Chip scare sends Brussels back to the drawing board

BRUSSELS — The EU is scrambling to redo its homework on building a secure supply of microchips after it was forced to accept it has made little progress on tackling its dependence on the U.S. and China.

The EU recently dodged a bullet for the second time this year when a weeks-long disruption fueled by trade tensions between the U.S. and China saw European carmakers warn in October that their assembly lines could grind to a halt.

That left the bloc reckoning with the reality that its first EU chipmaking plan — launched in 2022 to huge political fanfare in the wake of pandemic supply-chain disruptions — has had little impact on the bloc’s exposure to foreign production.

The European Commission announced it would accelerate a planned review of its chipmaking efforts, with a new proposal expected by the first quarter of 2026.

The latest crisis centered on Dutch-based, Chinese-owned chipmaker Nexperia — a key supplier to European carmakers. In late September, the Dutch government seized control of Nexperia due to concerns that its technology was being leaked to China. The U.S. and China imposed export controls on the company.

With chips essential for everything from electric cars to artificial intelligence, both the U.S. and China showed a willingness to weaponize microchip supply chains to gain an advantage in the development of new technologies.

Industry insiders say it was a reality check for Brussels.

The EU’s first chipmaking effort was “like a band-aid” and now the patient — the bloc’s microchip economy — needs a “full, general operation,” said Alison James, a senior director at the Global Electronics Association, which represents the electronics industry globally.

Among the criticisms are that the EU failed to properly address geopolitical realities in its 2022 plan, and that it also targeted the wrong type of chips, dazzled by hype about the most advanced microchips. Most industries function on basic microchips, with each car produced in Europe needing hundreds of these.

What went wrong?

The bloc’s first chipmaking plan had a clear goal: It wanted to boost the region’s market share, which had been in decline for decades, to 20 percent of the global industry by 2030.

In reality, it has hardly moved the needle from the 9 percent share it held three years ago.

The plan, in the form of a Chips Act, introduced the possibility of designating some factories as “first-of-a-kind” if they introduced new technology to the bloc, with manufacturers to be offered extra encouragement such as more flexibility on permitting and subsidies.

Much of the political headspace went into efforts to convince leading manufacturers, such as U.S.-based Intel and Taiwanese TSMC, to build factories for high-end chips in Europe.

Initially, Intel pledged €30 billion for a factory in the east of Germany, but canceled the plans after landing in financial trouble. TSMC is building a factory in Germany, but on a much smaller scale than its projects in the U.S.

In parallel, Europe’s remaining chip assets have become further entangled in a geopolitical tit-for-tat.

The U.S. piled pressure on the Dutch government to block exports to China from Dutch company ASML, the world’s leading manufacturer of high-end chipmaking machines.

In the final week of the Biden administration this past January, the U.S. restricted the supply of AI chips to certain EU countries. That led to calls from both EU countries and European Parliament lawmakers for a second go-around at a chipmaking strategy.

“This new chips proposal should feature a long-term strategy rooted in current geopolitical realities,” read a March letter sent by dozens of lawmakers.

Boring is fine

The Nexperia case served as an example of how the chips war is now being fought through export controls and national security tools, which aren’t yet part of Brussels’ repertoire.

It also reinforced the importance of “boring” chips after a year-long craze about AI chips, which are built to handle tasks such as machine learning and language processing.

Yet in announcing plans for the second effort, the EU’s tech sovereignty commissioner Henna Virkkunen said: “We are now preparing Chips Act 2, to make sure that Europe will be able to design and manufacture AI chips.” She later hinted it might also focus on stockpiling.

Experts argue Brussels needs to examine the entire chip industry, rather than focusing on providing billions of subsidies for factories that produce advanced AI chips.

“Up until a few weeks ago, the conversation on chips was really driven by advanced chips, AI chips,” said Chiara Malaponti, the geoeconomics program coordinator at the European Council on Foreign Relations.

“But then you also have the case of Nexperia, which isn’t really about that, but about mature semiconductors,” she argued. “You saw the consequences of the events of past weeks, and how they had a huge impact on our industry.”

Malaponti advocated for a comprehensive mapping exercise as part of Brussels’ second effort.

“[The first chips act] put an emphasis on manufacturing, which is cool, of course, but there are also other parts of the supply chain,” she said, adding that it will be important to understand Europe’s strengths.

“How we can cultivate those niches and how we leverage them is something that needs to be discussed as well,” said Malaponti.

The industry is also a proponent of examining the full chain of production from beginning to end, rather than just focusing on the front-end manufacturing.

“The chain is only as strong as the weakest link,” said James. “You’ve seen the chokepoints. There are many other chokepoints in the back-end of the electronics supply chain.”