Clifford Chance

Introduction

In early February, the European Commission published the details of its proposed 'European Chips Act' (EU Chips Act). Following in the footsteps of the U.S. 'Chips for America Act' that, once funded by the U.S. Congress, would provide $52 billion in federal funding, the EU Chips Act is the EU's recognition that microchips are a strategic resource impacting not just the tech sector but all industrial supply chains. As the Commissioner for the Internal Market puts it 'without chips, no digital transition, no green transition, no technological leadership'. Microchip production has recently been under the spotlight as the combination of increased demand and global supply crunches has hit production and increased costs across sectors from automotive production to smartphones to healthcare devices.

Currently, more than 63% of the global supply of semiconductors are produced in Taiwan with 18% produced in South Korea.[1] Europe has gone from supplying 44% of the global microchip market in 1990 to just 9% in 2021 and this market share is continuing to decline.  The proposed EU Chips Act aims to reverse this trend by mobilising more than €43 billion of public and private investments with the goal of doubling the EU's share of microchip production to 20% by 2030.[2]

The EU Chips Act is also the next bold step in the EU's ambitious policy of 'digital sovereignty', reducing the bloc's dependence on imports from third countries, and is described by the European Commission President as 'a game changer for the global competitiveness of Europe's single market'.

The impact of the EU Chips Act will not be confined to European companies or investors. Although the proposal seeks to stimulate investment in European tech production, Europe will still rely upon inbound investment from U.S. and Asian companies[3] until local players have established the technological capabilities required to build the latest 'mega fab' production sites .[4] Intel has recently committed to 'catalysing' European microchip production by building several such mega fabs in Germany[5] worth up to €80 billion over the next decade[6] [7] and Taiwan's TSMC is reportedly considering a potential plant in Germany.[8]

What does the EU Chips Act mean for companies and investors in the Tech sector?

• Public-Private Partnerships. A key plank of the platform is the 'Chips for Europe Initiative' to pool resources from EU and third countries, along with expected private sector funding. This initiative will make €11 billion available for R&D and training for the semi-conductor ecosystem and to set-up a virtual platform dedicated to chips design and a network of competence centres to build a common culture on semiconductors. The 'Chips Joint Undertaking' public-private partnership  for R&D and innovation (formerly the KDT Joint Undertaking, launched in November 2021) will also partner with EU member states and industry associations to mobilise public as well as private investments.[9]

• A 'Chips Fund', EIB loans and other financing and grants for start-ups. The EU will set up a dedicated semiconductor equity financing facility under Invest EU, in cooperation with the European Investment Bank Group (EIB). Funding will be provided through venture capital funds to support scale-ups and SMEs investing in semiconductor and quantum technologies. The EIB will also increase debt financing across the semiconductor value chain. The Accelerator scheme run by the European Innovation Council will also provide grants and equity to support high-risk and innovative projects investing in the same cutting edge technologies.

• Fast-tracked chip production facilities. The EU proposes recognising two new types of production facilities (1) 'Open EU Foundries' to design and produce components for other industrial players and (2) 'Integrated Production Facilities' to design and serve their own market. Either type of facility must be focused on innovation ('first of a kind') and will benefit from fast-track permits for construction and operation, as well as priority access to IP and pilot lines deriving from the 'Chips for Europe Initiative'. As stated in the communications accompanying the EU Chips Act, the European Commission is aware that investments for these kinds of facilities may require support schemes from EU Member States: due to the importance of the investment in question, the European Commission is in principle open to allow State aid up to 100% of any proven funding gap.

• Quantum computing. Quantum technologies are given special attention in the 'Chips for Europe Initiative', with proposals to set up engineering capacities for quantum chips, e.g. in the form of design libraries for quantum chips, pilot lines, and testing and experimentation facilities. Also, as mentioned above, quantum start-ups or scale ups would be eligible for financing from the 'Chips Fund' and Accelerator. This is in addition to the €1 billion Europe has already planned to invest under the Quantum Technologies Flagship initiative.

• Stricter regulatory oversight and emergency measures. The proposed regulations will also monitor supply of microchips across the EU to anticipate issues with supply in advance to avoid bottlenecks and coordinate emergency responses. Measures under discussion include, centralised EU procurement on behalf of EU countries, asking EU suppliers to prioritise supply of chips in critical EU sectors and even tackling shortages by imposing potential export restrictions.

The EU Chips Act is an ambitious plan that will require significant public and private capital investments and could well re-shape the European market for chip production with flow-on effects across all sectors of Tech hardware and the digital economies. Companies and investors in the sector should follow these developments closely to take into account the newly available funding and other incentives as part of their investment planning.

References

[1] 2 charts show how much the world depends on Taiwan for semiconductors -CNBC https://www.cnbc.com/2021/03/16/2-charts-show-how-much-the-world-depends-on-taiwan-for-semiconductors.html

[2] Europe's Digital Decade: Commission sets the course towards a digitally empowered Europe by 2030 https://ec.europa.eu/commission/presscorner/detail/en/IP_21_983

[3] EU explores chipmaker alliance as alternative to foreign-funded megafab - sources - Reuters https://www.reuters.com/article/us-intel-europe-idCAKBN2CG1S5

[4] Europe wants to become a leader in chips. But it’s going to need help -CNBC  https://www.cnbc.com/2022/02/11/eu-chips-act-europe-will-need-help-from-us-asia-to-achieve-goals.html

[5] Intel picks Magdeburg in Germany for new European chip factory - Reuters https://www.reuters.com/technology/intel-picks-magdeburg-germany-new-european-chip-factory-2022-02-27/

[6] Intel CEO Keynotes at IAA Mobility - Intel  https://www.intel.com/content/www/us/en/newsroom/news/ceo-keynotes-iaa-mobility-livestream-replay.html#gs.s3wr4g

[7] Intel to Invest Up to $95 Billion in European Chip-Making Amid U.S. Expansion - The Wall Street Journal  https://www.wsj.com/articles/intel-plans-investment-of-up-to-95-billion-in-european-chip-making-amid-u-s-expansion-11631027400?mod=article_inline

[8] Taiwan chipmaker TSMC in talks with Germany about potential plant - Auotomotive News EU https://europe.autonews.com/suppliers/taiwan-chipmaker-tsmc-talks-germany-about-potential-plant

[9] KDT-JU  https://www.kdt-ju.europa.eu/what-we-do