Make Germany a European semiconductor and microprocessor hub

_ Yuri Kofner, economist, MIWI Institute. Munich, 5 October 2021.

Introduction and necessity

Semiconductors and microchips and the materials they are made of – silicon and rare earths (REE) – are of strategic importance to any digitizing industrial economy. Semiconductors are considered to be the trailblazers for the entire electronics value chain, which accounted for around 10 percent of global GDP in 2020. [1] In fact, semiconductors have been identified by the European Commission as one of the key enabling technology (KET) due to their immense productivity and growth potential (under the heading of micro and nanotechnology).

China, the USA and, later, the EU, are relying on special industrial policy programs (e.g. China 2025, CHIPS for America Act) to make their semiconductor and electronics industries less dependent on foreign supply shocks. [2]

Although the truly globalized nature of this market has resulted in significant technological advances and cost reductions, recent events such as the (temporarily ended) Sino-US trade war and post-Corona shipment bottlenecks have shown the industry’s vulnerability to supply shocks.

The German automotive and supplier industry in particular is sensitive to Chinese raw material supplies for semiconductor and wafer production. In 2020, China accounted for 69 percent of global silicon production and 56 percent of global rare earth (REE) production. Western countries made up only 13 and 22 percent, respectively. The United States shows that strategic technological sovereignty can be improved: Between 2012 and 2020, the US increased its share of global rare earth production from 0.7 to 15 percent, with the largest increase occurring during Donald Trump’s administration. [3]

But Germany and the EU are also increasingly losing their competitiveness in downstream semiconductor production and the associated business models. In 2020, Germany accounted for 7 percent of global discrete semiconductor production and only 2 percent of integrated circuits, while China has caught up with 27 and 25 percent respectively in recent years. [4] Semiconductor production has been increasingly relocated to Asia for decades, which now accounts for 70 percent of global wafer manufacturing capacity, while North America and Europe lagged behind with 13 and 6 percent respectively. [5]

Unfortunately, the same regional value-added structure does not apply to production, but also to research and development. In 2017, Japan was the research leader in this segment with 34 percent of patents in micro- and nanoelectronics. China and the US each accounted for 19 percent, and the EU generated only 15 percent of the patents in this area. [6]

The semiconductor industry is not only characterized by a considerable R&D intensity, but also by a high “capital” investment intensity and high fixed costs. The construction of a new wafer factory cost at least 10 billion euros. Here, too, CAPEX spending by the European semiconductor industry stagnated at around 4 percent of total spending in 2019, while it made up 63 percent in the Asia-Pacific region. [7]

The key German automotive and mechanical engineering industries with around 1,83 mln direct jobs are particularly affected by the global shortage of chips. [8] The situation of German car manufacturers and their suppliers cooled down correspondingly in September 2021. The corresponding ifo value fell from 53 points in July to 13 points. The automotive industry is the industry most affected by supply bottlenecks with preliminary products. [9]

According to estimates by the Kiel Institute, the supply bottlenecks are currently costing German industry around 5 percent of added value, which is around 1 percent of gross domestic product. Over the year, the losses for the German economy are expected to amount to around 25 billion euros. [10]

In order to make the German high-tech manufacturers, especially their automotive industry and medium-sized automotive suppliers, more independent of foreign chip deliveries and to (re) build a technologically competitive national and European semiconductor industry, the federal and state governments should work with the EU to develop a strategy and roadmap to make Germany an important value-added center for semiconductors and special microprocessors – from basic research to final production.

Basics and first steps

At the end of 2018, the European Commission approved for the first time a large, transnational cooperation project with synergies in the microelectronics and user industries (Important Project of Common European Interest on Microelectronics, IPCEI) – and for the first time up to the first commercial use.

In December 2020, 19 member states of the European Union signed the “European Initiative for Processors and Semiconductor Technologies” to restore a stronger semiconductor industry in the EU. The joint declaration aims to improve cooperation and increase capital investment by pledging EUR 145 billion in assistance. [11]

The EU has a good base in the manufacture, construction and research of established semiconductor elements that can be used to rebuild the Bavarian semiconductor industry. In European production, 49 percent of all installed capacities relate to elements ≥0.2 micrometers, the highest proportion worldwide. In terms of research, the EU has a strong research record focused on small and medium lot sizes of 100mm and 200mm wafers. The most important centers include Fraunhofer in Germany, IMEC in Belgium and CEA-Leti in France. [12]

As part of the above-mentioned EU initiative, the BMWi supports 18 companies in Germany in developing the latest electronic products. These include three companies based in Bavaria: SEMIKRON Elektronik GmbH & Co. KG, OSRAM Opto Semiconductors GmbH and Infineon Technologies AG. The aim is to increase the EU’s share of global chip production to 20 percent by 2030, which should result in a tripling or even quadrupling of production in Germany. [13]

A second state financing project with the participation of the BMWi to promote R&D and reshoring of microelectronics was initiated at the beginning of 2021. It has an EU-wide volume of 1.75 billion euros. [14]

An important aspect of the new reshoring industrial policy is to ensure the security of electronic devices against foreign cyber attacks and to prevent the double-use capacities of geopolitical competitors. In September 2021, the Ministry of Research presented two new funding programs with a volume of 45 million euros, with which “future-oriented special processors and development platforms” (ZusE) and “trustworthy” electronics are to be developed. [15]

It remains to be seen whether these measures will be sufficient to stimulate sufficient investment and relocation efforts to revitalize the German microelectronics industry. The German automotive supplier and high-tech group Bosch is building a semiconductor production facility in Dresden, [16] and only recently TSMC, the Taiwanese world market leader in chip production, announced that it is currently examining the conditions for building a wafer factory in Germany. [17]

According to a recent study for the European Parliament, European semiconductor companies, especially electronics suppliers to German automotive groups, have an initial competitive advantage in the field of end-user technologies “More than Moore” and discrete semiconductors. [18] The proposed German semiconductor strategy could build on this advantage.

Policy recommendations and potential package of measures

In order to (re) build a technologically competitive semiconductor and microprocessor industry in Germany, attractive location conditions must be guaranteed, which must include the following:

• A sufficient supply of well-trained workers;
• A leading education and research cluster;
• A good digital and transport infrastructure;
• Cheap raw materials and intermediate products;
• Low energy and electricity costs;
• A steadily growing and sufficient demand base;
• A comfortable and stimulating control system;
• Deregulation and freedom of bureaucracy;
• Preventing unfair competition from foreign actors, e.g. by enforcing high security standards and other non-tariff barriers.
• Planning security that these prerequisites will continue to exist in the future regardless of changes of government.

Based on the views of the neo-Keynesian US economist Prof. Dr. Mariana Mazzucato as an “entrepreneurial” and “market-building state”, [19] these prerequisites can be created both through a reshoring and nearshoring program as part of a targeted industrial policy and through a broader, horizontal, investment-oriented location policy.