EU Chips Act: The EU's Push for Semiconductor Autonomy

Background 

Recent supply disruptions in the semiconductor industry have highlighted the dependence of many global economies, including the EU, on imported chips manufactured in Asia. Although the chip shortages affected large portions of the EU economy, the automotive, industrial equipment, and medical device sectors were among the hardest hit. In the auto industry, for example, production in some Member States reportedly decreased by one-third in 2021. While Europe has substantial domestic semiconductor R&D and equipment production, its position in chip manufacturing has declined over many years. The shortages have prompted policymakers to consider expansion of their domestic capabilities. 

The EU's proposal is among a number of recent government funding measures directed at supporting domestic chip production. Similar initiatives are planned or underway in many countries, including in the United States, Japan, South Korea, and China. 

The EU's plan is expected to result in investments of more than EUR 40 billion by 2030. It features public funding, industry collaboration measures, updated State aid rules for innovative production facilities, and governmental oversight of supply chain choke points, including corrective measures such as export bans and prioritizing orders for certain sectors.

State Aid for Localized Manufacturing

A key component of the plan is to incentivize semiconductor manufacturing in Europe to help offset production which is today largely based in Asia. The Chips Act recognizes that attracting local production in advanced facilities may require public funding. To that end, it opens the door to more flexible State aid rules, allowing subsidies accounting for up to 100% of the funding gap, which is higher than under existing State aid instruments.

More flexible rules would be available in particular for facilities that are the "first-of-a-kind" in the EU in terms of technology node, substrate material, or other innovations that offer improved technical, energy, and environmental performance. The traditional State aid requirements will continue to apply, namely the aid must have an incentive effect and be necessary, appropriate, and proportionate. In addition, the EC will consider other factors, including whether the fab can operate in the long term without continued public funding, its commitments toward innovation in EU semiconductors, and comfort that the facility will not be subject to public service obligations from non-EU governments.

Market Monitoring and Crisis Response

The EC and Member States also will closely monitor semiconductor supply chain dynamics to prevent future supply shortages. Consistent with this monitoring role, companies will be invited to share information about demand fluctuations and supply disruptions.

If a serious disruption is detected, the EC can draw upon significant powers contained in an "emergency toolbox." This includes powers to: 

• Request information from market participants, including about their production capacity, with the possibility of imposing fines in case of incomplete or misleading responses, or refusals to supply information;
  
  
• Direct certain designated facilities, notably those that received State aid, to prioritize orders for certain products, notwithstanding any contractual performance obligations under private or public law.
  
  The current proposal limits this power to "crisis-relevant products," which include (i) sectors listed in the Annex to the Proposed resilience of critical entities Directive (energy, transport infrastructure, banking & financial markets, health, digital infrastructure, space), (ii) the defense sector, and (iii) other activities that are relevant for public safety and security; and
   
• Act as a central purchasing body for two or more Member States.

In addition to these new emergency powers, the EC also stressed that it could leverage its existing export control authority if necessary and proportionate. (The EC used this authority during the COVID-19 pandemic to control the export of vaccines.)

Industry Collaboration

The package also contains plans for industry collaboration, often with the participation of public bodies, and in certain cases supported by public funding. Specifically, the proposal focuses on:

• Establishing open access pilot lines to bring chips from the labs to the fabs;
   
• Building a virtual platform for design infrastructure, combining existing electronic design automation tools with novel components and systems focusing in particular on low energy and security; and
  
  
• Establishing standards for the certification of chips based on green, trust, and security criteria.

International Cooperation

The proposal also foresees international cooperation with "like minded" countries, specifically mentioning the United States, Japan, South Korea, Singapore, and Taiwan. The EC seeks to encourage the exchange of information on supply issues, long-term investment plans, standardization, and coordination on export controls. 

Legal Risks for Companies

The EU Chips Act creates opportunities for semiconductor companies by making available large amounts of funding and encouraging cooperative research programs. At the same time, companies participating in this initiative (or indirectly affected by it) should be mindful of potential legal and commercial risks. 

Collaborations involving competitors raise inherent antitrust risks. Such risks may exist even for collaborations operating at the request of and with participation by one or more public authorities. Participating companies need to ensure that agreements and discussions between or among competitors comply with all relevant laws, including competition rules concerning exchanges of competitively sensitive information. 

Companies that receive subsidies also must ensure that those subsidies comply with State aid rules. Obtaining State aid frequently comes with conditions, for example, commitments to invest in R&D in addition to manufacturing. Most companies are already sensitive to these points. That sensitivity should be even more acute in the future to the extent the EC may require beneficiaries of State aid to make certain investments or carry out certain activities, such as critical R&D, in the EU. While public and private objectives likely align in most circumstances, there could be instances in which government and private company interests diverge, for example, if the EC orders fabs to redirect their supply to certain critical industries in Europe.

Chip customers also must assess the risks of potential corrective measures levied against subsidized manufacturers. It is possible that some customers might lose their contractually secured chips if the EC orders the fab to prioritize that capacity to critical industries—and, in turn, to a different customer base—during a supply shortage. 

Next Steps

The Parliament and the Council must enact the EC's new powers, notably those concerning funding, market monitoring, and the crisis "toolbox," before they can take effect. Although the EC has not disclosed a timeline for such approvals, the process is likely to take upwards of 12 months.

Meanwhile, several changes take effect immediately because they do not require legislative approval. The EC already has authority to apply updated State aid rules. In addition, the EC has recommended that Member States monitor the sector and consider steps to address the current supply shortages. Possible steps include asking manufacturers to redirect production to critical sectors, granting the EC a mandate to act as a central purchasing body, or triggering existing export control measures, limiting manufacturers' ability to export chips manufactured in the EU. 

EC President Ursula von der Leyen called the EU Chips Act a "game changer." The proposal signals the EU's ambition to play a leading role in semiconductors over the next decade.