11 March 2021 (Brussels, Belgium) – Europe’s powers that be have an issue. To simplify it greatly, the continent runs on technology built elsewhere. Brussels wants to change that even more than it wanted to be done with Brexit.
“Not all those who wander are lost”
This J.R.R. Tolkien quote concerns fellowships and rings, but let’s use it in service of the “Digital Compass.” That’s the name of a provision in the EU’s $2 trillion pandemic recovery package, which earmarks $150 billion to help the EU find its technological way. A full review is below but here are the four key planks:
• Train a more technical workforce (self-explanatory)
• Build “secure and substantial” domestic digital infrastructure (think cloud and AI)
• Drive “digital transformation” of businesses (this is government/Fortune 500-speak for ditching dinosaur databases and upgrading tech stacks)
• Digitize government (in this department, Estonia is goalz)
Where’s the compass pointed? The EU wants more digital sovereignty and less dependency on others for key technologies. How bad is the dependency? As of March 2020, every top EU bank was primarily using American cloud services. If Cosimo de’ Medici time traveled to today, he’d also probably use Amazon Web Services.
So what does progress look like? The EU aims to double its global market share of cutting-edge chip production, with the goal of 20% by 2030. One ace the EU does have in its pocket is Dutch semi equipment supplier ASML. Semiconductors provide a good window into continental pushes for domestic talent, industry, and infrastructure.
But it’s not just the EU sweating about semis. China is spending tens of billions to establish chip self-sufficiency. Biden recently ordered a review of the US’ critical supply chains. As a result, you’ll likely see Washington pour billions into subsidizing state-of-the-art US chip fabs (from TSMC or Intel).
And perspective. Uncle Sam helped to sow the seeds of today’s Silicon Valley in the twentieth century. During World War II thousands of radios, headsets, and radar systems were needed to be designed and built, and there were few many places to turn to in the 1930s and 1940s capable of filling this demand. With the second most important electronics development and research center in the country located at Stanford University, US military funding poured into the area. Silicon Valley’s partnership with the US military began in earnest and never really stopped.
But that doesn’t mean top-down industrial policy alone can magically produce a dynamic innovation ecosystem in the EU. It’s a start, but the recipe is very complicated.
Now, some more about the EU plan and notes from the press conference.
On Tuesday, the EU pledged more than $150 billion to develop next-generation digital industries this decade as it seeks to reverse a widening gap with the U.S. and East Asian rivals in advanced technologies like chips and artificial intelligence. Funded as part of the EU’s $2 trillion Covid-19 economic recovery package, the new “Digital Compass” aims to significantly boost the bloc’s technological autonomy by 2030.
Europe’s need to improve what politicians have termed digital sovereignty was highlighted by trade disputes with the U.S. under Trump and growing geopolitical tensions with China. Over the past year, supply-chain bottlenecks from coronavirus lockdowns and a shortage of microchips crucial to the automotive industry – a pillar of the region’s economy – have further increased Europe’s awareness of its industries’ reliance on other economies for daily essentials. Said European Commission Executive Vice-President Margrethe Vestager at the press conference:
“We need to become less dependent on others when it comes to key technologies”
Not so strangely, the U.S. is also addressing reliance on foreign technology, particularly from China. Last month President Biden issued an executive order launching a review of products and sectors where the country could face supply-chain disruptions from factors including “geopolitical and economic competition.” An initial review will focus on high-tech products including semiconductors, electric-vehicle batteries, certain pharmaceutical ingredients and critical elements and minerals.
Europe’s new plan, which builds on a digital agenda the EU issued last year, seeks to make European businesses and public services more digital, improve Europeans’ digital skills and upgrade digital infrastructure. Funding will come from the €672.5 billion ($796.6 billion) Recovery and Resilience Facility in the EU economic package agreed last summer, of which at least 20% has been pledged to promote Europe’s “digital transition.” Among the plan’s specific goals is for Europe to produce at least 20% of the world’s next-generation semiconductors by value in 2030, compared with 10% of the world chip market last year, according to the European Commission, the EU’s executive arm. The plan, which still requires final approval, will include a monitoring system to ensure money is being spent effectively, Vestager said.
The EU will vie against other chip initiatives around the world. China in 2019 set up a government-backed $29 billion fund to boost its domestic chip industry, and this week it announced plans to speed up development in advanced technologies, including chips, over five years. In the U.S., Congress recently passed legislation to give chip companies grants and financial incentives, which could be billions of dollars per project.
The big problem: shifting market share to European companies from American and Asian chip giants will be a challenge. Europe lacks heavyweights such as Intel Corp. or Taiwan Semiconductor Manufacturing Co. that make chips for industry’s biggest segments, which include data centers, smartphones and laptops. Hence this bit of a “back-step” from EU Internal Market Commissioner Thierry Breton at the press conference:
“We need to ensure that we can be autonomous. Or at least we must be able to talk on favorable terms with companies”.
Europe’s biggest semiconductor companies include the Netherlands’ ASML Holding NV, which builds machines that make chips, as well as Germany’s Infineon Technologies AG and the Netherlands’ NXP Semiconductors NV. Both make chips for the comparatively small automotive and industrial sectors. And the problem is it has proven hard to upend the chip industry’s status quo. As China has shown, throwing money at chips does not guarantee success. For the last few decades, Europe has seen its number of semiconductor companies shrink, and it will require a mighty effort to wrest leadership from the U.S. and Asia, which are also investing heavily.
And while there is broad acceptance across Europe of the need to reduce reliance on others in critical areas, divisions remain among EU members over how to avoid protectionism and whether EU-manufactured products are a better path than widely diversifying supply chains. Europe has a mixed record promoting technology industries. Airbus SE (a competitive struggle), TGV high-speed trains (a success) and GSM cellphones (overtaken in the market) all stemmed from government-sponsored projects. The EU’s Horizon technology-research programs for years have funded development of basic know-how such as making quieter helicopters, but European companies were unable to turn innovations into commercial gains.
More recently, the EU in 2017 launched the European Battery Alliance, a public-private partnership to develop electricity-storage technologies needed for electric vehicles, low-emission power grids and other applications. Germany, France and other EU countries in 2019 began a European public-private cloud-computing project, Gaia-X, that seeks to reduce reliance on U.S. and Chinese tech giants. All have met with middling success.