Semi-Conductors

Technology is a geopolitical issue which is at the core of the current debate about strategic autonomy in the EU.

Semiconductor chips are critical for economic productivity and innovation. These memory chips, processors, analogue integrated circuits (AICs) and application-specific integrated circuits (ASICs) and integrated circuits for machine learning are all vital for the contemporary software and circuitries which underpin key technologies from batteries to phones, from computers to 3D printing, from cars to drones and traffic management, from health diagnostic tools to robotics and AI and from financial services to renewable energy systems.

While the EU may well be a global leader in the regulation of technology, regulation cannot be equated with innovation or production and referees tend not to win games.

To achieve technological sovereignty, the EU will need to be able to effectively compete in the global semiconductor market. Yet, when the chips are down, it is clear that the EU is highly reliant on external suppliers for semiconductors and the critical raw materials needed to produce them like silicon, gallium and particularly germanium, the supply of which is classed as a high-risk by the EU.

However, a stable and secure semiconductor supply is essential if the EU is to achieve its strategic autonomy ambitions as well as realise the goals of the European Green Deal and Digital Transition. In this context, the EU has set itself the goal of doubling its share of global semiconductor chip market by 2030, to approximately 20%, in order to ensure a more resilient “security of supply” of critically important chips.

The pivotal economic role of semiconductors has placed them at the heart of international geopolitical tensions, particularly between China and the US. While the United States has long been a global leader in semiconductors, with 48% of global market share in 2020 and eight of the top 15 semiconductors firms, China is heavily reliant on semiconductor imports from the US and Taiwan to enable its technological development and imported approximately €300bn worth of semiconductor chips in 2020.

The situation has been further exacerbated by COVID-19 related supply disruptions and the splintering of supply chains between different designers, manufacturers, and suppliers. Both China, through its Made in China 2025 strategy, and the US have underlined the importance of developing their domestic semiconductor supply chains and manufacturing capacities, and the Trump and Biden Administrations have restricted strategically sensitive semiconductor-related exports to China. This has been further exacerbated by COVID-19 related supply disruptions and the splintering of supply chains between different designers, manufacturers, and suppliers.

This new global environment poses a challenge for the EU in terms of choosing between greater supply chain resilience for critical products and materials, ensuring EU technological sovereignty, and economic competitiveness. One of these three objectives will likely be negatively affected by attempts to achieve the other two.

Implications for Ireland

As the EU seeks to reduce its dependence on American and Asian suppliers, the EU’s goal of increasing EU production capacities for semiconductor chips could prove highly beneficial for Ireland which is a centre for high-tech manufacturing. This enormous EU ambition of increasing its domestic production capacities will however require significant capital investment, both private and public, to match the levels of state aid provided to firms in Japan, China, Korea, Taiwan and the USA in duplicating existing facilities. However, a promising example of public/private partnership was evidenced in the decision recently by the major US chip manufacturer, Intel to earmark US$7 billion to upgrade its facility in Ireland, to double its present capacity and develop more advanced 7nm (nanometre) chips in addition to 14nm chips for industrial and commercial applications.

Nonetheless, the outlook is not all positive. Timelines involved in establishing the EU as a significant manufacturing base are considerable and have raised concerns that the EU may not be able to catch up sufficiently to compete with existing manufacturing facilities elsewhere. Furthermore, chip manufacturing is the part of the semiconductor value-chain which has the lowest margins, the highest barriers to entry and the greatest need for state subsidies. Changes to EU state aid rules in order to protect and promote strategically sensitive industries could, therefore, negatively impact European competitiveness and have a detrimental impact on smaller economically open economies like Ireland, compared to larger Member States with greater fiscal resources.

The political implications of the semi-conductor debate become clear when technological supply chains (from raw materials to finished products) become existential and when global supply chains are weaponised. Strategic dependencies then become strategic vulnerabilities in an increasingly multipolar and competitive world. Furthermore, changes to the global rules-based international free-trade order to take greater account of interests and concerns beyond economic efficiency are moving towards a world of managed trade where regulation, restriction and resilience are the new watchwords.

Ireland may be able to benefit in the short-to-medium term from increased production of high-tech products like semiconductors in Europe, given its existing facilities, strong presence of technological firms and Ireland’s participation in a joint EU declaration on processors and semiconductors, but the risks posed to Ireland’s open liberal economic model of greater state aid, economic interventions and limits to global free trade may prove significant challenges. If the EU is to continue to position itself as a global leader in technological regulation, it must be able to assert its strategic autonomy and act alone when needed to protect its interests and promote its values free from foreign interference.