Chip Industry: Europe tries to Stay in the Race
But also — Fit for 55, MiCA Regulation
Hi! This is Monday, 24 April 2023, and here’s the EU news you need this week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and Linkedin.
The Briefing
On April 18, the Council and Parliament reached an agreement on the European Chips Act, which aims to double the EU's share of the global semiconductor market by 2030.
SHORTAGES • Semiconductors are essential to produce electronic chips contained in smartphones, computers, cars and other essential everyday items. After the start of the Covid-19 crisis, a shortage of semiconductors disrupted supply chains, bringing car production in Europe to a halt. This led the EU to realise its lack of strategic autonomy regarding this matter..
The bloc currently produces only 9% of semiconductors and depends heavily on Taiwan which provides 50% of global production. This situation has led the Commission to develop the European Chips Act, which it initially presented in February 2022.
PRESSURE • In March 2022, Intel announced a 17 billion euro investment to build a production site in Germany. Since then, rising energy prices and galloping inflation have acted as a game-changer, leading Intel to ask Berlin for additional subsidies. In response, the Parliament and the Council rushed to find an agreement on the European Chips Act in order to secure investments as soon as possible.
Recently, tensions between China and Taiwan have increased the sensitivity of Europeans to their strategic dependencies. The Taiwanese company TSMC — the world's largest manufacturer of semiconductors — has production sites in the United States and Japan, but not in Europe, which makes the old continent even more vulnerable to geopolitical disruptions on Taiwan's side. However, lithography machines produced by ASML in the Netherlands are essential to produce chips.
MEASURES • The proposed regulation includes a new framework for state aid directed towards semiconductor plants, EU funds earmarked for R&D and a crisis management system to anticipate supply shortages.
STATE AID • In total, the EU plans to harness 43 billion euros. It should be noted that this figure includes both public and private investment. On the public side, the majority of the funds will come from the Member States and a minority from the EU budget, i.e. 3.3 billion euros from the Horizon Europe and Digital Europe programs. By comparison, the construction of a single chip factory costs 15 to 20 billion dollars.
The regulation also provides for a relaxation of state aid law to facilitate subsidies for manufacturers wishing to invest in factories. In order for member states to offer subsidies to "mega-fab" projects, the facility will have to meet the criteria of a "unique" establishment that significantly advances Europe's public interest and technological capacity.
SUPPLY RISKS • In addition, the regulation provides for a crisis monitoring and response system to anticipate supply shortages and provide crisis response.
SUBSIDY WAR • It is not clear whether the provisions of the European Chips Act will be sufficient to achieve Europe's goals. China and the U.S. have already invested hundreds of billions of dollars to support their domestic industries and reduce their dependence on each other and on Taiwan and South Korea for the supply of the most advanced semiconductors.
The United States passed the CHIPS and Science Act in August 2022. The plan provides an estimated $280 billion in funding for domestic research and manufacturing, including $39 billion in chip manufacturing grants.
The effort may be starting to pay off in the U.S., with the Semiconductor Industry Association identifying more than 50 new semiconductor ecosystem projects in the country, with an upward trend, according to the FT — investment in chips as well as clean tech is twice as high as 2021, and 20 times as high as 2019.
In Europe, flagship projects include Intel, STMicroelectronics and GlobalFoundries, which have committed to building new facilities in Germany and France.
NEXT STEPS • The Council and European Parliament must now give final approval and formally adopt the tentative agreement reached last week.
In Case You Missed It
FIT FOR 55 • After two years of negotiations between the Parliament, the Council and the Commission, key measures in the "Fit for 55" legislative package were adopted by the Parliament on April 18. Before entering into force, they must still be formally approved by the Council.
The text includes 13 measures aimed at reducing the European Union's (EU) greenhouse gas (GHG) emissions by 55% by 2030 and achieving climate neutrality by 2050. The plenary vote focused on the following three measures:
The creation of the Carbon Border Adjustment Mechanism (CBAM). CBAM aims to impose a tax on imports of carbon-intensive products, to put them on an equal footing with products from the EU — which pay the cost of their emissions through the Emissions Trading Scheme (ETS). The EU wants to encourage non-EU countries to adopt more ambitious climate policies and avoid carbon leakage. This tool represents the first "carbon customs" initiative on a global scale.
The Emissions Trading Scheme (ETS). In addition to an increase in emission reduction targets for 2030, the ETS is evolving to make the CBAM compatible with WTO rules. Until now, European companies in sectors prone to unfair import competition and carbon leakage were allocated free emission permits under the EU ETS. The CBAM, which will put domestic products and imports on an equal footing, will therefore have to coincide with the phasing out of free permits in order to align with WTO rules. Emissions from the maritime sector have also been added to the ETS.
A European Social Climate Fund to support vulnerable households and micro-enterprises particularly affected by energy dependency, especially related to transport. This fund will be financed by the ETS to the tune of 65 billion euros, with an additional 25% covered by national resources (for a total estimated at 86.7 billion euros).
MiCA • On April 20, the European Parliament adopted MiCA (for Markets in Crypto-Assets) by a large majority. The MiCA regulation aimed to better regulate cryptocurrencies. Until now, crypto asset transfers escaped European financial services legislation. The MiCA regulation will notably contribute to the fight against money laundering and better protect consumers in this still nascent sector.
The MiCA and TFR (Transfer of Funds Regulation) regulations — which were adopted on the same day — "mark the end of the unregulated Wild West of crypto" according to Ernest Urtasun (Greens), co-rapporteur of the committee on crypto asset transfers. For the text's rapporteur Stefan Berger (EPP), MiCA will give "regulatory clarity that countries like the United States do not have" and consequently "a competitive advantage to the EU."
However, neither decentralized finance (DeFi) nor non-fungible tokens (NFT) are thus covered by MiCA, which led ECB President Christine Lagarde to already call for a "MiCA 2".
What we’ve been reading
With one year to go before the European elections, FT Magazine devotes a long portrait to Ursula von der Leyen, written by Sam Fleming. A must read!
Margrethe Vestager is also the subject of a very detailed article by Sam Stolton for Politico.
Sebastian Mack published a paper for the Jacques Delors Center (Berlin) on the role of banks in financing the ecological transition, and why the banking union is a prerequisite for a European climate policy.
This week’s newsletter is brought to you by Clément Albaret, Marwan Ben Moussa, Augustin Bourleaud and Maxence de La Rochère. See you next Monday!