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When the Chips are down - Europe acts to boost semiconductor capacity

According to Commission President von der Leyen, “[t]he European Chips Act will be a game changer for the global competitiveness of Europe's single market.” On 8 February 2022, the Commission presented a package of legislative and non-legislative measures to help Europe achieve a 20% global chips market share by 2030.  

The package presented this week stands in a long line of ambitious proposals from the European Commission (“Commission”) to address perceived dependencies on third countries, deficits in innovation at industrial level in the EU, and a lack of funding support that other world regions make available to investors.

In May 2021, the von der Leyen Commission presented its Industrial Strategy, one of the key objectives of which was the development of Europe’s strategic capacities in key sectors, such as semiconductors. After having identified a shortage, which disrupted the European supply chain ecosystem, Commission President von der Leyen announced the European Chips Act in her State of the Union address in September 2021.

The “Chips Act” package includes:

I.  a Communication, setting out the Commission’s strategy in more detail;

 II.  a proposal for a Regulation to establish a framework of measures for strengthening Europe's semiconductor ecosystem (“European Chips Act”), together with Annexes;

III.  a Recommendation to EU27 Member States setting out a toolbox for monitoring and addressing semiconductor shortages before the Chips Act enters into force; and

IV.  a Council Regulation, which will pool resources from the EU, Member States and third countries associated with the existing EU programmes, as well as the private sector (“Chips for Europe Initiative”)

This briefing explores the package in more detail, with specific regard to the State aid, foreign direct investment (“FDI”) and employment considerations, as well as gives an indication of next steps.

State aid

Funding wise, the strategic concept behind the proposed European Chips Act is that of matching government support available to the semiconductor industry overseas, notably in the US and in Asia, in the EU. This is not unprecedented in EU competition policy. We saw this previously with ship and civil aircraft building which was, however, unpopular under the WTO rules. With the European Chips Act, the EU Commission is committing to facilitating not only EU funding but more importantly Member States’ funding beyond what is currently available as R&D and investment support under the EU State aid rules (Articles 107, 108 TFEU). That said, in the chips markets, EU State aid policy does not start from scratch. One project, under the EU rules on Important Projects of Common European Interest (“IPCEI”), is already under way and another one is in the pipeline. What is new, however, is the focus on State aid for “first-of-a-kind” (European) facilities. As expressed in her speech, Commission Executive Vice President Margrethe Vestager, who is responsible for the competition portfolio, said, “[The facilities] require large investments that private investors cannot fund on their own […] Such facilities would not exist in Europe, if we do not do something. It is important for long-term European security of supply and competitiveness. And this means that it may be justified to cover up to 100% of a proven funding gap with public resources.” The Commission will also review such projects directly under Article 107(3)(c) TFEU, allowing it more flexibility than is normal practice under the published guidelines for State aid.

While this does sound like a game-changer in terms of approach, no-one should be in doubt that such screening by DG Competition will be stringent when it comes to ascertaining if the aid is targeted and proportionate and if indeed there is a funding gap. Indeed, during the press conference, Vestager emphasised “[o]nly what is needed, and nothing more.”

Foreign direct investment

At the same time as the European Chips Act proposes to unleash a tsunami of new funding to support and grow a strong European semiconductor industry, foreign investment in European companies in the semiconductor industry will remain subject to close scrutiny under the increasing number of new and strengthened foreign direct investment regimes across the EU. A number of recent deals involving targets active in the sector have been derailed following foreign investment/national security reviews including:

I.  the high-profile abandonment of Nvidia’s acquisition of Arm early this week citing “regulatory hurdles” (which included the first ever Phase 2 national security review in the UK);

II.  the planned takeover of Siltronic by Global Wafers of Taiwan which fell through following a protracted review by the German Ministry of Economic Affairs and Climate Protection; and

III.  the Italian government’s prohibition of the acquisition by a Chinese investor of a controlling stake in LPE in 2021.

The explanatory memorandum of the European Chips Act stresses that resilience and security of supply in the semiconductor sector is fundamental “economically, industrially and militarily”.  That reflects the rhetoric underlying the strengthening of European foreign investment regimes before and during the pandemic. Under the European Chips Act, national competent authorities will be required to map undertakings operating along the semiconductor supply chain in their national territory and the recitals state that “in determining whether a foreign direct investment is likely to affect security or public order, Member States and the Commission may consider its potential effects on critical technologies and dual use items […], including semiconductors. As part of the monitoring, Member States may specifically consider the availability and integrity of the services and goods of key market actors”. It can therefore be expected that foreign investment regimes will have an increasing role to play in supporting EU industrial policy objectives with the line between national security and promoting technological sovereignty becoming increasingly blurry.

Plugging the skills gap

The European Chips Act’s strategic objectives focus on the development of R&D, innovation and manufacturing capabilities in the EU but, at the same time, recognise the challenges that it implies in terms of skilled workforce. The proposal includes a number of generic suggestions to address this like increasing collaboration between industry and education and training providers and a higher participation of female workers. It also includes a number of more specific proposals, such as:

I.  the interplay with the Pact for Skills;

II.  the establishment of a European network of competence centres and skills development to support the strategic objectives of the proposal by raising awareness, provide knowhow, expertise and skills, facilitate the transfer of expertise between Member States and develop specific trainings to support the development of the talent pool of the EU.

The skill (gap) issue is not specific to this initiative and is something the Commission has been looking at for some time, as indeed huge re-skilling exercises are needed across all industries because of the digital transformation. Such re-skilling programmes give rise to a number of labour and employment issues, including information and consultation requirements with employee bodies and, of course, the issue of cost (who pays for the re-training and is training time working time?). Another potential labour and employment issue arising from the strategy is that organisations are likely to move production within Europe, leading to internal reorganisations which in turn will trigger information and consultation obligations for employers. Trade unions will want to have a say as with any transition.

Next steps at EU level

The European Chips Act is only a draft proposal which will now need to pass through the European legislative process. This means that the European Parliament on the one hand and the Council, representing the 27 Member States, on the other hand, will now scrutinise the proposal, and probably propose amendments.

The legislative process may take 12 – 18 months, but the European Chips Act is a clear political priority. Speaking in the European Parliament ahead of the publication of the package, French President Emmanuel Macron, who currently leads the Council’s rotating Presidency, said, “I am delighted that France is making strategic independence and supply chain resilience a priority of its Presidency. In an increasingly complex geopolitical world, where competition reaches new domains, we must forge our own destiny while promoting a long-term vision and favouring strategy over tactics.”

The Commission has also launched a targeted survey to “gather detailed information on current as well as future chip and wafer demand” and “better understand how the shortage of chips is affecting European industry.”