2.2 Necessary measures and open issues

demand side of the global semiconductor market are responsible for this shortage. While the main factor is certainly the enormous increase in demand for entertainment electronics triggered by millions of people working and studying from home during the pandemic, the war in Ukraine has further strained the situation with bottlenecks in raw materials and sanctions rightfully imposed by the EU against Russia.11,12 Given that it takes a lot of time and money to expand semiconductor manufacturing capacities, we can expect these shortages to continue in the foreseeable future.

The global semiconductor market is forecast to generate sales of over 600 billion US dollars in 2022.13 The range of application of semiconductors is very broad so the industry is closely connected to the rest of the global economy. The most common application is in global data and communications, estimated to have accounted for around two thirds of total semiconductor sales in 2021. In the EU, only around one third of total semiconductor sales are to the data and communications industry. The largest buyers of semiconductors in the EU are the automotive industry and industrial electronics, which together make up 63 percent of all EU-wide purchases.14 The European automotive industry has been amongst the hardest hit by the chip shortage so the need for action is greater there, particularly given the many employees working in this industry.

Rising geopolitical tensions, particularly between the United States and China, are also exacerbating the competition in technological policy in which the production of semiconductors is a central issue. Furthermore, the supply chains of semiconductors are very complex. No individual country or region is currently autonomous in the production of semiconductors. Seventy-five percent of global semiconductor production capacities are currently located in South-East Asia. Taiwan is dominant in the production of chips under 10 nm and accounts for almost one half of global supplies in this segment. The biggest producer in the 10 – 18 nm segment is South Korea, whilst China has a major share in larger sizes (>18 nm).15 Despite their formidable production capacities, countries such as Taiwan, South Korea and China do not dominate the semiconductor market. The United States, for example, is dominant in the decisive area of chip design and accounts for over 14 percent of global production capacities on account of the local establishment of global chip producers which it is consistently expanding.

By comparison, nine percent of chips are designed in the EU and eight percent are produced in the EU. Europe, and Germany in particular, is strong in the area of sensors, actuators and power electronics, which will be crucial in the transition to green energy and mobility. Other European strengths are chemical precursors, mechanical and plant engineering, and communication technologies. In this context, setting up a closed value chain in a single region would require investments of around one billion euros. In addition, prices for microelectronics would likely increase by around 35 to 65 percent, according to a Boston Consulting Group study16. A completely closed value chain is not necessary in every region to ensure technological sovereignty. Mutual dependence paired with alternative resilience approaches would be sufficient. Smooth-running global value

11 German Federal Office of Economics and Export Control (BAFA) (2022). Annex VII of Regulation (EU) No. 833/2014 (in the version amended by Council Regulation (EU) 2022/328) concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine. 1st Council Regulation. 25 February. Brussels. 12 European Union (2022). Official Journal of the European Union, L 111. 8 April. Brussels. 13 Semiconductor Industry Association (2021): Global Semiconductor Sales Increase 24% Year-to-Year in October; Annual Sales Projected to Increase 26% in 2021, Exceed $600 Billion in 2022. Report. 3 December. Washington. 14ZVEI. The Electrical and Electronics Industry (2021). Discussion Paper. Semiconductor Strategy for Germany and Europe. October. Frankfurt am Main. 15ZVEI. The Electrical and Electronics Industry (2021). Future Strategy and Market Development | Semiconductor Industry | Germany and Europe. 16 Boston Consulting Group and SIA (2021). Strengthening the Global Semiconductor Supply Chain in an Uncertain Era. April.

networks are a basic precondition for maintaining the high pace of innovation and affordable semiconductor products.

The severe global shortage in semiconductors is likely to persist in the foreseeable future and will affect the EU especially in the automotive industry and industrial electronics. The following measures are recommendations to combat the supply bottlenecks and to attain technological sovereignty in the complex semiconductor value chain.

2.2 Necessary measures and open issues

Germany and Europe must ensure that their industries and public authorities have a high capacity to act independently in conflict and crisis situations. Alongside a broad research base, this includes the ability to procure critical microelectronic components, also in times of crisis, either from domestic production or through supply chains that cannot be manipulated, politically or otherwise. Achieving this kind of resilience will require close cooperation along semiconductor value chains, Furthermore, a balanced and diversified access for all industries to production capacities and raw materials is paramount.

Germany is in a good position with its strong research base and a closely intertwined network of technical universities, research institutes and enterprises. Economic policy must now make targeted use of this strength. Specifically, this means expanding existing production capacities and developing and building more competencies, especially in chip design. Current competencies in the design of hardware, embedded software and automated solutions need to be extended along a broad base starting with universities. The competencies in semiconductor solutions for key national sectors such as automotive, mechanical engineering, electronics, energy, security, and communications need to be further improved through the generation of product-specific IP for the European semiconductor value chain based, among other things, on the open-source approach RISC-V.

Furthermore, current strengths based on the highly developed European competency in system integration need to be consolidated. It is wrong to think that ‘leading edge’ only applies to semiconductors under five nm. Important power semiconductors that are much larger than five nm and sensor cells up to 350nm are also ‘leading edge’ in their categories. At the same time, chips based on structural sizes below five nm are leading edge in the areas of AI / ML, 5G / 6G and HPC. Chip design, creation of intellectual property, and chip production must all be expanded based on a correctly understood concept of ‘leading edge’. In addition, the development of intellectual property must also be fostered in the areas of 5G / 6G, edge computing / edge AI, electromobility, cybersecurity, AI, aerospace and defence to tackle weaknesses and make full use of existing potential.

Semiconductors and microelectronics must not be treated as a separate field in research and development, but as a central dimension of technological sovereignty, and therefore, an integral dimension of a national and European industrial strategy. Core competencies in the field of semiconductors are imperative not only for the industrial future of Europe but also to meet the ambitious sustainability targets of the EU. The European Green Deal can only be implemented successfully with a targeted development of energy-efficient semiconductor technologies, above all, in the industrial, automotive and energy sectors. Power electronics, as a key technology, is just as significant to the transition as efficient processors. In this context, it is important to include the entire value chain as well as the main inputs, such as polysilicon and silicon-carbide-based semiconductors. In addition to reaching the objectives of the EU Green Deal, powerful hardware to protect European infrastructure from cyberattacks is also crucial.