty and supply chain resilience.