The EU Chips Act: strengthening the EU’s technological leadership and confronting semiconductor shortages

The proposed Act is intended to mobilise EUR43 billion of public and private funds in an effort to prevent, prepare, anticipate and respond to future supply chain disruptions. 

The proposed Act focuses on:

• strengthening the EU’s research excellence and technological leadership;
• building capacity to design, manufacture and package advanced chips;
• supporting SMEs;
• developing an in-depth understanding of global semiconductor supply chains to monitor their functioning, understand future trends, anticipate disruptions and take appropriate measures; and
• international cooperation with likeminded countries.

Chips – a vital global commodity

Chips are vital to a wide range of technological advances and digital transformations.  There is currently a worldwide shortage of chips that is impacting the supply of a variety of goods, such as internet routers, gaming consoles and vehicles.  As a consequence, overall, the Commission is aiming to reduce the EU’s reliance on suppliers based in third countries.  However, the Commission sees the proposed Act more broadly as supporting the EU’s position in the race for global technological and industrial leadership.

How other jurisdictions have responded to the chips shortage

The proposed Act sits alongside a range of similar initiatives globally.  In the US, the United States Innovation and Competition Act of 2021 provides for an allocation of USD52 billion to incentivise manufacturing and R&D until 2026.  Whilst China’s 14th Five-Year Plan (2021 – 2025) is focused to strengthening China’s domestic socio-economic foundations and to supporting technology and innovation. The semiconductor industry, particularly the integrated circuits industry, is a core component of this effort.  

Large scale investments are also being made by other countries, including South Korea and Japan.  In the UK, the Government is looking to increase public funding for technological R&D, including in relation to chips, to GBP22 billion per annum.  The new National Security and Investment Act 2021 also means that many chip-related M&A transactions can now be screened by the Government for national security risks.    

The proposed Act in outline

The proposed Act, which will take the form of a regulation, covers three key areas, described by the Commission as its three “pillars”:

• establishing the Chips for Europe Initiative (the Initiative) which will pool resources from the EU, its Member States and third countries associated with the existing EU programmes, as well as the private sector;
• setting out the criteria to recognise and support “first-of-a-kind” integrated production facilities and open EU foundries (together Facilities) that foster the security of supply of semiconductors in the EU; and
• setting up a coordination mechanism between the Member States and the Commission for monitoring the supply of semiconductors and responding to semiconductor shortages.

The Chips for Europe Initiative

A cornerstone of the Commission’s proposal is the Initiative which aims to redirect various existing sources of EU funding and support programmes towards the EU’s semiconductor technology and innovation capabilities.

Covering the current EU 2021-2027 budget, it is proposed that the Initiative will draw on numerous EU funding programmes with EUR1.65 billion being contributed through the Horizon Europe programme and EUR1.65 billion through the Digital Europe Programme.  Out of this total amount, EUR2.875 billion will be implemented through the Chips Joint Undertaking, as further described below.

The Initiative has five operational objectives:

• building 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 EU; and
• creating a so-called “Chips Fund” to tackle financing challenges, such as debt financing and raising equity by start-ups, scale-ups and SMEs and other companies in the semiconductor value chain. It will use a blending facility under the InvestEU Fund and via the European Innovation Council.

Coordinating these numerous programmes and initiatives will likely be challenging.  So the Commission stresses that these actions will be primarily implemented through a new “Chips Joint Undertaking”, i.e. a renamed and revamped version of the existing “Key Digital Technologies Joint Undertaking”, with a separate modifying regulation being proposed by the Commission to this end.  That undertaking’s scope is wider than semiconductors, as it currently provides support for industrial research, technology development, and innovation for electronic components and systems.  Given the potential synergies between chips and these critical activities, the rationale is that they become part of the initiative.  The Chips Joint Undertaking will have significant oversight of the expected budgetary increase.

In addition, the Commission proposes a “European Chips Infrastructure Consortium” (ECIC).  The ECIC’s task will be to handle and structure legal relationships between its private and public members and to act as an interface for the implementation of actions under the Initiative.  The ECIC will likely be a strategic forum for private players interested in benefitting from EU support.  The Commission also wishes to enhance collaboration between stakeholders by proposing a European network of competence centres in semiconductors and will cooperate with the European Investment Bank Group in relation to investment opportunity related to the proposed Act.

It is expected that funding for the Facilities will mainly come from state aid from the Member States and the private sector.  In contrast, funding for R&D will come from the Commission via the different research funds and programmes detailed above.

Recognising and supporting Facilities

The proposed Act focuses on two types of semiconductor manufacturing facilities – Integrated Production Facilities and EU Foundries.  If the criteria set out in the proposed Act are met, these Facilities will be eligible for state aid if they also fulfil the conditions of the EU’s state aid regulation.  Otherwise, aid for these Facilities will be prohibited. 

To fall within the eligibility criteria, the Facilities must:

• be “first-of-a-kind” in the EU. This means that the production must be novel by reference to the technology node, substrate material or another product innovation that can offer better performance, process technology or energy and environmental performance.  Novelty is achieved if a comparable capability on an industrial scale is not yet present or committed to be built within the EU;
• contribute to the security of supply and to a resilient ecosystem in the internal market;
• not be subject to any public service obligations that may be imposed by third countries that may hinder their ability to supply the so-called priority rated orders described below in relation to semiconductor crisis response; and
• commit to continued and efficient investment into the next generations of semiconductors. The difference between these two Facilities is that EU Foundries (sometimes referred to as Open EU Foundries) will be facilities that design and produce components mainly for other industrial players, i.e. they must be capable of offering production facilities to unrelated undertakings.  The Integrated Production Facilities will be factories that design and produce components for their own markets.  

The decision on whether a planned facility is recognised as an Integrated Production Facility or an EU Foundry will be made by the Commission.  In addition to considering the criteria described above, the Commission will also look at the readiness of the relevant Member State or States where the Facility is to be built.  

When a Facility is recognised, the impact will be considerable as administrative burdens will be reduced.  The Member States will be required to ensure that planning, construction and other permits are handled in an efficient and timely manner to attract investment in the development of the Facilities.  In this regard, the Facilities will be considered to be an imperative public interest within the meaning of Article 6(4) and Article 16(1)(c) of Directive 92/43/EEC (on the conservation of natural habitats) and of overriding public interest within the meaning of Article 4(7) of Directive 2000/60.

Coordination and crisis management

Finally, the proposed Act introduces a mechanism for coordinated monitoring of the semiconductor supply chain.  The system is based on monitoring of the so-called early warning indicators by the relevant authorities of the Member States.  Therefore, Member States shall invite relevant stakeholders and associations to provide information regarding significant changes in demand and disruptions of supply chains.  Member States may also request confidential and commercially sensitive information from individual undertakings.  This may raise questions on the limits of what is strictly necessary and proportionate from the perspective of monitoring the supply chain.

The proposed Act also enables the Commission to trigger crisis response measures by means of an implementing act when there is concrete, serious, and reliable evidence of a semiconductor crisis.  Such a crisis occurs when there are serious disruptions to the supply chain which:

• lead to significant delays or significant negative effects on one or more important sectors in the EU; or
• prevent the supply, repair or maintenance of essential products used by the critical sectors.

In such circumstances, the Commission may implement mitigating measures and the associated “emergency toolbox” includes:

• requesting representative organisations or individual undertakings operating along the semiconductor supply chain to provide the information necessary for assessing the semiconductor crisis and identifying potential mitigation measures;
• obliging the Facilities to accept and prioritise an order of crisis-relevant products which shall take precedence over any performance obligation under private or public law; and
• upon the request of at least two Member States, the Commission acting as a central purchasing body on behalf of the participating Member States for their crisis-relevant products for certain critical sectors.

In addition to the above, the recitals to the Act also explicitly refer to the possibility of introducing an export control regime using the powers in Regulation (EU) 2015/479 of the European Parliament and of the Council of 11 March 2015 on common rules for exports.      

State aid considerations

The Commission is clear that the new governance and subsidy schemes established in the proposed Act are without prejudice to EU State Aid rules.  Indeed, the Commission hopes that the Initiative under the proposed Act will drive significant volumes of public and private investment.  To this end, the Commission has stated that the Facilities will be considered to be in the public interest.  Further, the Commission envisages approving public support to fill possible funding gaps in the semiconductor ecosystem for the establishment, in particular, of “first-of-a kind” facilities in the EU based on Article 107(3)(c) TFEU.  This provision allows for the recognition of certain State aid measures which would otherwise be incompatible with the internal market.

A flagship, and increasingly used tool for such objectives, is the “Important Project of Common European Interest” (IPCEI).  In the semiconductors field, in December 2018, the Commission approved plans by France, Germany, Italy and the UK to give EUR1.75 billion of public support to a joint research and innovation project in microelectronics that aims to unlock an additional EUR6 billion in private investment.  Under the umbrella of the new initiative, the Commission is actively supporting Member States’ ongoing efforts to develop a second IPCEI.

Foreign investment control considerations

The effort to attract additional investment under the proposed Act will need to be considered in the light of recent laws adopted in many Member States to restrict or monitor non-EU investments in critical industries.

Regulation (EU) 2019/452 of 19 March 2019, which established a framework for the screening of foreign direct investments into the EU and entered into force in November 2020, is key in this regard.  That regulation characterises semiconductors as a “critical technology” in relation to which foreign investments are likely to affect the security or public order of Member States.  Additionally, the regulation specifies that EU operators who have received financing from Horizon 2020 are to be treated as sensitive businesses.  These provisions have been transposed in most Member States where foreign direct investment screening mechanisms are in force.  Projects – particularly those looking for funding from outside the EU – will need to take into account these mechanisms which will be most likely to impact on M&A deals, rather than on the construction of Facilities.

Proposed immediate actions by the Member States

Pending adoption of the proposed Act, the Commission has made a recommendation to the Member States (the Recommendation) which sets out a toolbox for monitoring and mitigating disruptions in the chips ecosystem.  The Recommendation is not binding on the Member States as a matter of EU law.  This toolbox includes immediate actions that could be taken if they would be appropriate to help overcome the current shortage of chips, before the proposed Act enters into force.  Those actions could include:

• engaging in dialogue with and asking manufacturers to prioritise the production of crisis-relevant products to ensure critical sectors continue to operate;
• considering, where appropriate, to grant to the Commission a mandate 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; and
• assessing whether the EU 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 should be introduced.

Next steps

The Commission is encouraging the Member States to immediately start coordination efforts in line with the Recommendation to understand the current status state of the semiconductor value chain across the EU, to anticipate potential disturbances and take corrective measures to overcome the current shortage until the Regulation is adopted.

The proposed Act will follow the ordinary legislative procedure with the agreement of the European Parliament and the Council being required.  The process could be concluded this year.  If adopted, the Regulation will be directly applicable across the EU.

Conclusions and observations

There is no doubt that the Act, if adopted in its proposed form, could result in substantial opportunities in the EU for businesses active in the semiconductor industry.  The proposed Act is ambitious and timely, so companies should be assessing how they can best take advantage of the package of measures proposed through examining their supply chains and revisiting their investment strategies and assumptions.  Companies should also be working with the authorities in individual Member States to identify opportunities and to share information.  Non-Member States will no doubt be considering the proposed Act carefully for its compatibility with WTO law, especially as the proposed Act’s legislative passage will coincide with consideration of a proposed EU regulation that seeks to remedy distortions in the EU single market caused by companies receiving subsidies from non-EU entities.