European Semiconductors - Quo Vadis?

Last week global chipset industry witnessed two events of symbolic importance.

Gordon Moore, one of the fathers of the semiconductor industry, died on March 24, 2023, at 94. His death might have ended an era of globalization in digital sectors.

Moore's Law, a widely known concept stating that the number of transistors on a chip—in other words, computing power—doubles roughly every two years, was named after Intel's co-founder. Today semiconductors are plugged into anything and everything, from consumer electronic devices to space rockets, from manufacturing robots to smartphones. Russia buys refrigerators and washing machines in Turkey to harvest semiconductors from them and repurpose these to feed ongoing military aggression against Ukraine. China spends more money today on importing chipsets than oil. The country encourages domestic R&D to escape dependence on US semiconductor capabilities. Mentioning China and Russia in the same paragraph on semiconductors appears premature, as Russia does not play any role in the global race of chipsets. The war in Ukraine might, however, increase the sense of urgency in Europe to aggressively address their technology sensitivities.

On March 10, 2023, Riyadh and Tehran decided to normalize relations. China brokered the deal and enabled representatives of the two countries to meet in Beijing and discuss the matter. More than getting Iran under its wing was needed. Russia followed suit. On March 20, President Xi Jinping met Vladimir Putin at the Kremlin.

Formally, China did not commit anything to Putin. Xi Jinping, however, ensured his conviction in Putin's electability in 2024 as if the matter was settled between an almighty sovereign and a vassal centuries ago when the people's voice didn't matter.

This week US politicians consider the consequences of a rising cluster of evil, with China in the center, and Iran, Russia, and North Korea under its wings. Ukraine might count on further military support. There might be other animosities against Iran and straitening of industrial policy against Chinese companies. We witness a reset of the global economy and rebalance of competitive powers.

Bits and bytes decide more about the competitive positioning of nations and regions than thousands of troupes. Europe sits at a crossroads. Xi Jinping's visit should force European leaders to review their technology roadmaps and competitive capabilities. There needs to be more than the current economic situation to guide them in the decision process. I expect a discussion around values and principles as prominent as a review of technology and supply chain risks and how to address them.

In the following years, we will witness the de-globalization of chipsets fabs and design capacities. Unfortunately, the cold war over hot tech won't benefit consumers and businesses. It will escalate costs.

What does it mean for the European semiconductor agenda?

Decreasing dependencies from Asia:

Today, Europe does not make advanced semiconductors. Local players Infineon, NXP, and STMicroelectronics supply transistors with designs measuring 180 nanometres (billions of a meter), which are generations behind best-in-class like TSMC and Samsung.?

The continent is still suffering from Chip shortages caused by the Covid-19 pandemic. For example, the European car industry lost 100 bn in 2021 and 2022 due to escalating costs, according to Allianz (Source:?https://www.allianz.com/en/economic_research/publications/specials_fmo/Europe-automotives.html ).

The war in Ukraine shows that using force on battlefields is still on the menu. European policymakers and corporate boards should be clear on what would happen if Taiwan's semiconductor supply chain was damaged or destroyed.?

TSMC makes 90 percent of chips smaller than 10 nanometers, which is essential for developing artificial intelligence, quantum computing, and high-speed wireless communications. In this context, encouraging TSMC to move some parts of its R&D and production to Europe doesn't sound like a crazy idea. This will be challenging, as Europeans must coordinate with and compete against the US, which considers the same idea.

Europe has already discussed additional funding for moving more fabs into its borders.?

The newly unveiled Chips Act (February 2023) should attract $49 bn of public and private investments to enable 20 percent of the global market by 2030 (source: ec.europe.eu). $30 bn should go into building fabs.

Further limiting China's access to sensitive technologies:

European companies deliver manufacturing equipment enabling global chipset production. For example, ASML, a Dutch company valued at $248 billion, is the sole supplier of lithographic equipment for the most advanced processors. Other players in delivering components for fabs are Zeiss SMT (making lenses for lithography machines), Siltronic AG (for manufacturing silicon wafers onto which chips are etched), and Aixtron (focused on gear to deposit chemicals onto those wafers to make circuits).?

In January 2023, the Netherlands restricted advanced microchip manufacturing equipment sales to China. The move came after substantial pressure from the US government. I would be surprised if further – and unified - European actions aren't contemplated.

Innovating in AI and Quantum Computing:

Consider a story of a Chinese microchip startup Moore Threads. It raised hundreds of millions of dollars from Sequoia Capital China and ByteDance. The company said it had developed its first graphics processing unit (GPU) —the kind of chip Nvidia pioneered. However, according to The Information, critical pieces of its chip design came from U.K.-based Imagination Technologies, a major global licensor whose customers also include Apple.

In 2017 I talked in "The Artificial Intelligence Imperative. A Practical Roadmap for Business" about Big Tech firms like Amazon and Alphabet designing their chips. I am curious about European companies and labs focused on AI-customed chipsets. Besides, AI can speed up parts of the chip design process. This is a sound hypothesis for building new enabler companies. The race for an AI-enabled chipset technology is still ongoing.?

Finally, Europe is a world leader in quantum research, though local companies need more investments to scale. The 2022 Quantum Technology Monitor reported that in 2019 the EU had the highest concentration of quantum technology expertise and journal papers. The EU is home to the world's most prominent quantum technologies industrial association, with over 100 startups active in the field. Hopefully, the European Chips Act helps these companies test and scale up.

Innovating in Network Technologies:

The world still needs to be done with the deployment of 5G. The talk of 6G by the end of the current decade might involve more geopolitical considerations than ever. 6G will feature AI. Europe would be wise to invest in IP and experiences that 6G might offer. These investments will likely happen without the participation of Chinese partners.?

During the last Mobile World Congress, the murmur of Vodafone replacing Huawei from its network made the mobile ecosystem rethink its traditional approaches. Private Equity invests in challengers and reviews all ways to lower CAPEX and OPEX. The RAN (radio-access-network) technology stack is about to disaggregate, as most technologies before it. The new environment will require semiconductor innovation, and Europe might want to compete.

Will Europe succeed?

No, if we investigate historical performance. The ambition to get to 20 percent of the worldwide market – as the creators of the Chipset Act suggested in February 2023 - is not new. In 2013, the EU launched a project to double the share of microchips made locally within seven years. The current figure is still at 10 percent.?

Yes, if we consider that the unprecedented attack of Russia against Ukraine unified the continent and pushed governments to reconsider energy policy, defense budgets, and the severity of sanctions. The recent visit of Xi Jinping to Moscow highlighted there is a need for further unity, further actions, and long-term policy to boost innovation in Europe.?

Europeans have little time to waste. The sector requires more leadership, which has never been more challenging or complex than today. Whatever happens, consumers and businesses will face more costs.