This week it became clear that Intel’s CEO, Pat Gelsinger, has put a proposal on the table with the European Commission to build a chip factory in Europe. Gelsinger wants an 8 billion euro subsidy in exchange for the construction of one European chip factory. That’s a nice offer to start with, but we think Intel could build two European factories for that amount. Here’s why.
That the CEO of Intel dares to put this proposal on the table of the European Commission has a reason. First, let’s explain the situation.
What is going on with the chip production?
Worldwide, there is a massive shortage of chips; every day, we could write a news article about a company that has run out of chips. The demand for chips is simply much higher than the supply. The downside is that every form of innovation starts with a chip. Chips are at the heart of many products and services. Without chips, production comes to a standstill. As a result, car factories are being closed, new game consoles are only limited available, fewer new smartphones will appear this year and data centres will also have to order on time. Delivery times for large quantities of chips is said to be somewhere between 6 and 12 months.
The solution to the problem is obvious; produce more chips. That is easier said than done. Building a factory and setting up and adjusting a machine capable of producing chips takes at least two years. If ASML can also deliver machines immediately because there is a queue for that too. There are also some quick solutions, chip manufacturers can buy upgrades for the machines that produce chips. There are software updates that can make a machine more efficient or just a little bit faster, which can increase the production quantity on existing machines. According to ASML, a large number of upgrades have been sold to customers in recent months.
Investing in more chip production
Governments are also starting to worry because if innovation slows down and companies come to a standstill, that will also slow down the economy. With all the consequences this entails. So they are also starting to get involved in the chip shortage.
The United States wants to invest 30 billion dollars
The United States will soon be voting on whether to make an investment fund of 30 billion dollars available to construct more chip factories in the US. Gelsinger said that Intel is not counting on government support, that it fits within Intel’s strategy to build new factories in the United States. So there is a chance that the US will invest that 30 billion in other chip manufacturers, such as Globalfoundries, Samsung and TSMC. Intel has already announced that it will build two new factories in the United States at the cost of 19 to 20 billion dollars.
The EU wants to bring 20 percent of chip production to Europe by 2030
Europe wants to be less dependent on Asia and the United States when it comes to technology. The goal the EU has said is to bring 20 percent of chip production to Europe by 2030. About 10 percent of the production is done in Europe, but that mainly concerns outdated production techniques. It will require substantial investments to achieve that 20%, especially since there is an expected growth of 33 percent in chip production over the next few years. An amount of 50 billion euros has now been mentioned by the EU.
Most production takes place in South Korea and Taiwan. They dominate the chip market in terms of production. In the United States, only 12% of production is done.
If the EU really wants to move towards this 20 percent, then five large chip factories will have to be built in Europe. This is certainly necessary looking at the growth of the chip market that is still to come, but even then, it remains to be seen whether it is sufficient. The underlying goal of reducing dependence is, in principle, achievable.
Intel’s 8 billion offer
Gelsinger has argued that it is more attractive for Intel to build a chip factory in Asia than in Europe because the costs are lower in Asia. Intel can deviate from this, but to do so, it needs an 8 billion euro subsidy. With that, Gelsinger seems to be playing a good game of poker because the company expects to invest 19 to 20 billion dollars in the United States in two brand new factories. This means that Europe would completely subsidise one factory to the tune of 8 billion euros, which converts to slightly less than 10 billion dollars.
A subsidy is generally intended to contribute to an investment, not to carry it out entirely. The European Commission should therefore commit to at least two European Intel factories for 8 billion euros. The EU should also demand that Intel will produce chips smaller than 5nm so that Intel will manufacture the most modern EUV chips in Europe. Intel is still lagging with EUV, and now that it is going to catch up, it is good if that also happens in Europe. As for the higher costs in Europe compared to Asia. The only Intel factory in Europe is currently in Ireland. If Intel moves to southern Europe, let’s say Spain, the costs could come down a bit. At the moment, however, Germany, France, the Netherlands and Belgium are frequently mentioned. Those are the more expensive countries.
The EU is also looking beyond Intel. TSMC has been approached to see if they want to build factories in Europe. Although Taiwan wants to keep the production in its own country, TSMC seems to be preparing to build several factories in the United States. This would involve potentially six new factories. Perhaps the EU can convince the company to build a number of them in Europe. Taiwan is willing to cooperate in an investment forum. Samsung is also said to have been approached, but that company mainly has factories in South Korea and South-East Asia. It will, however, be building a new factory in Austin, Texas. Perhaps Samsung is willing to build a chip factory in Europe. Finally, the EU is reportedly considering setting up its own European chip factory via a consortium. That seems a difficult road to go down, as you need a lot of expertise to produce chips in a good way.
Not everyone favours the European chip plans
There is also criticism of the European plans. A German think tank thinks it is a waste of money. According to the think tank, there are no customers in Europe for chips. Europe would also do better to focus on keeping companies that design chips in Europe.
We partly agree with that. Europe should certainly ensure that chips are also designed in Europe. That is what NXP does, but there is also the acquisition of ARM by Nvidia, which is awaiting approval. That acquisition has to be rejected by the EU. This company is primarily based in the United Kingdom, and with a takeover by Nvidia, there is a good chance that it will eventually all move to the United States.
Furthermore, we see no reason for the lack of customers. There is a global shortage of chips, while demand continues to grow. If Intel opens factories in Europe and produces for third parties, those chips can go in any direction. Certainly, now that Intel is going to produce ARM chips in addition to its own x86. More and more companies are designing their own ARM chips. Amazon designs their own ARM chips for their data centre, Google recently started doing so, and almost every smartphone manufacturer wants to design chips. There is no shortage of customers.
Tip: Should Europe compete for technological world domination?