Compliance is not enough to thwart cyber attacks

Compliance is not enough to thwart cyber attacks

By Michael Alexander and Thomas Kirschstein

The recently announced “European initiative on processors and semiconductor technologies” has bold aims to get the EU semiconductor industry back on its feet. But even with its promised EUR 145 billion of investment, it can’t do it alone. Here we examine the initiative itself, assess action areas and explain why we think the key to success lies in forming non-EU partnerships to enable knowledge transfer.

The European semiconductor industry needs non-European partnerships to ensure long-term competitiveness.
The European semiconductor industry needs non-European partnerships to ensure long-term competitiveness.

In December 2020, 19 European Union member states signed off the “European initiative on processors and semiconductor technologies” in a bid to re-establish the EU as a global powerhouse in the semiconductor industry. The joint declaration aims to enhance cooperation and increase investment in equipment and materials, design, and advanced manufacturing and packaging, pledging EUR 145 billion in support.

The move comes at a critical time. EU semiconductor producers have long been losing ground to rivals outside the bloc, with leading global players now able to produce smaller and more advanced chips. In addition, the European semiconductor industry’s CAPEX spending has stagnated at around 4% of total expenditure (Asia-Pacific: 63% in 2019). Action is needed, and not just through the initiative or increased CAPEX spending.

In this article, we consider three areas of action, and make a recommendation, that are key to the future success of the EU semiconductor industry. The first is how the industry can leverage one of its main strengths, namely its solid grounding in the manufacture/design of conventional industrial semiconductor products. The second is how the industry can maintain a critical mass, while the third examines how the EU’s new initiative can help to sustain this base. Lastly, we outline why we believe partnering with non-EU technology players is the key to success for EU semiconductor producers.

A strong base to build on

The EU has a solid base in the manufacture, design and research of established technology nodes, and this can be leveraged to rebuild its semiconductor industry. In manufacturing, 49% of all installed capacity is for nodes of ≥0.2 micrometers, the highest share in the world. This ensures a strong base to build on and availability of skilled labor for a manufacturing scale-up. Key production centers in the EU and European Free Trade Association (EFTA) include Austria, France, Germany, Italy, Ireland and the Netherlands, all of which are home to several leading manufacturers.

The EU and EFTA is also home to leading specialized application integrated device manufacturers, with highly competitive players in analog and microcontroller applications, in particular. This will be key to attracting talent.

Regarding research, the EU has a strong research footprint focused on small and medium batch sizes of 100mm and 200mm wafers. Key centers include Fraunhofer in Germany, IMEC in Belgium and CEA-Leti in France. They will play a key role in scaling up the EU R&D effort required to meet the goals of the EU’s initiative.

“The EU needs to re-establish itself as a global semiconductor powerhouse – Even with a funding of EUR 145 bn this goal can only be achieved if the project is realized together with non-EU technology partners.”
Portrait of Thomas Kirschstein
PRINCIPAL
Berlin Office, Central Europe

Why a critical mass is essential to survival

The initiative states that the EU needs a broader semiconductor base to ensure long-term competitiveness, and we agree. Logic and memory capability will be key for future competitiveness, but the EU currently lacks capability and scale in this area. Achieving critical mass will require two things: safeguarding industrial/automotive innovation , and safeguarding the semiconductor industry itself.

The latest breakthrough innovations heavily depend on semiconductors at current technology nodes (7 nanometers and 5 nanometers). This is particularly the case for the EU’s large and successful automotive and machinery sectors, where AI and autonomous driving applications are driving demand for semiconductors. With industry accounting for 24.6% of the eurozone’s GDP, the need to safeguard its survival is clear.

Currently, most 7nm and 5nm semiconductors are produced in Taiwan and South Korea. But reliance on these non-EU countries carries significant risk. Taiwan is highly prone to earthquakes, with a major seismic event every five years on average. In 1999, for example, a quake with a magnitude of 7.6 on the Richter scale led to a production loss of 20% of monthly output. The country is also caught up in a global trade dispute that could affect its ability to fulfill long-term delivery commitments. These risks need to be mitigated.

The need to safeguard the European industry is accelerated by the recent trend away from x86 processors to ARM-based processors. Infrastructure in the EU is geared towards production of x86-based chips, leaving it further exposed to reliance on non-EU players. This competency deficit is exacerbated by Britain’s departure from the bloc, as ARM is headquartered in the country. Significant skills and IP in central processor and system-on-a-chip architecture have been lost as a result.

How the EU’s semiconductor initiative can help

A key aim of the initiative is to allow EU semiconductor producers to regain competitiveness and catch up with global players.

EU semiconductor CAPEX has been at a low level – between 3% and 4% of total industry expenditure – since the 2009 bankruptcy of German chip-maker Qimonda and the recent move to fab-lite business models (outsourced manufacturing). Increasing this figure is key to improving the EU industry’s level of competitiveness, but commercial players alone do not have the resources to do so. To address this, the initiative pledges EUR 145 billion of state support.

The reason for state intervention is clear. In 2019, the top five global semiconductor CAPEX spenders, which are all based outside the EU, accounted for 69% of all semiconductor CAPEX. This is equivalent to USD 71.2 billion. Such consolidation and huge spending cannot be matched by individual EU players without state backing.

The success of the initiative will ultimately depend on implementation by signatory member states, but we are confident that a coordinated response can enable EU chipmakers to close the CAPEX gap.

Recommendation: Partner with non-EU technology players

To complement the investment support, we recommend that EU semiconductor producers partner with a non-EU technology player. Working together, partners can shorten technology development timelines and ensure better access to R&D resources.

In development, the typical timeline for moving from 14nm to 7nm nodes is three to five years. But in their current state, it is unrealistic that EU players will reach 7nm capability by 2023-2025 without partnerships. In addition, leading global producers are already working on 3nm and 2nm nodes. This threatens to leave EU players even further behind despite the promised investment.

The R&D gains of partnerships are equally beneficial. For example, leading suppliers are currently hiring huge numbers of highly qualified staff; TSMC announced plans in August 2020 to hire 8,000 engineers to work on 2nm technology. A partnership with a market leader would therefore provide quick access to top-level talent.

Such examples highlight that technology transfer from non-EU partners is just as important as financial support. Indeed, the EU’s EUR 145 billion investment package will be ineffective without such partnerships. But combined, the two prongs of financial support and productive partnerships with non-EU players will ensure that the EU semiconductor industry can re-establish itself as a global powerhouse and safeguard Europe’s industrial innovation .

European Chips Act: towards EU semiconductor autonomy

European Chips Act: towards EU semiconductor autonomy

BY Allen & Overy

The European Commission (the Commission) plans to adopt a European Chips Act (the Act) in 2022. The aim is for the European Union (EU) to double its market share in semiconductors (also referred to as chips or microchips) from 10% to at least 20% by 2030.

The Commission also intends for the EU to produce higher quality chips since the majority of advanced microchips are currently produced in Asia. The Commission is clear that the EU will need to coordinate its research, chip design, production capacity and industry cooperation to achieve this goal.

Chips are vital to a wide range of technological advances and digital transformations. There is currently a worldwide shortage of chips that is impacting on the supply of a variety of goods such as internet routers, gaming consoles and vehicles. Therefore the Commission is aiming to reduce the EU’s reliance on suppliers based in third countries. However, the Commission sees the Act more broadly as supporting the EU’s overall position in the race for global technological and industrial leadership.

The Act in outline

It is expected that the Act will cover three key areas:

  • designing a European Semiconductor Research Strategy to leverage Europe’s existing research partnership (the KDT Joint Undertaking) and the EU’s research capacity;
  • creating a collective plan to enhance European production capacity through monitoring the EU’s industrial supply chains, anticipating possible future disruptions, and ensuring the resilience of the EU’s entire supply chain. In particular, the Act is intended to support the development of fabrication plants – “mega fabs” – able to produce the most advanced (towards 2nm and below) and energy-efficient semiconductors in high volumes; and
  • forming a framework for international cooperation and partnership.

The European Chips Act will support the work of the Industrial Alliance for Processors and Semiconductor Technologies (the Alliance) which was formed in July 2021. The Alliance is intended to bring together industry, consumers, and research and technology organisations to identify issues and opportunities across the semiconductor industry. The Alliance will have two main lines of action: reinforcement of the EU’s electronics design ecosystem and establishment of the necessary manufacturing capacity.

Additionally, the Commission is exploring setting up a dedicated European Semiconductor Fund.

Next steps

It is clear that the Commission’s intention is to integrate and leverage national efforts at the EU Member State-level to avoid national public subsidies fragmenting the single market. This could create substantial opportunities for businesses active in the semiconductor industry as EU-level resources are brought to bear. The Act will sit alongside equivalent initiatives globally in countries such as the U.S. and China and continued efforts at the Member State-level. Indeed, on 20 December 2021, the German government announced that it will support investments of more than EUR 10 billion in the country’s microchip industry through 32 industry projects. We will be closely monitoring developments ahead of the Act being published in early 2022.