Is Europe still in the semiconductor race?

The recently released Draghi report on the future of European competitiveness, proposes additional measures for the EU semiconductor sector. We believe there is indeed scope to strengthen the European semiconductor industry through these proposed measures.

Looking beyond Europe, it’s clear the EU’s intervention was timely. The US has seen success with its recent CHIPS Act and €52 billion in subsidies, while South Korea is providing $74 billion in tax incentives for semiconductor manufacturing. Taiwan, India and Japan, and more recently, the Middle East are also promoting local investments. Alongside these fiscal frameworks there’s a trade war raging, with the US pursuing aggressive trade policies against a country that arguably looms larger than any other: China. Through equity funds totalling $142 billion, the semiconductor powerhouse is attempting to build enough capacity to be self-sustaining, integrating all elements of the supply chain. It already significantly dominates the global supply of semiconductor raw materials like Gallium and Germanium, and holds a large, growing global market share in mature node logic semiconductors as well as in the Assembly, Test, and Packaging-segment.

So where does that leave Europe’s aim of representing 20% of global production capacity? Given that the leaders in this race have only extended their lead, Europe’s current share of 8% is likely to remain unchanged by 2030. Without the EU’s intervention, however, that share could have dropped significantly. Success, then, can be seen as keeping Europe in the game and staving off some of the competition coming from East Asia, which is crucial to ensuring European industries (such as the automotive or telecommunications technology sectors) have consistent access to cutting-edge microchips. It’s important to note that full independence from other regions will be impossible, as the semiconductor market relies on highly efficient global supply chains.

Can European countries innovate at the same rate as other countries?

The major leaps in AI we’ve witnessed over the last few years have both driven, and been driven by, advancements in semiconductor technology. AI innovation relies on smaller, more sophisticated chips, most of which tend to come from outside of Europe, by companies such as US-based tech leader Nvidia. Intel is an outlier in that respect, having developed (a now delayed) plan to building a fabrication plant (fabs) in Europe, in line with its goal to deliver five nodes in four years. Taiwan’s TSMC is also constructing a fab in Germany, but it will focus on semiconductors of 20 nanometres and above. Advanced chip production, under 10 nanometres, remains largely the domain of Taiwan and Korea, whose sizeable combined market share makes it harder for other regions to wrestle control.

That said, a report from the Semiconductor Industry Association (SIA) and Boston Consulting Group (BCG) predicts that this share will spread out after 2030. With TSMC’s investments in Arizona, the US could reach a 30% share, while Europe could move from 0% to 6%, assuming Intel’s plans for a leading-edge facility on the continent are realised. The disparity in these figures suggests Europe still has a lot of catching up to do.

This doesn’t mean the Europe is starved of innovation. For starters, the Netherlands-based ASML is a world leader in its semiconductor machinery, the UK’s Arm is a top provider of semiconductor architectures and Belgium’s IMEC is a research centre focused on pre-competitive research. In Germany, Infineon is developing chips used for power conversion, and European microchips are already found in AI servers, highlighting how global companies depend – and will continue to depend – on one another in the semiconductor value chain. It is worthwhile for Europe to stake its claim in this chain, as the design and manufacturing of chips, practices usually confined in the US and Asia, are where most value is generated.

Photonic integrated circuits are another promising technology. The photonic chips market is showing strong growth, with characteristics similar to the early semiconductor industry. Integrated photonics offer benefits in data, speed, power consumption, and cost, potentially solving major global challenges in high-growth markets. Dutch companies are among the leaders in this field.

But ultimately, Europe presents a challenging environment for ramping up chip design and manufacturing. In the Netherlands specifically, the business climate is under pressure due to government interventions. Other countries are willing to negotiate favourable fiscal incentives to attract the headquarters of companies like BESI, ASMI and ASML. Plus, it’s never been easy to match the size of New York’s stock exchange, as evidenced by Arm’s decision to list in the US. The US is already a major hub for start-ups and unicorns, whereas that level of innovation and investment is the exception rather than the rule in Europe. In recent years, however, Amsterdam has become Europe's Tech hub, attracting interest from numerous tech companies across the continent. While the right expertise exists in Europe, it is often confined to universities, making it challenging to translate academic potential into business. The battle for talent is also fierce, with the EU historically adopting a defensive strategy focused on retaining what it has.

Is supply matching demand?

Production of semiconductors used to be very cyclical. Because of increasing specialisation and consolidation in the sector the supply swings are less severe. This also holds for demand, as semiconductors now serve many more markets than at the start of the century. Generally speaking, semiconductor markets have become more mature. However, increasing global production through subsidies brings new risks, such as oversupply. We’ve seen previously with Chinese solar panels flooding the market, and the same could feasibly happen with low-end semiconductors.

Although sales in several subsegments of the industry have declined, it is positive that high semiconductor inventories have now been reduced. The largest cyclical challenges are currently in the DRAM memory market, though a recovery is expected in 2025. High Bandwidth Memory (HBM) DRAM, driven by the AI boom, has been very strong recently. The hyperfocus on AI and its strong performance overshadows weaker performance elsewhere in the industry. However, the lull is not expected to last long, with leading semiconductor manufacturers aiming to reach two-nanometre technology in the coming years. Across sectors like automotive and telecommunications technology, there’s an expectation that markets will recover in the next year and new chips will enable new products. While PC and smartphone sales typically rise with the launch of new product and fluctuate in line with GDP growth, the trend electric vehicles gaining a larger market share is expected to continue. Demand for chips in this sector will remain high, as each new generation of electric vehicles will require more chips, or increasingly advanced ones.

A similar story is unfolding across many different industries and products: as the tide of digitalisation and AI continues to rise, so does demand for semiconductors. While it’s difficult to predict which applications will generate significant revenue, new subsegments of the industry are constantly emerging, because of the increasing variety of semiconductor-dependent products and sectors.

So, what about Europe?

Amid growing geopolitical and economic tensions, the EU's intervention was a necessary step to keep Europe competitiveness aggressive trade policies and substantial investments by the US, Taiwan, South Korea, and China. Without the EU Chips Act, Europe’s global competitive edge would have dropped significantly, a concern highlighted in the Draghi report. The report offers further recommendations to competitively strengthen the European semiconductor industry.

An important objective of this report is de-risking Europe’s strategic dependencies and enhancing its current strengths in the semiconductor supply chain. Another focus is on supporting European semiconductor manufacturing equipment, such as lithography and deposition technology. The report also calls for an EU semiconductor budget to fund higher levels of semiconductor research investment and provide substantial incentives for local manufacturing and chip design in strategic segments. Proposals include a ‘fast-track’ IPCEI for semiconductor projects, with shorter approval times and co-financing from the EU budget. The report also advocates for European leadership in semiconductor manufacturing equipment and supports a policy of export controls at the EU level. Finally, it recommends stronger cooperation between EU member states and the private sector, particularly in training technically skilled talent.

The Chips Act and the Draghi report encourage in-house EU production and innovation, strengthening established EU industries. Europe should focus on innovative deployments in the automotive sector and future growth industries, such as the photonic chips market, and on supporting trends like the Internet of Things, the energy transition, and chiplet architectures. There is no energy transition without chip. They are a critical enabler of the kinds of clean technologies needed to decarbonise.

What is ING’s view?

The Draghi report offers a valuable refinement to the EU Chip Act. As previously argued, we agree that the EU should protect its local semiconductor industry at a time of geopolitical uncertainty and when other regions are providing significant subsidies. As the semiconductor industry is a vital industry, Europe must expand its strategic autonomy through the proposed measures. It is very promising that the report encourages faster decision-making and a larger budget for the semiconductor industry. The objectives set out in the report are realistic and within reach. However, it is disappointing that plans to bring cutting-edge (sub 2nm) manufacturing capabilities to Europe have been delayed. Such an investment is crucial to a fully-fledged European semiconductor industry and important for strategic autonomy. We encourage efforts to attracting leading manufacturers to establish such a fab in Europe by offering subsidies to supply local industries. Given the Europe’s strong R&D expertise and established position in semiconductor machinery, we believe there is potential for new companies to see the light in Europe with a promising future.