'The EU Chips Act is another epic failure of state planning'

“It will make Europe a leader in this market,” boasted Ursula von der Leyen, the president of the European Commission, when the Chips Act was passed back in 2023. The Commission was to mobilise €43 billion in public and private investment in microchips to make the continent a world leader in technology. It would pump money into research, development and state-of-the-art technology.

At the time, there was a global shortage of processors, and the US under Joe Biden was pursuing an even more ambitious strategy of self-sufficiency in chipmaking. It seemed vital Europe followed that lead. The target was 20% of the global market by 2030, double the percentage when the programme was announced.

How is it coming along? Intel announced last week that it was giving up on Europe. The giant chipmaker said it was scrapping planned investments in Germany and Poland. That was one of the cornerstones of the entire strategy, with a planned €30 billion chip manufacturing complex in the German city of Magdeburg and a related €5 billion plant in Wroclaw, Poland. Both were promised massive subsidies by national governments and were scheduled to go live in 2027.

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Instead, Intel will be moving production to Vietnam and Costa Rica. Meanwhile, Tesla is going to South Korea to start making the chips it needs for its operations. Nvidia, which relied on Taiwan’s TSMC for its supplies, has started working on an American factory, but so far, there is no sign of one in Europe. As for new start-ups, there is absolutely no sign of them.

Why the Chips Act failed

In short, the Chips Act has been yet another epic failure of state planning. There were three big problems. To start with, it focused far too much on raw production instead of quality. The really generous subsidies were for plants such as the one planned by Intel that were planning to churn out very basic chips to go into cars and TV sets and dozens of other devices. That is a commodity industry and brutally competitive, where Europe’s high labour costs were always going to count against it.

Next, even when new factories did get the go-ahead, they quickly became entangled in red tape, making it impossible to get them operating on time and on budget. There is no point offering subsidies to chipmakers if you don’t also strip away the legislation that undermines their competitiveness. Worse, the one-sided trade deal the EU has signed with Donald Trump is likely to mean Europe will have to allow US chips into the European market, but that any processors made on this side of the Atlantic will face 15% US import tariffs.

Can the European Chips Act 2.0 succeed?

Finally, as bureaucrats often do, they misjudged the cycle. It was clear in 2023 that far too much money was being spent on chip manufacturing. Biden had pledged $230 billion for his Chips Act, and Japan, Taiwan and South Korea, which already had the real expertise, were stepping up their investments as well. Indeed, even as the investments were announced, giants such as Samsung were warning that falling chip sales were hitting profits. It should have been clear that as new factories came on stream, there would be a glut of chips. But the pen-pushers in charge of the programme know so little about how markets work that they failed to notice.

Incredibly, the EU is now planning a Chips Act 2.0, even though the first one has achieved nothing. Instead of hitting 20% of the global market by the 2030s, it looks more likely that Europe’s share will drop to 5%, and perhaps even less. There is a bigger point here. Governments around the world have been obsessed with industrial strategies and picking winners. But the outcome is always the same.

Lots of money is wasted and very little achieved. If governments genuinely want to compete in high-tech industries, the formula is simple. Forget about industrial strategies, partnerships with a handful of giant corporations and trying to pick the technologies of the next decade. Instead, focus on encouraging entrepreneurship, reducing regulation, especially for start-ups, and removing the barriers to growth.

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