Intel came first, agreeing to build a multibillion-euro foundry in Magdeburg. Taiwan Semiconductor is now following, with a plan for an €11 billion investment in Dresden, Germany.  

Both the US and Taiwanese chipmakers will receive large dollops of German public funding. The subsidies aim to secure European supplies of critical chips. But critics wonder whether the strategy will be both cost effective and avoid exacerbating tensions within the European Union. 

Start with upsides. After suffering through a serious chip shortage which hobbled European industry, the EU has relaxed rules against state aid and secured public funding for semiconductors through the EU Chips Act.  

The new Taiwanese plant in Dresden aims to bolster Germany’s powerful auto industry. TSMC will own 70%, 10% each by major customers Infineon, Bosch and NXP.  “It makes a lot more sense than Intel Magdeburg because it’s backed by TSMC’s key customers from Europe – Infineon, Bosch and NXP – all of which are already relying on TSMC for the production of their microcontrollers”, says Jan-Peter Kleinhans, semiconductor specialist at think-tank SNV

The Dresden plant is not being built to produce TSMC’s smallest, most advanced chips. Instead of the sub-7nm process used for the complex Systems-on-Chip needed in consumer electronics, it will produce chips using TSMCs 28/22nm (planar) and 16/12nm (FInFET) processes. These basic chips provide the backbone of modern automobile electronics. 

Secure semiconductor supplies will keep cars rolling off German production lines.  Semiconductor suppliers and SMEs in the automotive space will join independents such as Indie Semiconductor to create “Silicon Saxony” in the former East Germany.  

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It’s a good deal for Taiwan and TSMC. The global chips leader is investing only €3.5 billion out of the €10 billion cost while maintaining 70% ownership – virtually doubling its investment from day one. Taiwan benefits politically, too. Its “silicon shield” remains intact as Taiwan remains an indispensable supplier for advanced sub-7nm technologies, still manufactured on its own island. What a powerful “poke in the eye” to the Chinese Communist Party. 

Now let’s look at the downsides.  

One obvious loser is Germany’s fight against climate change. The country’s Climate and Transformation Fund will see €20 billion in government subsidies go resource-hungry semiconductor manufacturing. 

Other investments in Germany’s domestic chip industry may also suffer. US company Global Foundries, which has been operating in Dresden for 25 years with negligible subsidies, finds itself snubbed and at a competitive disadvantage.  

The European Single Market is compromised. Strict rules against competition-distorting government aid are being trashed, on the grounds that semiconductors are strategic. This could be the thin end of a wedge, escalating into all-out subsidy wars if relations sour between France and Germany.   

The subsidies are coming out of the rich German government budget. Smaller, financially strained EU members are unable to offer similar support. 

China looks like another loser. Chinese acquisitions of automotive semiconductor facilities have been blocked in Germany and the UK. Supply from a Taiwan-owned facility represents a blow to the Communist Party’s ambitions to control and weaponize automotive supply chains. 

Another loser is the UK. After cutting itself off from the EU Single Market with Brexit, the British semiconductor strategy fell short. UK car factories will not stand at the head of the line to secure supply from these new European foundries. The UK car and semiconductor industries are not getting any help from government to exploit obvious synergies with Europe, to the detriment of both. 

Do the upsides outweigh the downsides? At this time, it’s hard to come to a firm verdict. Stay tuned. 

Christopher Cytera CEng MIET is a non-resident senior fellow with the Digital Innovation Initiative at the Center for European Policy Analysis and a technology business executive with more than 30 years of experience in semiconductors, electronics, communications, video, and imaging. 

Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.

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