The EU’s Confused Role in the “Chip War”
By Chris Miller, Associate Professor of International History at The Fletcher School
While the US and China battle for technological supremacy, the European Commission has been misunderstanding the nature of the struggle. Intervening in supply chains is the wrong approach.
In the accelerating “Chip War” for control over semiconductors, transatlantic cooperation might seem to play a minor role. Semiconductors provide the computing power needed for devices from datacenters to cars to advanced weapons systems. They are a key focus of competition in the world today: technological, commercial, and geopolitical. Every major power, from Tokyo to New Delhi, is focused on the chip industry in a manner unseen in decades. In this intensifying technological struggle, Europe is trying to find its role.
The United States, home to Silicon Valley, stands at the center of the world’s semiconductor industry. The US government has been using the power this position brings to ban Chinese firms like Huawei—and the entire country of Russia—from accessing certain types of chips. China is the rising competitor, still spending more money importing chips than it does oil, but pouring billions of dollars into its domestic semiconductor industry, with the aim of domesticating critical technology. Washington is pushing three allies in Asia—Japan, South Korea, and Taiwan—via the Chips 4 alliance to tighten cooperation and to limit China’s advances.
In this technological struggle, Europe appears to play a minor role. Yet though Europe makes up only 11 percent of market share across the semiconductor supply chain, it plays a vital, even dominant, role in certain crucial nodes. When it comes to designing chips, a Japanese-owned but British-based company called Arm has a critical position in chip design, producing the semiconductor architecture that undergirds nearly every smartphone processor, for example. Germany’s Siltronic is one of the major producers of the ultra-pure silicon wafers needed to make chips. And Siemens owns one of the three US-based firms that dominate the market for the specialized software needed to design chips.
Europe’s biggest role in the chip industry, though, is in the production of specialized chemicals and machine tools. The extreme precision needed to fabricate chips is only possible thanks to Europe’s expertise in ultra-accurate machinery. Austria’s EV Group has a near monopoly in the small but crucial subset of wafer bonding tools, for example, while Germany’s Bruker, SUSS MicroTech, and Vistech produce other machines needed to make chips. Similarly, the chemicals needed in chipmaking are often highly specialized and require extreme purity. Linde and BASF have substantial market share in the provision of chemicals for semiconductor manufacturing.
The best example of Europe’s hidden role in the semiconductor supply chain, however, is the Dutch company ASML, which is one of Europe’s biggest publicly-traded companies, but which few Europeans are aware of. ASML holds an absolute monopoly on the production of the most complicated and important tools needed to make advanced chips. The company’s Extreme Ultraviolet Lithography (EUV) tools shoot balls of tin only 25 microns (millionths of a meter) wide at a speed of 250 kilometers per hour through a chamber. These tin balls are pulverized 50,000 a second by a high-powered laser, creating an ultra-hot plasma, measuring several hundred thousand degrees, which emits ultraviolet light at the wavelength of 13.5 nanometers. This light is then directed via extraordinarily precise optics to create patterns on silicon wafers that are crucial to the process of fabricating chips. ASML has spent three decades bringing its EUV tools to market; each one costs around $150 million. None of the world’s leading chipmakers can produce semiconductors without them.
ASML, for its part, relies on a supply chain that stretches across Europe and the United States. For example, Germany’s Zeiss supplies the optical systems—including the flattest mirrors ever mass produced—without which EUV systems won’t work. Trumpf, the German precision tooling company, produces the high-powered laser that blasts the balls of tin inside each EUV system. The expertise of ASML and its key suppliers is so specialized and unique that they have a monopoly position in the chip industry.
In these crucial niches, European firms have irreplaceable capabilities. Because of this, Europe has an important role to play in shaping the future of the semiconductor supply chain—something that European political leaders are trying to do via instruments like the European Union’s Chips Act.
Flawed Diagnosis
However, there are serious flaws in EU leaders’ diagnosis of the problems in the semiconductor supply chain. As a result, the EU Chips Act targets non-existent problems with tools that might make things worse. When European leaders have explained the Chips Act, they have generally cited the need to secure supply of chips for European end users. European Commission President Ursula von der Leyen, for example, promised the EU Chips Act “will increase our resilience to future crises, by enabling us to anticipate and avoid supply chain disruptions.” Her vice president, EU Competition Commissioner Margrethe Vestager, declared that “we should not rely on one country or one company to ensure safety of supply.” And Thierry Breton, the commissioner responsible for the EU’s single market, has said that “securing the supply in the most advanced chips has become an economic and geopolitical priority. …We are putting everything in place to secure the entire supply chain.”
The EU’s focus on supply crises is understandable, given the severe hit to the world economy—and to European automakers in particular—from the 2020-2021 semiconductor shortage. However, it is important to understand the causes of the shortage. There was no reduction in the number of chips. Indeed, the number of semiconductors produced globally increased by 8 percent in 2020 and by 21 percent in 2021, according to research firm IC Insights. Supply shocks like COVID-19 lockdowns in Malaysia and natural disasters in Texas impacted semiconductor supply in certain segments, but the surprise of 2020 and 2021 was not reduced supply but surging demand.
What’s more, the outsized pain suffered by automakers was largely their own fault. Early in the pandemic, expecting a collapse in car sales, they slashed component orders, so semiconductor producers shifted capacity to other customers, whose demand for personal computers and datacenter chips was increasing as many people around the world shifted to working from home. Automakers, meanwhile, relied on a “just-in-time” sourcing model for chips, leaving them highly vulnerable to disruption. The fact that the automobile sector was hit hardest by the chip shortage has less to do with the semiconductor industry than the auto industry’s own decisions about how to acquire components.
Political leaders in Europe continue to talk about “digital sovereignty” and “supply chain security” as interlinked topics. However, there’s no evidence that cross-border supply chains contributed to the chip shortage. To the contrary, supply chains that stretch from Europe to the United States to Taiwan proved remarkably capable of responding to shortages. Key partners like Taiwan, South Korea, and the US avoided export limitations or other political efforts to control who received chips (in contrast, for example, to supplies of personal protective equipment in the early stages of the COVID-19 pandemic.) No amount of “digital sovereignty” could have prevented the chip shortage.
Nevertheless, the EU’s focus when it comes to semiconductor policy is on controlling the supply chain. The EU has proposed an “emergency toolbox” to allow the EU to respond to supply crises by non-market measures such as common EU purchasing or export controls. This toolbox is supposed to be informed by improved monitoring, aimed at giving EU decision makers an “early warning” system to prepare for shortages.
Yet as critics like Jan-Peter Kleinhans and Julia Hess of the Stiftung Neue Verantwortung have noted, this system is unlikely to work. Government officials are highly unlikely to develop expertise and information-gathering systems that can detect supply chain issues in advance of private firms whose business is at stake. Moreover, even if the early warning system were to work, the “toolbox” it is given, such as common purchasing and export controls, would disrupt semiconductor production, not assist it. If Europe were to ban the export of, for example, chips for automobiles, other countries that produce necessary chips, like Taiwan, Japan, and the US, might be pressured to take similar measures, intensifying the disruption. It is difficult to imagine a way that government officials could have foreseen or dealt with semiconductor production issues last year more efficiently than private firms.
Interventionist impulses like these make transatlantic cooperation harder than it otherwise needs to be. The EU-US Trade and Technology Council has embraced measures to “advance transparency and communication in the semiconductor supply chain.” However, compared to the US, the European Commission seems far more committed to developing policy tools giving it manual control over the supply chain. The US chip industry and its main customers will resist government intervention in supply chains, given that the existing ones have worked well, and that government “crisis management” is only likely to make problems worse.
What’s more, the EU’s semiconductor strategy has barely begun to grapple with the biggest risk hanging over the chip industry: that a Chinese blockade or attack on Taiwan cuts off access to leading edge logic chips, 90 percent of which are currently fabricated in Taiwan. The world’s reliance on Taiwan-made chips is even more dramatic than Germany’s dependence, until this year, on Russian gas. Yet the European Commission’s 131 page Staff Working Document on chips mentions this risk once, only obliquely, with the vague phrase that “geopolitical tensions are simmering.” No number of EU monitoring techniques can rescue semiconductor supply if Taiwan’s ability to produce or export chips is taken offline by a Chinese attack. Yet Europe is still struggling to speak about this risk, to say nothing about taking action to address it.
The irony of the digital sovereignty agenda is that it politicizes technology in precisely the wrong way. Threatening to meddle in supply chains creates problems, rather than solving them. Free trade and private competition in semiconductors between market economies has worked spectacularly well. The economic threat to the chip industry—in Europe, no less than elsewhere—is the enormous slew of Chinese government subsidies that are reshaping the industry and threatening the profitability of Western firms.
The biggest political threat to the chip industry, meanwhile, is a Chinese attack on Taiwan. Transatlantic cooperation on semiconductors is a valuable goal, and Europe’s control over key nodes in the supply chain gives it a powerful voice. But until Europe recognizes that the chip problem is fundamentally a China problem, its policies toward the industry may cause more problems than they solve.
This piece is republished from Internationale Politik Quarterly.