Source: Foreign Affairs
Authors: Chris Miller andJohn Allen
CHRIS MILLER is a Professor at the Fletcher School at Tufts University, a Nonresident Senior Fellow at the American Enterprise Institute, a Strategic Adviser to the GLOBSEC Geotech Center, and the author of “Chip War: The Fight for the World’s Most Critical Technology”
JOHN ALLEN is Director of the GLOBSEC Geotech Center, a Strategic Adviser to Microsoft, and a Member of the Board of Directors of Polar Semiconductor. From 2011 to 2013, he commanded U.S. and NATO forces in Afghanistan.
European leaders have grand ambitions to reduce the continent’s reliance on sensitive technologies from abroad. Today, they are debating an update to the European Chips Act, which was finalized in 2023 and allocated billions of euros to subsidize chip-making on the continent. The act was meant to increase Europe’s share of global chip manufacturing from ten to 20 percent by 2030, but it will likely fall short of that target by a wide margin.
A purely European supply chain for semiconductors—the sector that undergirds the digital economy and defense sector—is a fantasy that distracts from real opportunities. Many of the powerhouses of Europe’s chip industry, such as ASML, a Dutch company that makes semiconductor equipment, and Merck, a German firm that produces chemicals for chip-making, don’t manufacture semiconductors. Companies like these are cutting-edge, are often highly profitable, and draw on Europe’s industrial expertise in precision machinery, specialty chemicals, and advanced materials. Yet they are overlooked by politicians who focus on chip output.
At the same time, the semiconductor industry is facing rapid technological changes, trade restrictions, and geopolitical shifts that Europe is not prepared for. The main driver of rising demand for chips is artificial intelligence, an area in which Europe is comparatively weak. European firms are being squeezed out of China’s market, which used to be a primary source of growth for them. And the United States, which used to be a close partner, is threatening tariffs that would limit European sales to the U.S. semiconductor market. Merely setting targets for domestic chip production will not solve these challenges.
A self-sufficient semiconductor industry may be out of Europe’s reach, but a more vibrant one is not. Europe has a meaningful edge in certain steps of the semiconductor supply chain, and it can cooperate with allies—including the United States—for the supply chain segments it lacks. The billions of euros being poured into the continent’s rearmament can also be an opportunity for its chip makers, given how critical artificial intelligence has become to defense. To take full advantage of these trends, European leaders need to build on the chip industry’s strengths with deeper partnerships, not a futile drive for self-sufficiency.
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NO SMALL ROLES?
The biggest problem for Europe’s chip industry is the slow development of the continent’s artificial intelligence ecosystem. AI has become the primary driver of growth in chip demand: data centers need chips to power AI training, and devices such as phones, laptops, and cars require chips to run AI. Yet European AI firms are minor players in the global industry, and fewer data centers are being built in Europe than in other regions. Unless European chip companies contribute more to global AI supply chains, their market share will shrink.
European firms, such as ASML, that supply leading Asian chip makers with tools and materials are benefiting from the AI boom. But with the AI ecosystem concentrated in the United States and China, Europe’s chip industry struggles to attract talent, raise venture capital, or anticipate technological trends. Having focused more on regulating AI than deploying it, Europe risks being left behind. Nvidia, a U.S. company that produces AI chips, is worth 30 percent more than the entire German stock market. If European entrepreneurs continue building their AI companies in California instead of at home, European chip makers and designers will lose out, too. Companies in the AI supply chain benefit when they cluster together, as they have in Silicon Valley.
Europe has significant pockets of expertise to contribute to AI supply chains. Arm, a British firm, designs and licenses intellectual property and know-how to AI chip designers around the world. The Netherlands has unique capabilities in photonics, a technology used to accelerate interconnections between AI chips. The Belgian research institute IMEC devises the next-generation technologies that enable the manufacture of ever more advanced AI processor chips around the world.Europe doesn’t need to manufacture cutting-edge AI processors, a business that Taiwan today all but monopolizes. But it does need to ensure that its semiconductor and broader technology ecosystem remains competitive with those of other regions.
This means that European governments and companies must embrace AI development. Centuries-old industries, such as auto manufacturing, need to rapidly adopt advanced technology to stay competitive. Continental, a European auto parts manufacturer, announced in June that it was creating a unit to design chips to sell to auto companies, which are embedding cars with advanced sensors, communications capabilities, and AI. Pirelli, the Italian tire maker, already puts chips in tires to collect vehicle data. Companies that make industrial equipment, medical devices, aviation parts, and robots all require increasingly specialized semiconductor hardware. The faster European industry adopts AI capabilities, the more demand there will be for European chips.