The European Chips Act: Commission releases Europe's strategy on semiconductors

For the second year in a row, the semiconductor shortage is front-page news. COVID-19-related disruptions to global supply chains and the global semiconductor shortage have brought into sharp focus in Europe and elsewhere the critical role of semiconductors in supporting traditional manufacturing (e.g. cars, appliances, medical devices, etc.), employment, and technological innovation and competitiveness. The pandemic has put a spotlight on the fragility of semiconductor supply chains resulting from the dependence on the concentrated chip production in certain parts of the world.
Commissioner for Internal Market Thierry Breton recently described semiconductors as "the core of the global technological race". After the U.S. has put the ‘CHIPS for America Act’ program into force, the European Union has now joined this race. Similar efforts to boost domestic chip production are underway in Japan, South Korea, and China to reduce their dependence on external sources of supply.
Below we provide a detailed walkthrough of the European Commission’s extensive plans and provide commentary on the proposed Act from our experts in the fields of State Aid, International Trade as well as Supply Chains.

EU Chips Act - What it is

On 8 February 2022, the European Commission (the “Commission”) has published its European Chips Act package. The package is a set of measures aimed at strengthening various aspects of the European semiconductor supply chain. The overall level of policy-driven investment in support of the EU Chips Act is estimated to be in excess of EUR 43 billion up to 2030, on the basis of announcements to date.

The key strategic objectives are:

• Europe should strengthen its research and technology leadership.
• Europe should build and reinforce its own capacity to innovate in the design, manufacturing and packaging of advanced, energy-efficient and secure chips, and turn them into manufactured products.
• Europe should put in place an adequate framework to substantially increase its production capacity by 2030. As the market is expected to double by 2030, quadrupling the production is necessary to reach Europe’s objectives of 20% share of the worldwide production.
• Europe should address the acute skills shortage, attract new talent and support the emergence of a skilled workforce, as current shortages are limiting efforts aimed at strengthening the ecosystem.
• Europe should develop an in-depth understanding of global semiconductor supply chains to monitor its functioning, understand future trends, anticipate disruptions, build international partnerships based on more balanced capabilities and mutual interest, react in time to prevent international supply chains from breaking down and enable the EU to take appropriate measures when necessary.

These objectives are addressed in the following documents, accompanied by the overall Communication from the Commission:

1. The "Chips Act":
   The Proposal for a Regulation establishing a framework of measures for strengthening Europe's semiconductor ecosystem, including Annexes.
2. The Toolbox:
   The Commission Recommendation on a common Union toolbox to address semiconductor shortages and an EU mechanism for monitoring the semiconductor ecosystem; and
3. Digital Europe and Horizon Europe:
   The Proposal for a Council Regulation amending Regulation (EU) 2021/2085 establishing the Joint Undertakings under Horizon Europe, as regards the Chips Joint Undertaking

The "Chips Act"

The “Chips Act”, a proposed regulation, establishes a framework consisting of three "pillars" for strengthening Europe’s semiconductor ecosystem:

The Chips for Europe Initiative (pillar 1) will reinforce the Union’s competitiveness, resilience and innovation capacity. This Initiative has five elements:

• building up of advanced large-scale design capacities for integrated semiconductor technologies;
• enhancing existing and developing new advanced pilot lines;
• building advanced technology and engineering capacities for accelerating the innovative development of quantum chips;
• creating a network of competence centres across the Union; and
• undertaking activities, to be described collectively as a ‘Chips Fund’ activities to facilitate access to debt financing and equity by start-ups, scale-ups and SMEs and other companies in the semiconductor value chain, through a blending facility under the InvestEU Fund and via the European Innovation Council.

For the purpose of implementing eligible actions and other related tasks funded under the Initiative, a European Chips Infrastructure Consortium (“ECIC”) will be established.

The framework for the Integrated Production Facilities and Open EU Foundries (pillar 2) aims at ensuring the security of supply. While Integrated Production Facilities are vertically integrated production facilities, Open EU Foundries offer a significant degree of their production capacity to other industrial players, such as fabless semiconductor companies (i.e. companies that design but do not manufacture chips). Member States may, without prejudice to State aid rules, apply support schemes and shall provide for administrative support, including fast-tracking of administrative application procedures related to their planning, construction and operation.

Regarding the coordination mechanism for monitoring and crisis response (pillar 3), a monitoring and alerting system of the semiconductor value chain will be set up. The system is based on regular monitoring activities of Member States and Member States should provide regular updates and exchange their findings in the European Semiconductor Board. In case of an alert, the Commission shall convene an extraordinary meeting of the European Semiconductor Board which is also established by the proposed regulation. It is to consist of representatives of each Member State and is chaired by a representative of the Commission. The meeting will serve to assess the need to activate the crisis stage and discuss potential coordinated procurement ahead of a shortage.

The Commission is enabled to activate the crisis stage by means of an implementing act when there is concrete, serious, and reliable evidence of a semiconductor crisis. Such a semiconductor crisis occurs when there are serious disruptions in the supply of semiconductors leading to significant shortages, which involve significant negative effects on one or more important sectors of the Union, or prevent the supply, repair and maintenance of essential products used by critical sectors. The Commission can request various information and may oblige Integrated Production Facilities and Open EU Foundries to accept and prioritise the order of crisis-relevant products. The obligation shall take precedence over any performance obligation under private or public law. Further, the Commission may, upon the request of two or more Member States, establish a mandate to act as a central purchasing body for their public procurement of crisis-relevant products for certain critical sectors.

The proposed Chips Act will follow the ordinary legislative procedure, in which the European Parliament and Council act as co-legislators. The European Parliament will designate a committee to review the Commission’s draft text and prepare a mark-up with amendments, which it will share with the Council. Both institutions will exchange comments and amendments until a  final text is ready for a vote.  This legislative procedure is likely to take more than 12 months.

The Toolbox

The Recommendation accompanies the proposed “Chips Act” as a tool with immediate effect to enable a rapid and coordinated Union response to the current shortage of chips. Immediate crisis response and monitoring are proposed to the Member States.

To that end, it is recommended that Member States work together with the Commission through the framework of the European Semiconductor Expert Group, which will coordinate immediate crisis response measures and function as a platform for monitoring the semiconductor value chain.

The Immediate Crisis Response implies that Member States should urgently meet in the European Expert Group on Semiconductors to exchange information on the current state of the semiconductor crisis in their national markets. Member States should also request information from the representative organisation of undertakings or, if necessary, from individual semiconductor and equipment manufacturers on supply capabilities, which may include information on production capability, production capacity and current primary disruptions. On the basis of this information, Member States are asked to consider appropriate, effective and proportionate crisis response measures at national and Union level (crisis toolbox).

These measures could include the following:

• engaging in dialogue with and asking manufacturers to prioritize the production of crisis-relevant products;
• considering, where appropriate, to empower the Commission to act as a central purchasing body on behalf of two or more Member States for public procurement of crisis-relevant products for certain critical sectors;
• assessing whether the Union should exercise surveillance over exports of crisis-relevant products and issue a request to the Commission to assess whether the conditions for protective measures with regard to exports are fulfilled; and
• entering into coordinated consultations or cooperation with relevant third countries with a view to seeking cooperative solutions to address supply chain disruptions, in compliance with international obligations. 

Monitoring measures include that Member States regularly review the semiconductor value chain, focusing on risks that may disrupt, impair or adversely affect the supply of semiconductors. For this purpose, early warning indicators shall be identified. Member States should also provide to the Commission information for the purpose of mapping factors, trends and events that could lead to significant disruptions of the global semiconductor value chain with repercussions in the Union (Union risk assessment). The main categories of users of semiconductors, especially those from critical sectors should be identified. They should provide information regarding atypical increases in demand and known disruptions of their supply chain. Member States should immediately alert the Commission where they become aware of potential disruption of the supply of semiconductors, an atypical increase in demand or any other risk factor.

Digital Europe and Horizon Europe

The Chips for Europe initiative will be implemented by the Digital Europe and the Horizon Europe programmes, using for most of its actions the new EU “Chips Joint Undertaking”. Digital Europe supports digital capacity building in key digital domains: this is the case where semiconductor technology underpins performance gains, notably High-Performance Computing, Artificial Intelligence, and Cybersecurity, together with skills development and the deployment of digital innovation hubs. The Horizon Europe programme supports intensive pre-competitive research, technology development, and innovation in the area of materials and semiconductors.

The State Aid perspective

As the European Union intends to spend billions on the chip industry, this might result in Member States fighting for the biggest piece of the cake. Hence, to avoid distortions of competitions within the Internal Market, EU State aid law provides for strict rules companies need to keep in mind when applying for State support in the chip sector:

• The Commission expects that the Chips for Europe Initiative will alone pool together approx. EUR 11 billion of public investments until 2030 from both the European Union and Member States, and will also lead to significant leverage of private investments. The Chips for Europe Initiative will be implemented by the Digital Europe and the Horizon Europe programmes. For this purpose, the new EU Chips Joint Undertaking will be used which is the amended and renamed current Key Digital Technologies Joint Undertaking.
  • Digital Europe supports digital capacity building in key digital domains, i.e. in such domains where semiconductor technology support performance gains, namely in High-Performance Computing, Artificial Intelligence, and Cybersecurity, also including skills development and the deployment of digital innovation hubs.
  • The Horizon Europe programme focuses on intensive pre-competitive research, technology development, and innovation in the area of semiconductors and materials.

• The new EU Chips Fund will support equity or start-ups and scale-ups in the chip sector and the Commission forecast for this measure alone approximately EUR 2 billion.
• Aiming to increase the security of supply in the EU and to attract investments, the proposed Chips Act provides the definition of two types of facilities, so-called Open EU foundries, which are facilities that design and produce components mainly for other industrial players, and so-called Integrated Production Facilities, which are factories that design and produce components that serve their own market. Such facilities must be “first of a kind” in Europe and their operator should commit to continued investments in innovation in the semiconductor sector in European Union. The recognition as either type of facility triggers a number of benefits:
• • It allows having access to fast-track permit granting in the Member States for the construction and operation of the facilities.
  • Under certain conditions, it also allows prioritised access to pilot lines set up under the proposed Chips for Europe Initiative; and
  • Member States may offer public support to such facilities, without prejudice of State aid rules. However, the Commission will take the positive effects of such facilities for the European ecosystem into account for its State aid assessments.
• As already announced in the Communication on a competition policy fit for new challenges, the Commission may consider approving aid to such facilities directly under Article 107(3)(c) TFEU. This provision allows approving State aid to facilitate the development of certain economic activities if the positive effects of such State aid outweigh its potential negative impact on trade and competition. In its assessment, the Commission will ensure that any State aid must:
  • Have a so-called “incentive effect” and be necessary, i.e. State aid can be granted only to support a project that would not take place without public support.
  • Be appropriate, i.e. there is no other possible tool that would be less distortive for competition.
  • Be proportionate, and limited to the minimum necessary.
• In this regard, relevant aspects to ensure that the positive effects of State aid outweigh the negative will be inter alia:
  • The facilities will be “first of a kind” in Europe, meaning that an equivalent facility does not already exist in Europe based on the definition contained in the proposed Chips Act.
  • The supported facility will not crowd out existing or committed private initiatives.
  • The public support covers a maximum of 100% of a proven funding gap, i.e. the minimum amount necessary to make sure such investments take place in the European Union.

• Further, depending on the merits of each individual case, additional positive effects to offset risks of competition distortion will be considered, such as:
  • A strengthening of the semiconductor value chain, to ensure the security of supply for European businesses using chips in their products.
  • A positive contribution in terms of attracting a qualified workforce to Europe.
  • A positive impact on Innovation in Europe, bringing benefits to SMEs and end-users. Again, the commitment to invest in innovation set out in the proposed Chips Act for the recognition of Open EU Foundries and Integrated Production Facilities will play a role in this respect.

The International Trade perspective; compatibility of the package with international trade rules

From an international perspective, the EU is bound by the World Trade Organization’s Agreement on Subsidies and Countervailing Measures (“WTO SCM Agreement”) which sets disciplines for financial contributions by a government or public body conferring a benefit to a recipient. The definition of “subsidy” under the WTO SCM Agreement is very similar to what constitutes state aid, though EU rules are more stringent than WTO subsidy rules.

If a subsidy is “specific” (i.e., specific to a company, industry, a group of companies or industries, or a geographical region) and causes adverse effects to a WTO Member, the latter WTO Member can take action against the Member providing the subsidy by requesting consultations leading to either a mutually agreed solution or formal dispute settlement procedure. For example, subsidies for research activities performed on a contract basis are potentially permissible if they meet certain requirements under the SCM Agreement. However, given the weakness of the WTO’s rules on domestic support, the chances of a successful challenge to the EU Chips Act appear minimal.

More controversial may be the possibility of monitoring exports of crisis-relevant products and, if necessary, imposing certain export restrictions. Regulation 2015/479 of 11 March 2015 on common rules for exports provides a legal basis for the European Commission to block exports of essential products in certain circumstances. The European Commission relied on this Regulation to introduce an export authorization mechanism for COVID-19 vaccines. During the European Commission’s press conference following the release of the Chips Act, Commissioner Vestager stressed that the shortages affecting the supply of semiconductors are very different from the situation with COVID-19 vaccines and any export restrictions imposed in the context of the Chips Act should be considered as a last resort measure. The focus of the Chip Act package is to prevent shortages and strengthen semiconductor supply chains; only if international coordination and cooperation fails, may the European Commission consider imposing export restrictions through Implementing Acts requiring approval by a committee representing all Member States.

With regard to export restrictions, WTO rules provide space for WTO Members to adopt trade measures deemed necessary to respond to supply shortages or protect their essential security interests (including import and export bans, quantitative restrictions on imports and exports, and non-automatic import licensing). Under WTO rules, these measures should be applied in a manner that does not discriminate between WTO members and should not constitute a disguised restriction on international trade.

The Customer perspective: supply chain effects

The Chips Act means good news for European semiconductor supply chains. In the short term the Commission aims to increase the resilience of supply chains to future crises. Over the medium term, Europe shall become a strong player and industrial leader across the entire chips value chain. The latter will not be a quick fix. Naturally, it will take some time for the future European semiconductor megafactories to be up and running. That said, the necessary diversification of supply chains will be easier to accomplish in the long term – and will be essential to achieve resilience.

Immediate and mid-term action items can be:

• Identifying supply chain links that would benefit from a geographic shift
• Analyzing the respective supplier portfolio – on various levels of the supply chain
• Entering into early conversations with existing or new suppliers about upcoming changes and how to make use of it
• Securing European production capacity early on
• Identifying areas for collaboration across the supply chain
• Identifying legal issues (contractual, IP, competition etc.) for switching production to new suppliers or facilities and monitoring timelines
• Analyzing contracts to reflect increased European capacity

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Our multidisciplinary team will be following the legislative developments closely and able to assist corporates with all related supply chain issues.

The authors would like to thank legal trainee Lasse Heber for his active and valuable contribution to this article.

Authored by Patrick Ayad, Lourdes Catrain, Detlef Haß, Warren H. Maruyama, Carolin Marx, Falk Schöning, Kelly Ann Shaw, Michel Struys, Jared Wessel, Sebastian Schnell, Jessica Goetsch, Philipp Heuser, Francesco Pili, Stephanie Seeuws, and Eleni Theodoropoulou.