Comparison and experiences US vs. EU Chips Act

11 Lessons from the US Chips Act for the EU Chips Act

November 18th 2022

Summary

Both Chambers of US Congress passed the CHIPS and Science Act on July 29th, 2022 after months of negotiations, an act that focuses on incentives for semiconductor manufacturing and research funding. The European Commission published the proposal for an EU Chips Act on February 8th, 2022, which aims to strengthen the European semiconductor ecosystem. Global demand for chips will double by the end of the decade. Increasing geopolitical tensions mean that semiconductor manufacturing is becoming the subject of strategic interests of states worldwide. High government subsidies in Asia (China, Japan, South Korea, Singapore,...) and the US are a response to this and technological competition will be further intensified as a result. In Europe we must also find a suitable response to this too and cannot waste any time now

In this paper, we therefore directly compare the EU and US Chips Acts and derive experiences and recommendations for action for the German government and the EU Commission. We are particularly interested in the following questions: What lessons can be learned from the US Chips Act for the EU Chips Act? What development potential and obstacles for German industry do we see in the EU Chips Act compared to the US Chips Act? German industry identified the following 11 lessons:

Legend:

Great need for action on the EU Chips Act:

Medium action required for the EU Chips Act:

Minor action required for the EU Chips Act:

US Chips Act EU Chips Act

Funding

Provision of an additional 52.7 billion USD, a further 82.5 billion USD for research and development in technologies of the future

43 billion euros from partly already existing EU funding programmes

► Experience 1: Ensure provision of "fresh money"; establish a funding strategy

Tax incentives

Tax credits of 25 % for investments in semiconductor manufacturing facilities and equipment No tax incentives envisaged so far

► Experience 2: Establish tax incentives as a promotional tool

Partnership between government, research and industry

Founding of the USA Semiconductor Institute as a framework for exchange between government, industry and research.

EU Semiconductor Board with representatives from the EU Commission and the Member States

► Experience 3: Direct industry involvement in the EU Semiconductor Board

Design of the pilot lines

39 billion USD in financial support for the construction, expansion or modernisation of domestic semiconductor manufacturing facilities and equipment, no mention of pilot lines

Creating pilot lines for testing and validation, making the design platforms and pilot lines usable for SMEs, end-users and start-ups

► Experience 4: Adapt the design of the pilot lines to the needs of the industry

Skilled workers

200 million USD designated for the "CHIPS for America Workforce and Education Fund"; microelectronics workforce training

Establishment of competence centres and the involvement of end user SMEs

► Experience 5: Concretely initiate stronger action to combat the shortage of skilled workers

Broad spectrum of funding - 1st, 2nd, 3rd, 4th-of-a-kind

No restriction for the funding of 1st, 2nd, 3rd, 4th of a kind projects

Exclusive funding of first of a kind facilities

► Experience 6: Allow broader financial support for 2nd, 3rd, 4th of a kind

Promotion of the whole ecosystem Mature semiconductors

Designated budget of two billion dollars for "mature semiconductors"

No special financial support for "mature semiconductors" envisaged

► Experience 7: Ensure promotion of the entire semiconductor ecosystem

Intervention in the event of a crisis

US Defense Production Act: State intervention in the event of a national defense crisis

"Crisis stage”: Institutional intervention in the case of a hitherto undefined crisis in the semiconductor industry

► Experience 8: No institutional intervention due to an economic crisis in the semiconductor industry

Practicability of order commitments

In case of national defence: enforcement of the primacy of contracts and orders by the US President

In the event of an economic crisis: Order commitments for companies in the semiconductor industry

► Experience 9: Adapt order commitments to the production realities of the industry

Stabilisation of the supply chains

In case of defence: coordination of procurement within supply chains by the US President

Monitoring of supply chains, coordinated risk assessment, information obligations, optimisation of resource allocation

► Experience 10: Establish a new approach to supply chain stabilisation Create a clean division of tasks between the state and the economy

Relations with third countries - implementation of export licences

Condition for receiving subsidies: No expansion of semiconductor production in "countries of concern"

Export licences in the event of an economic crisis

► Experience 11: Do not create barriers towards third countries

Energy costs

Investments in existing facilities in Europe as well as incentives for new investments are essential for achieving the 20 % target. In addition to the above mentioned experiences, the location factors must also be included in the Commission's consideration. The most important location factors are skilled labour, social acceptance, capital, water, land and energy. Triggered by the war in Europe, there are strong barriers to relocation in Europe, especially in the area of energy. US electricity prices remain stable thanks to domestic energy production capacities. Japan, Taiwan and South Korea also have stable energy costs. Europe, and Germany in particular, will remain an energy importer in the long run. An exponential rise in energy costs, as has been the case in Europe in recent months, reduces the attractiveness of Europe as a location for investment by international standards. Energy affordability is essential. Consequently, tax relief, compensation payments or financial subsidies by the state must be provided for companies in the semiconductor sector so that Europe as a location remains competitive in international comparison.

First pillar: Establishment of a "Chips for Europe" programme

Funding

The most crucial difference between the EU Chips Act and the US Chips Act is funding. The US has comparable targets of 30% of global chip production to the EU, which has set itself 20%. However, the funds available for this differ considerably. In the US, $52.7 billion in additional new money is being made available for necessary investments. In contrast, the funding of 43 billion euros envisaged in the EU Chips Act comes largely from existing EU funding programmes, money from the member states (e.g. in the form of IPCEI II) and assumed investments on the part of companies Accordingly, no additional money is invested in the current draft. The deposit of the 43 billion euros is also not clearly identified, only the 3.3 billion euros from Horizon Europe and Digital Europe are clearly identified here in the EU budget. The US Chips and Science Act also provides an additional 82.5 billion USD in research funding for future technologies, including 20 billion USD for a new directorate at the National Science Foundation to focus on new technologies. Accordingly, the EU's 11 billion euro for the R&D pillar ("Chips for Europe Initiative"), allocated proportionally from the 43 billion euro, may not be sufficient to attract the entire R&D semiconductor ecosystem in competition with other countries

Experience 1: Ensure provision of "fresh" funds; establish a financing strategy

In order to be able to keep up with international competition, new additional money is needed for the financing of the EU Chips Act as well as a financing strategy for the subsidies of the member states envisaged in the second pillar. However, there is also the danger of costly subsidy races, especially if the location is not optimally chosen (lack of skilled workers, lack of raw materials, high energy costs). If the corresponding subsidy pots become too large for one company, this can lead to unfair competitive conditions, especially for SMEs and start ups.

Tax incentives

In the US Chips Act, unlike the EU Chips Act, investment and production incentives are provided through tax incentives. Investments in semiconductor manufacturing facilities and equipment in the US receive tax credits of 25%.

Experience 2: Establish tax incentives as a promotional tool

These targeted tax incentives would also be desirable in the European states so that Europe remains attractive and competitive as a location, especially in view of the exponentially rising energy prices in Europe compared to non European states.

Partnership between government, research and industry

The US Chips Act defines the creation of the USA Semiconductor Institute, which provides the framework for a partnership between government, industry, universities and research institutions. The goal of this partnership is to research the virtualisation of semiconductor machines, develop Assembly, Testing, and Packaging capabilities and design and disseminate training. The EU Chips Act mentions the European Semiconductor Expert Group, or the EU Semiconductor Board, which is to pool information from the Member States on crisis situations and also takes care of the selection and evaluation of first of a kind facilities

Experience 3: Direct industry involvement in the EU Semiconductor Board

We call for the inclusion of research institutions, universities and companies from the semiconductor industry, the end user industries as well as supplier industries in the EU Semiconductor Board. The creation of a framework like the US Chips Act for an active and regular exchange between government members, industry and research is urgently needed to align the design capabilities, pilot lines and subsidies with the needs of the semiconductor industry

Design of the pilot lines

The US Chips Act is intended to finance the construction, expansion and modernisation of domestic facilities and equipment for semiconductor manufacturing, assembly, testing, advanced packaging and research and development with a budget of 39 billion US dollars The US Chips Act does not explicitly mention pilot lines as the EU Chips Act does. We welcome the special funding of pilot lines through "Chips for Europe", but point out that the needs of the German and European customer industries must already be taken into account in the design of the pilot lines

Experience 4: Adapt the design of the pilot lines to the needs of the industry

The pilot lines should strengthen the innovative power of the industry and the investments in the pilot lines should also have an effective benefit for industry. We therefore demand that the industry must be responsible for the design of the pilot facilities in the first instance, in order to have the scaling and the special features of industrial production in mind from the outset and to avoid that costly pilot facilities for design and production miss the needs of the semiconductor industry. This also applies to first of a kind facilities Today, 67% of the European industry needs semiconductors larger than 90nm, the demand for the size from 22nm to 65nm is 21%, that between 22nm and 7nm is 7% and semiconductors smaller than 7nm are needed in 5%. The extensive and increasing digitalisation of the economy and society will also strongly drive the need for smaller node sizes. In addition, the increasing use of artificial intelligence, high performance computers and advances in the development of quantum technologies will increase the demand for specialised chips for these key technologies. Funding measures for research and development should be orientated on these needs of the industry

Skilled workers

Under the US Chips Act, USD 200 million is designated for the " CHIPS for America Workforce and Education Fund ". This funding is intended to address the ever increasing shortage of skilled workers in the semiconductor industry. Furthermore, the US Chips Act allocates 13 billion euro for STEM education to create a workforce in key fields, which includes the establishment of a national network for microelectronics education. We welcome that the EU Chips Act designates the development of centres of excellence and the involvement of end user SMEs

Experience 5: Concretely initiate stronger action to combat the shortage of skilled workers

However, a clear funding framework and budget similar to the US Chips Act for training of skilled workers is urgently needed. German industry is calling for greater consideration of the shortage of skilled workers up to doctoral level in chip design and production, as well as training needs. Without the necessary skilled workers, the German and European semiconductor industry is not fit for the future. The training of skilled workers should also be oriented towards the needs of the industry. A stronger fight against the shortage of skilled workers is urgently needed. Currently, German companies alone are facing an enormous shortage of skilled workers, amounting to about 276,000 STEM experts of which about 96,000 are IT specialists.

Second pillar: Ensuring security of supply

Broad spectrum of funding - 1st, 2nd, 3rd, 4th-of-a-kind

Unlike the EU Chips Act, which promotes state aid for "first of a kind facilities" projects, there are no such restrictions in the US Chips Act. The US Chips Act is generally more about subsidising the construction, modernisation and expansion of fabs.

Experience 6: Allow broader financial support for 2nd, 3rd, 4th-of-a-kind

We very much welcome the funding of "first of a kind facilities" projects as a means for more innovation. However, it would make sense for European industry to also promote "2nd, 3rd and 4th of a kind" in Europe. Otherwise, further investments in this area will have to be financed exclusively by the companies, which will make Europe less attractive and less competitive in international comparison.

Promotion of the whole ecosystem - Mature semiconductors

In contrast to the US Chips Act, the EU Chips Act does not contain any concrete proposals regarding "mature semiconductors". Europe's market share in the assembly, testing and packaging of semiconductor devices (ATP capacities) is 5%. With regard to the desired increase in supply chain independence, the US Chips Act provides for an earmarked budget of USD 2 billion for mature semiconductors

Experience 7: Ensure promotion of the entire semiconductor ecosystem

Subsidies and incentives along the entire value chain would also be desirable in the EU Chips Act. Too much subsidisation of a few technologies could lead to market inefficiencies. It is important to include the promotion of front and back end processes. This includes advanced assembly, testing and inspection. In view of the EU's aim to become more independent in the semiconductor industry, it would be beneficial to promote the entire ecosystem.

Third pillar: Preparation and monitoring

Intervention in the event of a crisis: defence case economic crisis

In the EU Chips Act, a "crisis stage" is anchored in the third pillar, after which special measures are to take effect, which include export licences for crisis relevant products and order obligations. The European Commission wants to create a crisis instrument which, according to the EU Commission, is oriented towards the US Defense Production Act (DPA). There is no such defined crisis situation in the US Chips Act. The basis of government intervention in the semiconductor industry in the areas of data transmission, order commitments and procurement coordination are based in the USA on the need for national defence. The rationale of the DPA is the continuity of national defence, public health, critical infrastructure protection and national security. Intervention by the European Commission would be based on an economic semiconductor crisis and not on a defence strategy.

Experience 8: No institutional intervention due to an economic crisis in the semiconductor industry

We demand that the EU Chips Act creates framework conditions for innovation and investment. We are very critical of direct market intervention by the European Union in the event of a crisis. The European semiconductor industry calls on policy makers to take into account that the introduction of far reaching market intervention to deal with an economic crisis, which is not even legally defined in the EU Chip Act or in other EU legislation, is disproportionate. We do not see the need for political intervention in economic crises, because due to the lack of detailed know how regarding supply chains at the political level, this would not offer any perspective added value for companies. We see the establishment of a "crisis stage" for the semiconductor industry, which concerns the defence of European states or general health, as a possible step. A corresponding adjustment of the crisis definition is a necessary condition in this context.

Practicability of order commitments

In the US, the Defense Production Act stipulates that in order to promote national defence, the US President can enforce the priority of contracts and orders. However, he has no legal authority to control contracts in the civilian market, whereas this is provided for in the EU Chips Act. If a

crisis

situation is declared in the EU, special measures take effect, including contract obligations. Failure to comply with the special measures may result in fines.

Experience 9: Adapt order commitments to the production realities of the industry

We demand that the European Commission takes into account the production realities of the European semiconductor industry. Semiconductors are products specialised for a specific end user application. It is technically impossible to quickly switch production to reprioritised technology nodes and structure sizes in a short period of time in the event of a crisis, so a quick crisis response with order commitments is not feasible for example, it takes three to five years from concept to finished chip. In addition, failure to comply with supply contracts will result in penalties for the companies. It is imperative that the EU Commission should it, together with the European Council and the European Parliament, adhere to the introduction of the crisis stage ensure that companies that are obliged to re prioritise production capacities due to requirements of the European legislator are exempted from penalty payments or that these are covered by public funds.

In the case of a company's participation in crisis management, they receive compensation payments in the USA, a measure that would also be desirable for European companies. State mandated order obligations will not only hardly be feasible for the European semiconductor industry in the event of a crisis, but will also worsen the attractiveness of the European location. For European industry to become even more resilient in the future, production capacities and technologies should be orientated on the needs of European industry in the long term.

Stabilisation of the supply chains

In the area of supply chains, too, the US president can only coordinate procurement and arrange for the transfer of data from companies in the event of defence. The EU Chips Act describes the need for continuous monitoring in order to better anticipate and quickly respond to possible shortages of semiconductors. Such cooperation between Member States and the European Commission would also optimise the allocation of resources, according to the EU Chips Act.

Experience 10: Establish a new approach to supply chain stabilisation - Create a clean division of tasks between the state and the economy

Since supply chains in the semiconductor industry are very complex and contain products specialised to a structural size, it should not be state procurement structures but companies that coordinate supply chains in the event of a crisis. Rather, in the event of a crisis, the European legislator and member states should ensure that a platform of dialogue between all stakeholders is established. The monitoring of supply chains in the EU should include a network of manufacturers, but above all also of user industries and suppliers. The stability of supply chains should remain the responsibility of companies. We recommend that the entire semiconductor ecosystem is to be made responsible for restructuring and thus stabilising supply chains sector specific strategy boards could be a first starting point. We also recommend that the European Commission provides financial incentives for companies to build up strategic contingency reserves and storage capacity, making them less vulnerable to supply chain problems. If the European Commission does conduct a request for information in the semiconductor industry in times of crisis, the scope and purpose of the request must be defined. In addition, the European Commission should have to prove that no adequate and authoritative data is available from any other source.

Relations with third countries, implementation of export licences

The US Chips Act defines that conditions are attached to the receipt of subsidies. In the event of non compliance with the conditions attached, the companies are obliged to repay the subsidies received. In contrast to the EU Chips Act, the recipients of the subsidies or tax credits must therefore agree not to expand semiconductor production in China or other "countries of concern". This could discourage new investment in the US. In the EU Chips Act, such obligations or performance indicators of the companies are not linked to the receipt of funding

Experience 11: Do not create barriers towards third countries

As the world's largest sales market for semiconductors, China represents an important trading partner for the European semiconductor industry due to its largest electronics production. Furthermore, in view of the complexity and internationality of the supply chains, one should refrain from making similar systematic differentiations of third countries from the European side in order not to build up barriers and to worsen the situation of the supply and value chains. We are therefore very critical of the proposed export licences in the EU Chips Act. German industry welcomes the establishment of international semiconductor partnerships with like minded countries envisaged in the EU Chips Act to strengthen the European semiconductor ecosystem. International cooperation and the creation of mutual dependencies along the semiconductor value chain are essential for the semiconductor industry.

Imprint

Federation of German Industries (BDI) Breite Straße 29, 10178 Berlin, Germany www.bdi.eu T: +49 30 2028 0

Lobby register number : R000534

Editorial

Dr. Sophia Helmrich Senior Manager Digitalisation and Innovation T: +49 30 2028 1402 s.helmrich@bdi.eu

Anna Luise Schütz Intern Digitalisation and Innovation T: +49 30 2028 1762 a.schuetz@bdi.eu

BDI number of documents: D 1679