Why do chip companies run to Germany to build factories?

In August 2023, chip giant TSMC announced that it would jointly invest in a chip factory in Dresden, Germany, with Bosch, Infineon and NXP, two chip companies headquartered in the European Union. TSMC will also operate the new plant and will own 70 percent of the joint venture, with the other three companies holding 10 percent each. The new facility is also known as the European Semiconductor Manufacturing Company (ESMC).

According to Reuters, the plant is scheduled to begin construction in the second half of 2024 and production by the end of 2027. With the support of the European Union and the German government, the total investment in this chip factory will exceed $10 billion. Among them, the German federal government promised to provide the equivalent of 40 billion yuan to support the construction of the factory.

Driven by the European "Chips Act", chip manufacturers have built new factories in Europe. However, among many countries, giants in the chip industry such as TSMC and Intel have chosen Germany. At present, 3/4 of the world's chip production capacity is concentrated in China, Japan and South Korea in East Asia, and the most advanced 5nm and 7nm production capacity are also located in East Asia. The major chip companies invest in Germany to build factories, perhaps to transfer future production capacity to Germany.

So why do these chip giants have such a choice? What are the reasons behind their presence in Germany?

One of the reasons is the German version of the "10 billion subsidy" in the context of the European Chips Act.

According to Roland Berger, the future trends of the world are closely related to the products that contain chips. Intel CEO Patrick Gelsinger has a similar view, and every aspect of human beings, such as smartphones, telemedicine, and self-driving cars, is becoming more digital, and the way to achieve digitalization depends on semiconductors.

At present, Europe accounts for less than 10% of global chip production capacity, which does not match the EU's position as the world's third largest economy. In 2022, the United States passed the "CHIPS and Science Act" involving $280 billion in appropriations, with the aim of attracting chip manufacturers to build and expand semiconductor production lines. In July 2023, the European Parliament passed the European version of the "Chips Act", which wants to increase the EU's global chip production from the current 10% to 20% by 2030.

Former German government officials said in an interview with Finance that the European "Chips Act" is different from the "Chips and Science Act" in the United States, the amount of subsidies for technology companies in the United States is determined, while the amount of subsidies in the "EU Chips Act" is determined by the governments of each member state, and other investments will be driven. In other words, the EU's subsidies for chips mainly come from the budgets of each member state, so Germany, which is relatively wealthy, has an advantage.

According to a Reuters report, Germany will provide more than 30 billion yuan in funding for 31 chip projects. Seventy percent of the funding is provided by the German federal government and the other three percent by the Länder. These projects cover the entire industry chain of the chip industry, including material production, chip design and semiconductor manufacturing.

In the process of attracting Intel to invest in the construction of the factory, the German government initially promised 6.8 billion euros, about 50 billion yuan in subsidies. Citing increased energy and construction costs, Intel eventually raised the amount of government subsidies to nearly 10 billion euros, or more than 78 billion yuan.

During the negotiations, both the German Chancellor and the Minister of Economy were willing to provide Intel with more financial support. According to a report by the German media Handelsblatt, the German government has committed to invest nearly 40 billion yuan in TSMC's project.

The second reason is that Germany, as the main producer of automobiles, has a large demand for chips.

As a traditional automobile manufacturing and production powerhouse, Germany's automotive industry is worth 410 billion euros, more than 3 trillion yuan. During the pandemic, many automakers had to shut down their vehicle's assembly lines due to a chip shortage due to the global supply chain crisis. Germany's Volkswagen, Audi, BMW and other car companies have successively reduced production and stopped production. Alix Partners, a consulting firm, believes that the automotive industry could lose $61 billion in 2021 due to the chip shortage. According to the German Association of the Automotive Industry, car production in Germany fell by about 400,000 units in 2021.

At the same time, Germany's automotive industry is also transitioning to new energy sources. In April 2023, the Council of the European Union approved a regulation requiring the EU to ban the sale of new gasoline-powered cars and minivans that cause carbon emissions from 2035 – the European Commission had hoped to ban all new gasoline-powered cars. As a result, Audi announced in 2021 that it would stop developing gasoline and diesel engines. However, Audi and Mercedes-Benz have said in 2024 that this plan will slow down.

Compared with traditional fuel vehicles, new energy vehicles require more chips. According to a report by consulting firm Sullivan, a new energy vehicle uses an average of more than 1,500 chips, which is twice the amount of chips used in traditional fuel vehicles. Moreover, the computing power level of chips used in new energy vehicles is also increasing rapidly, and the value of chips in the whole vehicle is also gradually increasing, and the chips have reached 5% to 8% of the cost of the whole vehicle.

Among the other three companies involved in TSMC's investment project in Germany, Bosch is the world's largest supplier of automotive parts, and Infineon and NXP are also giants in the field of automotive chips. Some chip industry experts from Germany said that Germany's demand for semiconductors is the strongest in the automotive industry, industrial automation and other fields, and these industries do not need a large number of cutting-edge chips, such as the automotive industry needs chips with mature manufacturing technology in the market.

Therefore, TSMC also said that its German factory will cater to the needs of the local automotive industry and manufacture chips with non-cutting-edge technical grades. At present, TSMC has received long-term orders from Mercedes-Benz and BMW, and Volkswagen, GM and Honda are also negotiating.

The third reason is that Germany is a leader in the European semiconductor industry.

The factory that TSMC plans to invest in is located in Dresden, Saxony, Germany, which was the center of microelectronics for the whole of Eastern Europe back in the GDR. At present, Saxony has hundreds of semiconductor-related companies, is the largest semiconductor industry center in Europe, about 1/3 of Europe's chips are produced here, so Saxony is also known as the "Silicon Valley of Europe", and even the local semiconductor industry association is called Slicezen-Silicon Saxony.

Auto parts giant Bosch says universities and research institutes in Saxony can bring experienced chip experts to producers, as well as young graduates and skilled workers. According to the semiconductor industry research institute Xinmou, Germany not only has companies integrating chip design, manufacturing and packaging such as Infineon and Bosch, but also world-renowned companies such as wafer foundry xFab, Siemens EDA and optical component manufacturer Tsis.

EDA is an indispensable software tool for designing chips, and Siemens EDA accounts for 15% of the global market. The production of high-end chips must use lithography machines produced by the Dutch company ASML, and Zeiss of Germany is the supplier of optical components for ASML lithography machines. According to the research report of Guojin Securities, Zeiss components account for about 26% of the cost of ASML products, that is, 1/4 of the cost of a lithography machine is spent on Zeiss optical components in Germany.

Due to the strength of both upstream and downstream, Germany naturally has the confidence and motivation to develop its own semiconductor industry.

However, Germany also faces some uncertainties in the process of manufacturing chips.

The first is the shortage of talent. According to research by Strategy&, a consulting firm owned by PwC, Europe will need 350,000 employees by 2030 to double its chip market share. A recent study by the German Institute for Economic Research found that as of June 2022, the German semiconductor industry was short of more than 60,000 employees, especially in professions such as electrical engineering, software development and mechatronics. And the aging population is also a problem that Germany is facing. In the next decade or so, more than one-quarter of electrical engineers and one-third of engineering directors in the German semiconductor industry will reach retirement age.

As more and more chip companies set up factories in Germany, the shortage of workers will become more severe. The clash of cultures is also one of the uncertainties. TSMC had previously encountered a culture conflict in its U.S. factory, and some local engineers said that TSMC's work culture was harsh and the standards were too strict, so they left. A similar situation is likely to occur in other developed countries.

In addition, there is a shortage of electricity in the German chip industry. At present, 20% of Germany's electricity is imported from France, but chip manufacturing requires a lot of electricity, and TSMC alone consumed 8% of Taiwan's electricity consumption that year in 2022. After TSMC's German factory is put into operation, Germany will need to import more electricity from France.

In September 2021, there was a large-scale power outage in Dresden, and in two hours, the power supply was intermittent, and the production of chip manufacturers such as Infineon and Bosch was affected. The industry predicts that if the target of 20% market share of the CHIPS Act is to be reached, the electricity consumption of semiconductor equipment produced in Europe will be three times that of the current level, equivalent to 5% of the total electricity consumption in Europe.