Countries across the world are competing to build domestic semiconductor prowess. With its Chips Act, Europe is no exception, says Stefan Gries, manager of the BlackRock Greater European fund.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The world’s semiconductor industry is in flux. Mounting geopolitical tensions across the world have highlighted the need for semiconductor independence. This has left governments scrambling to build semiconductor manufacturing capabilities and know-how. The Eurozone is no exception, with the European Parliament recently approving the all-important Chips Act, which aims to double the region’s semiconductor market share by 2030.1
To date, the semiconductor industry has been dominated by a handful of companies, mostly based in Asia. In particular, Taiwan has shown real dominance. It currently produces over 60% of the world’s semiconductors and over 90% of the most advanced ones.2 The majority are made by a single company. With Taiwan officially claimed by the Chinese, and China’s relationship with the West deteriorating, this reliance has looked increasingly precarious.
Semiconductors have become the oil on which much of the global economy turns. They are necessary for the growth of AI, for example, allowing the data storage and analysis that ‘trains’ machines to complete tasks normally requiring human intelligence. They power electric cars, smartphones and laptops, alongside everyday goods such as washing machines, microwaves and refrigerators. They are vital for day to day living, but also to drive the technology of the future.
Their importance to future economic growth, and their manufacturing concentration in the hands of a few companies in a limited number of countries, has prompted many governments across the world to build domestic semiconductor capability. In the US, this has come in the form of the CHIPS and Science Act, which provides significant subsidies to companies setting up semiconductor manufacturing in the US.3
The Chips Act, passed in late July, is the European equivalent. It was created to stimulate more than €43bn of public and private investment in the sector, similar to that invested in the US.4 This sounds like a big investment, but bearing in mind that a single ‘FAB’ – a manufacturing plant for semiconductors – can cost up to €20bn, the region also needs to encourage major global semiconductor companies to come and invest.
This is not the first time Europe has tried an initiative of this kind: it launched a similar initiative in 2013, but the sums involved were much smaller, and this time round Europe has a number of advantages. Although it only holds about 10% of European semiconductor manufacturing,5 it has built a well-established semiconductor ecosystem, which may prove just as important. For example, one of the industry’s main research and development hubs is at the Interuniversity Microelectronics Centre, based in Belgium.6
It is a European firm that is the sole global supplier of the lithographic equipment on which FABs depend to build advanced chips. There are other necessary links in the chain – silicon wafers, specialist chemicals providers – where Europe has established businesses. If it can build the requisite manufacturing plants, it may meet its goals to build market share.
Nevertheless, the region’s governments will also have to show a willingness to invest to encourage inward investment in semiconductor manufacturing. International chip manufacturers giants are only likely to consider building plants in the region if there are financial incentives in place. The world is trying to create semiconductor sovereignty and it is a competitive market.
We see a bright future for the semiconductor industry in the region and a strong pathway of potential growth, supported by the EU and individual company governments. To shore up future growth, they cannot afford to fall behind. We believe this will keep policymakers on their toes.
There are opportunities across the semiconductor ecosystem. To meet the demands of emerging AI technologies, semiconductor chips will have to become smarter and more powerful. A number of Europe’s Wafer Fab Equipment companies have a key role to play here. We hold a range of semiconductor opportunities within the Greater Europe portfolio as part of our objective of targeting long-term structural growth opportunities.
Sources:
1 GSMArena - EU approves Chips Act – 26/07/23
2 Economist - Taiwan’s chip industry – 06/03/23
3 Whitehouse - CHIPS Act – 09/08/23
4 Economist – 12/02/23
5 Economist – 12/02/23
6 Economist – 12/02/23
7 Economist – 12/02/23
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