Explanatory Memorandum to COM(2022)46 - Framework of measures for strengthening Europe's semiconductor ecosystem (Chips Act)

Please note

This page contains a limited version of this dossier in the EU Monitor.

dossier COM(2022)46 - Framework of measures for strengthening Europe's semiconductor ecosystem (Chips Act).
source COM(2022)46 EN
date 08-02-2022


1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

Semiconductor chips are central to the digital economy. They make digital products work: from smartphones and cars, to critical applications and infrastructures in health, energy, communications and automation to most other industry sectors. They are also key to the technologies of the future, including artificial intelligence (AI) and 5G/6G communication. There is no “digital” without chips.

Within the past year, Europe has witnessed disruptions in the supply of chips, causing shortages across multiple economic sectors and potentially serious societal consequences. Many European sectors, including automotive, energy, communication and health as well as strategic sectors such as defence, security, and space are under threat by such supply disruptions. At the same time, fake chips start appearing on the market, compromising the security of electronic devices and systems.

The current crisis has revealed structural vulnerabilities of the European value chains. The global semiconductor shortage has exposed European dependency on supply from a limited number of companies and geographies, and its vulnerability to third country export restrictions and other disruptions in the present geopolitical context. Furthermore, this dependency is exacerbated by the extremely high barriers to entry and capital intensity of the sector. For example, the most computationally powerful chips require manufacturing to a precision of a few nanometres (nm). 1 Building such facilities entails an upfront investment of at least EUR 15 billion 2 and requires three years to achieve production-readiness with adequate yields 3 . The expenditures to design such chips can range from EUR 0.5 billion to well over EUR 1.0 billion. Research and development (R&D) intensity in the sector is high and more than 15%. 4

Today, European players invest mainly in R&D, but not enough in translating its results into industrial benefits. Such R&D is a key enabler of miniaturisation in semiconductor technologies required for the production of the next generation computationally powerful chips. Europe is home to world-leading research and technology organisations (RTOs). However, many results of European R&D are industrially deployed outside the Union.

The Union is strong in the design of semiconductor components for power electronics, radio frequency and analogue devices, sensors and microcontrollers that have a widespread use in the automotive and manufacturing industries today. It is less strong in the design of digital logic (processors and memory), which become essential as data, AI and connectivity become increasingly pervasive.

The Union is also very well positioned in terms of the materials and equipment needed to run large chip manufacturing plants, with many companies playing essential roles along the supply chain. It has strong and diversified industrial user sectors, e.g. automotive, industrial automation, healthcare, energy, communication, etc. However, collaboration along the value chain is weak.

The Union’s overall global semiconductors market share is 10% in value 5 , well below its economic weight. Despite its strong global position in materials and equipment manufacturing, the Union is heavily dependent on third-country suppliers for the design, manufacturing, packaging, testing and assembly of chips.

Today, semiconductors are at the centre of strong geostrategic interests and at the core of the global technological race. Countries are keen to secure their supply in the most advanced chips as it will condition their capacity to act (economically, industrially and militarily) and drive digital transformation. All major world regions are heavily investing and rolling out support measures to innovate and strengthen their production capabilities.

The Union has the assets to become an industrial leader in the chips market of the future. Its ambition is to double its world production share today to 20% in value by 2030 6 . The goal is not only to reduce dependencies, but also to seize the economic opportunities as the global market for semiconductors is expected to double before the end of the decade, increasing competitiveness of the semiconductor ecosystem, and of industry at large, through innovative products for European citizens.

New market trends and opportunities are emerging. Semiconductor companies increasingly co-design customised chips with end-user companies to improve system performance through hardware-software optimisation. AI, edge cloud and the digital transformation of industrial sectors offer new opportunities for future competitiveness of European technology and industry leadership.

At the same time, technology is constantly evolving. Further miniaturisation continues, towards smaller node dimensions in the mainstream process technologies (FinFET and FDSOI) along the lines of Moore’s law 7 , while more energy-efficient solutions are in high demand to ensure that the ever-growing processing footprint remains sustainable. Emerging computing paradigms, such as neuromorphic computing and quantum technologies are promising technologies for new application areas. New materials such as Silicon Carbide (SiC) and Gallium Nitride (GaN) are essential for power management, e.g. the optimal use of battery power, in particular for electric vehicles of all kinds and renewable energy generation.

This explanatory memorandum accompanies the proposal for a Regulation of the European Parliament and Council establishing a framework of measures for strengthening the semiconductor ecosystem in the Union (Chips Act).

This proposal delivers on the political commitment by President von der Leyen, who announced in her 2021 State of the Union speech that the aim is to jointly create a state-of-the-art European chip ecosystem, including production 8 . The proposal’s underlying strategic vision for strengthening Europe’s semiconductor ecosystem is explained in the accompanying Communication. 9

Contents

1.

To fulfil this vision, the European Chips Strategy is articulated around five strategic objectives:


·Europe should strengthen its research and technology leadership;

·Europe should build and reinforce its own capacity to innovate in the design, manufacturing and packaging of advanced chips, and turn them into commercial products;

·Europe should put in place an adequate framework to increase substantially its production capacity by 2030;

·Europe should address the acute skills shortage, attract new talent and support the emergence of a skilled workforce;

·Europe should develop an in-depth understanding of global semiconductor supply chains.

The proposal aims at reaching the strategic objective of increasing the resilience of Europe’s semiconductor ecosystem and increasing its global market share. It also aims at facilitating early adoption of new chips by European industry and increasing its competitiveness. For this, it needs to attract investment in innovative production facilities, have a skilled workforce, but also be in the position to design and produce the most advanced chips that will define the markets of tomorrow, develop capabilities and have the possibility to test and prototype innovative designs through pilot lines in close collaboration with its industrial vertical sectors. These are necessary steps, but not sufficient unless the Union has the analytical capability of increasing the knowledge of the policy makers of the value chain and is capable to benefit from increased capacity to serve the common interest of the single market in case of crisis. The objective is not to become self-sufficient, which is not an achievable target. We must strengthen our strengths, develop new strengths and work with third countries in a supply chain where interdependencies will remain strong.

2.

In terms of delivering on these objectives, the proposal will aim to:


·Set up the Chips for Europe Initiative, to support large-scale technological capacity building and innovation throughout the Union to enable the development and deployment of cutting-edge and next generation semiconductor and quantum technologies that will reinforce the Union’s advanced design, systems integration, chips production capabilities and skills, including emphasis on start-ups and scale-ups (pillar 1, “Chips for Europe Initiative”).

In particular, the Initiative will build an innovative virtual design platform to reinforce Europe’s design capacity, which will be accessible on open, non-discriminatory and transparent terms. The platform will stimulate a wide cooperation of user communities with design houses, start-ups and SMEs, intellectual property (IP) and tool suppliers, designers and RTOs, and will integrate existing and new design facilities with extended libraries and EDA 10 tools.

The Initiative will support pilot lines that provide the means for third parties under open, transparent, and non-discriminatory terms to test, validate and further develop their product designs. The development of new advanced pilot lines will prepare for the next generation of production capabilities and their validation.

Furthermore, the Initiative will contribute to building advanced technology and engineering capacities for accelerating the innovative development of quantum chips, e.g. in the form of design libraries for quantum chips, pilot lines, and testing and experimentation facilities.

The Initiative will support a network of competence centres across the Union that will provide expertise to stakeholders, including end-user small and medium-sized enterprises (SMEs), start-ups as well as vertical sectors, and improve their skills. Competence centres will facilitate open, transparent, and non-discriminatory access to and effective use of the design infrastructure and the pilot lines. They will become poles of attraction for innovation and for new, highly skilled talent.

Additionally to the Initiative, activities to facilitate access to debt financing and equity in the semiconductor value chain, to be described collectively as the ‘Chips Fund’, should support the development of a dynamic and resilient semiconductor ecosystem by providing opportunities for increased availability of funds to support the growth of start-ups, scale-ups and SMEs as well as investments across the value chain, including for companies in the semiconductor value chains potentially with blending provided by the Initiative.

·Create a framework to ensure security of supply by attracting investments and enhanced production capacities in semiconductor manufacturing as well as advanced packaging, test, and assembly via first-of-a-kind Integrated Production Facilities and Open EU Foundries (pillar 2, “Security of supply”).

In particular, the proposal defines criteria for facilitating the implementation of specific projects that contribute to the security of supply of semiconductors in the Union. To this end, it distinguishes between two types of first-of-a-kind facilities 11 , namely Integrated Production Facilities and Open EU Foundries 12 . If an application by a facility to be recognised as one of the two types of first-of-a-kind facilities is successful, the proposal requires Member States to ensure efficient processing of administrative applications related to the planning, construction and operation of a recognised first-of-a-kind facility.

In response to increasing need for cyber-resilient supply chains 13 the Commission will work with Member States and private actors to identify sectorial requirements for trusted chips with a view to establishing common standards and certification, as well as common requirements for procurement, to be developed with the support of the European standardisation organisations where appropriate and bearing in mind the principles of the New Legislative Framework for conformity assessment and market surveillance.

·Set up a coordination mechanism between the Member States and the Commission for strengthening collaboration with and across Member States, monitoring the supply of semiconductors, estimate demand, anticipate shortages, trigger the activation of a crisis stage and act through a dedicated toolbox of measures (pillar 3, “Monitoring and Crisis Response”).

• Consistency with existing policy provisions in the policy area

This proposal is coherent with the Commission’s overall digital vision, targets, and avenues for a successful digital transformation of the European Union by 2030 as presented in the Commission Communication “The 2030 Digital Compass: the European way for the Digital Decade” (‘Digital Compass Communication’) 14 and the subsequent Commission’s proposal for the Digital Decade Policy Programme 15 , with the particular target on semiconductors. This proposal is intended to help equip the Union with the capabilities that will be needed to deliver on its 2030 target.

This proposal is consistent with the Commission’s Communication updating the 2020 new industrial strategy 16 in May 2021 that identifies areas of strategic dependencies that could lead to vulnerabilities such as supply shortages. The proposal addresses the design, manufacturing, packaging, testing and assembly challenges identified in the Communication and accompanying staff working document. The Communication announces the Industrial Alliance on Processors and Semiconductor technologies (Alliance) 17 to identify gaps in the production of microchips and the technology developments needed for companies and organisations to thrive, help the competitiveness of companies, increase Europe’s digital sovereignty, and address the demand for the next generation of secure, energy-efficient, powerful chips and processors. In the context of this Regulation, the Alliance will play an advisory role.

This proposal is consistent also with the Commission’s standardisation strategy 18 and the 2022 Annual Union Work Programme for European standardisation 19 that were adopted on 2 February 2022. They envisage the development of standards for the certification of chips in terms of security, authenticity and reliability.

This proposal also takes account of the objectives of the Observatory for Critical Technologies 20 , which aims to help identify the Union’s current and possible future digital strategic dependencies and contribute to strengthening its digital sovereignty.

This proposal addresses the sector-specific and unique challenges of the semiconductors supply chain and is a separate initiative from the planned “Single Market Emergency Instrument” that the Commission announced in its updated industrial strategy.

This proposal contributes to the implementation of the Declaration on A European Initiative on Processors and semiconductor technologies, signed by 22 Member States on 7 December 2020. 21 In the declaration, the 22 Member States agreed to “undertake particular efforts to reinforce the semiconductor ecosystem and to expand industrial presence across the supply chain.” Member States also agreed to “work towards common standards and, where appropriate, certification for trusted electronics, as well as common requirements for procurement of secure chips and embedded systems in applications that rely on or make extensive use of chip technology.” This proposal is consistent with these objectives.

Furthermore, the proposal is in line with the recent Communication “A competition policy fit for new challenges”, where the Commission acknowledges that it may “envisage approving public support to fill possible funding gaps in the semiconductor ecosystem for the establishment in particular of European first-of-a-kind facilities in the Union, based on Article 107(3) TFEU. Such aid would have to be subject to strong safeguards to ensure aid is necessary, appropriate and proportionate, undue competition distortions are minimised, and that benefits are shared widely and without discrimination across the European economy.” 22

The Chips for Europe Initiative will pool resources from the Union, Member States and third countries associated with the existing Union programmes, as well as the private sector.

The actions under the Chips for Europe Initiative will be primarily implemented through the Chips Joint Undertaking, i.e. the amended and renamed current Key Digital Technologies Joint Undertaking 23 . This Joint Undertaking currently provides extensive support for industrially driven research, technology development, and innovation in the area of electronic components and systems, and related software and systems technologies. These activities will become part of the Chips for Europe Initiative.

The Chips for Europe Initiative builds on and complements the five specific objectives of the Digital Europe programme (DEP) 24 , which support digital capacity building in key digital domains where semiconductor technology underpins performance gains, including High Performance Computing, Artificial Intelligence, and Cybersecurity, together with skills development and the deployment of digital innovation hubs. The Chips for Europe Initiative through new Specific Objective 6, which should have a thematic focus on semiconductor technologies, will invest in capacity building to reinforce advanced research, design, production and systems integration capabilities in cutting-edge and next generation semiconductor technologies.

The Chips for Europe Initiative also builds on and complements Horizon Europe programme (HE) 25 , which in the area of semiconductors provides support for academically driven research, technology development and innovation. The Initiative will focus on supporting investment into cross-border and openly accessible research, development and innovation infrastructures set up in the Union to enable the development of semiconductor technologies across Europe. New semiconductor technologies from research and innovation actions supported by Horizon Europe may be progressively taken up and deployed by the capacity building parts of the Chips for Europe Initiative. Conversely, the technology capacities of the Initiative will be made available to the research and innovation community, including for actions supported through Horizon Europe.

This proposal is provided in light of the opportunities offered by the InvestEU 26 programme and the significant contribution to digital transformation provided by the Recovery and Resilience Facility 27 , for which at least 20% of funds must contribute to digital objectives. This proposal is also consistent with the Security Union Strategy 28 .

In order to accelerate the implementation of the actions, the Chips for Europe Initiative provides for a new legal instrument – the European Chips Infrastructure Consortium (ECIC) – that is specifically developed to simplify and structure the legal relationships between the private-public consortium members, including particularly RTOs, and provide a structural dialogue with the Commission for the implementation of the actions under the Initiative. This new legal instrument is voluntary and will complement the Union’s toolbox of various other legal instruments, including European Digital Infrastructure Consortium15, that allow to combine funding from Member States, the Union budget, and private investments. Legal entities, when forming a public-private consortium for the purpose of the implementing actions under the Initiative, will have a choice among the available Union’s legal instruments that better fits the specific purpose, composition and set-up of a particular consortium. The Chips Joint Undertaking entrusted with the overall implementation of the certain actions under this Initiative, may under the conditions provided in the Article 134 of the Commission’s Proposal for a Council Regulation amending Regulation (EU) 2021/2085 establishing the Joint Undertakings under Horizon Europe, as regards the Chips Joint Undertaking 29 provide that certain actions may be carried out only by legal entities cooperating within a consortium that may be structured in a form of European Chips Infrastructure Consortium, or any other available Union legal instruments available for forming a consortium.

• Consistency with other Union policies

The proposed measures can support some of the main policies of the Union, such as the Green Deal 30 . The application of semiconductor technologies, and digital technologies in general, are powerful enablers for the sustainability transition and can lead to new products and more efficient and effective ways of working that contribute to the Green Deal objectives.

Semiconductor supply disruptions and dependencies on other regions can slow down the sustainability transition of European sectors benefiting from digital solutions. To address the disruptions and dependencies, the proposal strengthens Europe’s semiconductor production capacity. Where applicable, facilities should be fully compliant with requirements stemming from Union legislation such as related to environmental impact assessment, emissions to air, water and soil, including the risk and prevention of industrial accidents, and seek to ensure high energy and resource and water efficiency. Strengthening the production capacity requires quick set-up of semiconductor manufacturing facilities, which may exceptionally be considered as being of overriding public interest where necessary for derogations in permit granting procedures, including in certain environmental assessments, provided that the remaining other conditions set out in the relevant provisions are fulfilled. At the same time, the first-of-a-kind concept includes possible qualification also based on the facility’s envisaged energy or environmental performance.

Digital technologies, both when manufactured and used have their own environmental footprint, including from the release of fluorinated greenhouse gases during manufacturing to their significant energy consumption for their production and during their use. The information and communications technology (ICT) sector is responsible for 5-9% of the world’s total electricity use and more than 2% of all emissions 31 . Data centres alone accounted for 2.7% of electricity demand in 2018 in the Union and will reach 3.21% by 2030, if development continues on the current trajectory 32 . Such energy consumption needs to be reduced. The proposal, and in particular the setting up design facilities and pilot lines under pillar 1, will lead to the design, testing and validation of new, low power processors. Processors are the core components of servers that handle the computational workload in data centres. Larger data centres contain millions of such servers and improvements in the power consumption of processors can have a significant bearing on the overall power consumption of a data centre. Such chips with a low-energy footprint contribute also to positioning the Union as a leader in sustainable digital technologies.

The proposal contributes to the objectives of parts of the Fit for 55 package that focus on promoting cleaner vehicles and fuels in a technologically neutral way 33 . The revision of the CO2 emission standards for new cars and vans aims at further reducing the greenhouse gas emissions of these vehicles, providing a clear and realistic pathway towards zero-emission mobility. Consumer demand for zero emission vehicles, such as electrically chargeable vehicles, is increasing already 34 . Electrically chargeable vehicles typically have more than twice the amount of semiconductor content per vehicle than cars with internal-combustion engines 35 . Advanced packaging technologies are increasingly important to address increasing power and energy-efficiency requirements by electrical vehicles. It follows that this is consistent with the objectives of the Fit for 55 package.

The proposal is in line with the Circular Economy Action Plan 36 , which identifies electronics and ICT as a key value chain and announces a Circular Electronics Initiative to encompass “regulatory measures for electronics and ICT including mobile phones, tablets and laptops under the Ecodesign Directive so that devices are designed for energy efficiency and durability, reparability, upgradability, maintenance, reuse and recycling”.

Keeping electronic products in use for longer, through design for durability and upgrading services, will reduce replacement rates and the need for new products. Microchip materials can be recovered from electronic waste; it is, for instance, technically possible to recycle compound semiconductor materials, although currently only in very small quantities. The Sustainable Product Initiative, based on expansion of the scope of the Ecodesign Directive, will provide a potential vehicle for such requirements. The Commission is also investigating various possibilities for take-back and sell-back schemes for consumer electronics, to boost the supply of functional used devices.

With digitalisation and electrification increasing, energy-efficient chips contribute to other policies as well, including policies on industrial manufacturing, transport and energy, e.g. the upcoming Digitalisation of Energy Action Plan 37 . The demand for semiconductor technologies is expected to double in a decade. More and more chips are embedded in robots and manufacturing machines, in industry and in agriculture, but also in transport vehicles and other devices. Because the proposal aims at smart use of chips and other digital technologies, and production of more energy-efficient chips, it is consistent with and contributes to several sectoral policies.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

This Regulation pursues two separate specific objectives, which form essential parts of its general objective to establish a coherent framework for strengthening the Union’s semiconductor ecosystem. The first specific objective of the Regulation, underlying pillar 1, is creating large innovation capacities and the adequate technological capabilities in the semiconductor industry to accelerate and adjust to innovation. In addition, underlying pillars 2 and 3, the Regulation aims to increase the Union’s resilience and security of supply in the field of semiconductor technologies by supporting and coordinating investment in advanced semiconductor manufacturing (pillar 2) and enabling coordinated monitoring and crisis response (pillar 3).

The appropriate legal basis for the first objective are Articles 173(3), 182(1) and 183 of the Treaty on the Functioning of the European Union (TFEU). Article 173(3) provides that the European Parliament and the Council, acting in accordance with the ordinary legislative procedure and after consulting the European Economic and Social Committee, may decide on specific measures in support of actions taken in the Member States to secure the conditions necessary for the competitiveness and innovation capacity of the Union and ensure the adjustment of the industry to structural changes due to fast innovation cycles. This legal basis, with regard to most activities undertaken under the Initiative, is appropriate given that pillar 1 of this Regulation aims to accelerate the semiconductor production of the Union’s industry, reinforce sovereignty in the semiconductor supply chain, boost industrial capacities, facilitate the development of innovative start-ups and SMEs, and encourage new investments in innovation and technological development. In view of the broad nature of the Initiative, it is also based on the TFEU Title ‘Research and technological development and space’ (Articles 182(1) and 183).

The appropriate legal basis for the second objective, underlying pillars 2 and 3, is Article 114 TFEU. Pillars 2 and 3 of this proposal aim to create a harmonised legal framework for increasing the Union’s resilience and security of supply. The use of semiconductors is critical for multiple economic sectors and societal functions in the Union and therefore, a resilient supply is essential for the functioning of the internal market. Thus, any supply disruption must be anticipated and addressed without delay in order to preserve the stable functioning of strategic downstream sectors. In light of the significant economic impact of the current semiconductor shortage, it is likely that Member States initiate regulatory measures to address the structural vulnerabilities of the sector that have led to the current shortage or to respond to and mitigate future shortages in crisis situations 38 . While adequate with a view to addressing deficiencies at a national level, such regulatory measures could entail an incoherent response to the need to strengthen resilience and to address possible crises in the internal market, thereby leading to fragmentation of the sector. With a view to enabling coordinated measures for building resilience, harmonised rules for facilitating the implementation of specific projects that contribute to the security of supply of semiconductors in the Union (pillar 2) are necessary. The proposed monitoring and crisis response mechanism (pillar 3) should be uniform to enable a coordinated approach to crisis preparedness for the cross-border semiconductor value chain. The proposal provides for the appropriate governance structure and cooperation between Member States at Union level, hence supporting trust, innovation and growth in the internal market. Article 114 TFEU is therefore a pertinent legal basis for pillars 2 and 3 in order to ensure the proper functioning of the internal market.

Other articles of the TFEU or each article on its own cannot justify both of the above objectives. Article 122 TFEU is not pertinent, as it does not provide for a basis for both objectives and is not compatible with either of Articles 114 and 173 TFEU. The proposed elements are provided in one act, as all the measures constitute a coherent approach to address, in different ways, the need for strengthening of the Union’s semiconductor ecosystem.

• Subsidiarity (for non-exclusive competence)

The objectives of the proposal cannot be achieved by Member States acting alone, as the problems are of a cross-border nature, and not limited to single Member States or to a subset of Member States. The proposed actions focus on areas where there is a demonstrable value added in acting at Union level due to the scale, speed and scope of the efforts needed.

Providing a comprehensive response to the semiconductor crisis requires a rapid and coordinated joint action from a variety of stakeholders, and in cooperation with Member States. No single Member State is capable of achieving this alone. Moreover, given the complexity of the semiconductor ecosystem, the consequence of the Union’s structural dependencies and supply shortages are so far-reaching that intervention at the level of the Union is best placed to address such issues.

Action at Union level can clearly best drive European actors towards a common vision and implementation strategy. This is key to generate economies of scale and of scope and generate critical mass necessary for cutting-edge capacities, limiting, if not avoiding, fragmentation of efforts, subsidy races, and suboptimal national solutions.

Union action is needed in relation to the areas that this proposal addresses through its three pillars.

·With regard to the first pillar (“Chips for Europe Initiative”), the Initiative will support large scale technological capacity building and innovation through the Union to enable the development and deployment of cutting-edge and next generation semiconductor and quantum technologies and to address Europe’s chronic structural weaknesses in design and production. Member States set up a first ‘Important Project of Common European Interest’ (IPCEI) in 2018, supporting cross-border innovative projects across the microelectronics value chain, with a second IPCEI in this field being planned. 39 While such initiatives are of strategic importance for the sector, at this stage it is likely that they alone would not sufficiently address the capacity building in the form of pilot lines and design infrastructures that need to be made widely available to all interested third parties across Europe and which will also enable the Union to play a stronger role in a global and interdependent ecosystem. Such large-scale facilities can only be delivered at Union level due to the scale of investments and know-how necessary.

·Regarding the second pillar (“Security of supply”), actions aimed at accelerating investment in semiconductor manufacturing can only be adequately designed and implemented at Union level, given the scale of the investments needed and because such manufacturing facilities will, by definition, serve the full internal market, strengthen the whole ecosystem, and guarantee security of supply in crises.

·In relation to the third pillar (“Monitoring and Crisis Response”), enhanced Union cooperation will ensure the necessary and comparable intelligence gathering. Together, Member States and Commission will be able to anticipate shortages, activate the crisis stage in a situation of severe shortage and put in place the necessary measures to address such a crisis in more effective ways than through a patchwork of national measures.

• Proportionality

The proposal is designed to strengthen Europe’s semiconductor ecosystem via short-term preparedness and monitoring to increase transparency of semiconductor supply chains, mid-term security of supply actions to enhance semiconductor production capacity in Europe, and longer-term technology and innovation leadership actions to set up design and production facilities for advanced and emerging semiconductor technologies.

In this context, the proposal focuses on those parts of the semiconductor ecosystem that contribute most to the resilience of the Union’s supply chain. The focus on the semiconductor ecosystem itself, rather than the larger electronics components and systems domain, or application areas using semiconductors and/or electronics components and systems, is intended to limit actions to one of today’s most crucial pain points for the European economy and society at large.

The Chips for Europe Initiative in pillar 1 puts in place the mechanisms necessary for ensuring longer-term competitiveness and innovation capacity of European industry via research and design capabilities, pilot lines for testing and experimentation, capacities for quantum chips, competence centres, and a fund for start-ups, scale-ups and SMEs.

The security of supply actions to enhance the Union’s semiconductor production capacity in pillar 2 may recognise a certain facility as an Integrated Production Facility or as an Open EU Foundry. With such recognition, Member States are required to ensure permits for such facilities and foundries are granted through fast procedures.

The preparedness actions in pillar 3 are based on monitoring and information exchange by Member States and the Union to anticipate disruptions in the supply chain. In case of (anticipated) disruptions, coordinated measures may be taken to mitigate or prevent semiconductor shortages and other disruptions.

• Choice of the instrument

The proposal takes the form of a Regulation of the European Parliament and of the Council. This is the most suitable legal instrument for pillar 1 of the proposal setting up the Chips for Europe Initiative, as only a Regulation, with its directly applicable legal provisions, can provide the necessary degree of uniformity needed for the establishment and operation of a Union Initiative aiming at supporting an industrial sector across the internal market. The choice of a Regulation as a legal instrument for pillar 2 is justified by the need for a uniform application of the new rules, in particular the definition of Integrated Production Facilities and Open EU Foundries, as well as a uniform procedure for their recognition and support. Additionally, a Regulation is the most suitable instrument for pillar 3, as this part should provide for a mechanism to anticipate and address serious disruptions of the supply of semiconductors in the Union. The mechanism does not require the transposition through national measures and is directly applicable.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Stakeholder consultations

In her speech at the World Economic Forum in January 2022, President von der Leyen mentioned that “we will propose our European Chips Act in early February” and that “we have no time to lose” 40 . Leading economies are keen to secure their supply in the most advanced chips as this increasingly conditions their capacity to act (economically, industrially, militarily) and drives digital transformation. They are already heavily investing and rolling out support measures to innovate and strengthen their production capacities, or expect to do so soon 41 . There are indications that Union companies and RTOs may be attracted to move to other regions. International players are less likely to expand existing facilities or set up new production facilities in the Union without full clarity on investment conditions, possibilities for public support, public investments in skills, infrastructure, and advanced R&D, etc.

Given the urgent need to act, no impact assessment was carried out and no online public consultation was foreseen. The analysis and all supporting evidence will be set out in a staff working document published at the latest within three months of the proposal’s publication.

Nevertheless, ad-hoc workshops with industry stakeholders on specific topics related to pillar 1 indicated the need to consider facilities for upcoming technologies, such as photonics, neuromorphic computing, and quantum technologies, as well as new materials 42 . In addition, these workshops emphasised the need for due consideration of alternative instruction set architectures, such as RISC-V.

Furthermore, in the context of the ECSEL Joint Undertaking – the predecessor of the Key Digital Technologies Joint Undertaking – meetings with industry representatives and public authorities took place in summer 2021, where the Digital Compass objectives, the update of the industrial strategy, the Industrial alliance, and the European Chips Act were discussed.

Regular meetings with Member States took place monthly in 2021 to prepare the planned second IPCEI on Microelectronics. The Member States provided inputs for the definition and assessment of Integrated Production Facilities and Open EU Foundries in pillar 2, as well as for the definition of specific facilities under pillar 1.

A meeting with CEOs representing key stakeholders in the European semiconductor sector took place on 10 January 2022. Key takeaways from that meeting were: the need to build on European strengths, e.g. R&D and equipment manufacturing; clear support for pilot lines and design infrastructures; support for start-ups and scale-ups; the need to increase Europe’s manufacturing capacity for both mature and advanced technologies; and the need for a worldwide level playing field 43 .

There were also numerous meetings with representatives of CEOs on the need to strengthen the European semiconductors sector, following Commissioner Breton’s meetings with the CEOs of the main semiconductor players and RTOs. These provided inputs particularly to pillar 1.

The European Forum for Electronic Components and Systems (EFECS), in November 2021, with over 500 participants, provided a large platform for discussion on industrial needs. Further input was provided in meetings with industry associations and their members, such as SEMI, ESIA, and Digital Europe.

Moreover, long-standing and regular contacts with industry stakeholders, Member States, trade associations and user associations enabled the collection of a fair amount of information and feedback relevant to the proposal.

Many reports have been published since end-2019 on the semiconductor sector describing trends and providing facts and figures, and served to inform the proposal 44 .

• Impact assessment

This proposal is not accompanied by a formal impact assessment. Considering the urgency as explained above, an impact assessment could not have been delivered in the timeframe available prior to the adoption of the proposal. The analysis and all supporting evidence will be set out in a staff working document published at the latest within three months of the proposal’s publication.

• Fundamental rights

Article 16 of the Charter of Fundamental Rights of the European Union (‘the Charter’) provides for the freedom to conduct a business. The measures under pillars 1 and 2 of this proposal create innovation capacity and foster the security of supply of semiconductors, which can reinforce the freedom to conduct a business in accordance with Union law and national laws and practices. Nevertheless, some measures under pillar 3 needed to address serious disruptions to of the semiconductor supply in the Union may temporarily limit the freedom to conduct a business and the freedom of contract, protected by Article 16 and the right to property, protected by Article 17 of the Charter. Any limitation of those rights in this proposal will, in accordance with Article 52(1) of the Charter, be provided for by law, respect the essence of those rights and freedoms, and comply with the principle of proportionality.

The obligation to disclose specific information to the Commission, provided that certain conditions are met, respects the essence of and will not disproportionately affect the freedom to conduct a business (Article 16 of the Charter). Any information request serves the objective of general interest of the Union to enable the identification of potential mitigation measures to a semiconductor shortage crisis. These information requests are appropriate and effective to attain the objective by providing information necessary to assess the crisis at hand. The Commission in principle only requests the desired information from representative organisations and may issue requests to individual undertakings only if it is necessary in addition. Since information on the supply situation is not available otherwise, there is not any equally effective measure to attain the information necessary to enable European decision-makers to take mitigation action. In light of the serious economic and societal consequences of semiconductor shortages and the respective importance of mitigation measures, information requests are proportionate to the desired aim. Furthermore, the limitation to the freedom to conduct a business and the right to property are offset by appropriate safeguards. Any request to information may only be launched in a situation of crisis in which the Commission has activated the crisis stage through an implementing act.

The obligation to accept and prioritise priority rated orders respects the essence of and will not disproportionately affect the freedom to conduct a business and the freedom of contract (Article 16 of the Charter) and the right to property (Article 17 of the Charter). This obligation serves the objective of general interest of the Union to ensure critical sectors affected by supply disruptions on account of a semiconductor shortage continue to operate. The obligation is appropriate and effective to attain this objective by ensuring the available resources are preferentially utilised for products supplied to these sectors. There is no equally effective measure. It is proportionate to oblige in a situation of crisis semiconductor manufacturing facilities that have applied to be recognised as “Integrated Production Facilities” and “Open EU Foundries”, other semiconductor manufacturing facilities which have accepted such possibility in the context of receiving public support, or undertakings along the semiconductor supply chain which have been subjected to a priority rated order from a third country to the extent this impacts significantly the security of supply to critical sectors, to accept and prioritise certain orders. Appropriate safeguards ensure that any negative impact of the prioritisation obligation on the freedom to conduct a business, the freedom of contract and the right to property does not amount to a violation of these rights. Any obligation to prioritise certain orders may only be launched in a situation of crisis in which the Commission has activated the crisis stage through an implementing act. The undertaking concerned may request the Commission to review the priority rated order if it is unable to perform the order or performing the order would place unreasonable economic burden on them and entail particular hardship. Furthermore, the subject of the obligation is exempt from any liability for damages for the violation of contractual obligations resulting from compliance with the obligation.

4. BUDGETARY IMPLICATIONS

The proposal establishes the Chips for Europe Initiative, which will not have a separate financial envelope, but will be supported by funding from the HE, and the DEP, to be enlarged by a new Specific Objective 6. The Regulation 2021/2085 establishing the Joint Undertakings under HE is amended and expanded to allow the Key Digital Technologies Undertaking, renamed as a Chips Joint Undertaking (Chips JU) to implement the increased contribution from HE and contributions from DEP under the Specific Objective 6. The financial consequences of the proposal on the Union budget are presented in the financial statement accompanying the proposal and will be met from the available resources of the Multiannual financial framework 2021-2027.

The EU budget will support the Chips for Europe Initiative with a total of up to EUR 3.3 billion, including EUR 1.65 billion via HE and EUR 1.65 billion via DEP. Out of this total amount, EUR 2.875 billion will be implemented through the Chips Joint Undertaking, EUR 125 million through InvestEU (to be complemented with other by 125 million under InvestEU itself) and EUR 300 million through the EIC. This comes in addition to the budget already dedicated to activities in microelectronics under this MFF to reach almost 5 billion.

In particular, an amount of up to EUR 1.65 billion will be implemented under HE in favour of the Chips for Europe Initiative: EUR 900 million under Cluster 4 EUR 150 million from Cluster 3, EUR 300 million from Cluster 5 and EUR 300 million under the European Innovation Council (EIC). In addition, the Commission proposes to reduce the budget of HE by an amount of EUR 400 million to increase the amounts available for DEP. In order to compensate for this reduction of EUR 400 million, the Commission proposes to make available again, for the benefit of the HE programme, a further amount of EUR 400 million (in current prices) of commitment appropriations over the period 2023-2027, resulting from total or partial non-implementation of projects belonging to that programme or its predecessor. This amount will be in addition to the EUR 0.5 billion (in 2018 prices) already mentioned in the Joint Declaration by the European Parliament, the Council and the Commission on the re-use of decommitted funds in relation to the research programme 45 . The Commission therefore invites the European Parliament and Council to supplement this Joint Declaration with a mention of the additional amount to make available again.

Under DEP, a new Specific Objective 6 is proposed for the purposes of the Chips for Europe Initiative. This Specific Objective 6, covers components a to d of Article 5, and it is to be implemented by the Chips JU. A total of up to EUR 1.65 billion will be allocated to this new Specific Objective 6 of the programme: EUR 600 million reallocated from the existing objectives of the DEP, a reduction of EUR 400 million of the Connecting Europe Facility Programme (CEF), including EUR 150 million from CEF-Digital and EUR 250 million from CEF-Transport 46 , the reduction of EUR 400 million of cluster 4 of the HE programme (as mentioned in the above paragraph, compensated by the reuse of decommitments), and EUR 250 million from the unallocated margin of heading 1 to finance the Initiative under the DEP.

The Commission proposes to handle the reductions of the financial envelopes of CEF and HE within the 15% variation provided by Point 18 of the Interinstitutional Agreement of 16 December 2020 between the European Parliament, the Council of the European Union and the European Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources 47 . The Commission invites the European Parliament and Council to refer to these variations, which are required for the efficient implementation of the Chips for Europe Initiative, in the Joint Declaration referred to in the previous paragraph.

Further details are provided in the Legislative Financial Statement annexed to this proposal.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

The Commission will evaluate the output, results and impact of this proposal three years after the date on which it becomes applicable and every four years thereafter. The main findings of the evaluation will be presented in a report to the European Parliament and the Council, which will be made public. In order to conduct the evaluation, the European Semiconductor Board, the Member States and national competent authorities will provide information to the Commission on its request.

Detailed explanation of the specific provisions of the proposal

1.1.Chapter I – General Provisions

Chapter I lays out the subject matter of the Regulation. It also sets out the definitions used throughout the instrument. The Regulation establishes a framework, consisting of three “pillars”, for strengthening Europe’s semiconductor ecosystem. In particular, the Regulation establishes the Chips for Europe Initiative that creates the conditions necessary to strengthen the Union’s industrial innovation capacity (pillar 1), includes the definition and criteria of first-of-a-kind Integrated Production Facilities and Open EU Foundries (pillar 2) and a coordination mechanism for monitoring and crisis response (pillar 3).

1.2.Chapter II – Chips for Europe Initiative

Chapter II sets up the Chips for Europe Initiative that will reinforce the Union’s competitiveness, resilience and innovation capacity. Through investments into the Chips for Europe Initiative, the Union should increase its effectiveness in turning its research and technology developments into demand-oriented, application-driven, secure and energy-efficient semiconductor technologies of the highest quality. At the same time, the Union should provide an opportunity for its supply industry to leverage on such investments.

To this end, this Chapter includes the general provisions and objectives of the Chips for Europe Initiative. The Initiative aims to support large-scale capacity building throughout the Union in existing and cutting-edge and next generation semiconductor technologies. The Initiative comprises five components: design capacities for integrated semiconductor technologies, pilot lines for preparing innovative production, and testing and experimentation facilities, advanced technology and engineering capacities for accelerating the development of quantum chips, a network of Competence Centres and skills development and the ‘Chips Fund’ activities for access to capital by start-ups, scale-ups and SMEs.

The Initiative shall be supported by funding from HE and DEP, and in particular its new Specific Objective 6 thereof, and implemented in accordance with the Regulations establishing those programmes.

The Regulation provides for a procedural framework to facilitate combined funding from Member States, investment without prejudice with State aid rules, the Union budget and private investment. This will take the form of a new instrument with legal personality, the European Chips Infrastructure Consortium (‘ECIC’), which can be used by legal entities to structure their collaborative work within a consortium, on a voluntary basis. In addition, Section 1 sets up a mechanism for establishing a European network of Competence Centres for the purpose of implementing actions on competence centres and skills under the Chips for Europe Initiative.

The Chapter also includes provisions on the implementation. The primary implementation of the Initiative will be entrusted to the Chips Joint Undertaking as proposed in the Commission’s Proposal for a Council Regulation amending Regulation (EU) 2021/2085 . The technical description of the actions is provided in Annex I. Annex II includes measurable indicators to monitor the implementation and to report on the progress of the Initiative towards the achievement of its objectives. The Commission is enabled to adopt delegated acts to amend the list of measurable indicators. The Initiative builds on Europe’s existing strengths in the global semiconductor value chain and enhances synergies with actions currently supported by the Union and Member States. Therefore, in order to maximise its positive impacts, the Initiative should enable synergies with Union programmes described in Annex III.

1.3.Chapter III – Security of Supply

Chapter III sets out the framework for Integrated Production Facilities and Open EU Foundries. Integrated Production Facilities and Open EU Foundries are manufacturing facilities providing semiconductor manufacturing capabilities that are “first-of-a-kind” in the Union and contribute to the security of supply and to a resilient ecosystem in the internal market. In particular, in order to qualify as Integrated Production Facilities and Open EU Foundries, the facility should have a clear positive impact on the semiconductor value chain in the Union.

While Integrated Production Facilities are vertically integrated production facilities, Open EU Foundries offer a significant degree of their production capacity to other industrial players, such as fabless semiconductor companies (i.e. companies that design but do not manufacture chips). Investment in these facilities facilitates the development of semiconductor manufacturing in the Union. Hence, upon recognition as an Integrated Production Facility or Open EU Foundry by the Commission, these facilities shall be considered to contribute to the security of supply of semiconductors in the Union and therefore in the public interest. In order to reach security of supply, Member States may, without prejudice to State aid rules, apply support schemes and shall provide for administrative support, including fast tracking of administrative application procedures related to their planning, construction and operation. The Commission will recognise a facility as an Integrated Production Facilities or Open EU Foundries if they fulfil the criteria set out in this Chapter. The Commission may repeal its decision if the recognition was based on incorrect information or the facility no longer fulfils the criteria.

1.4.Chapter IV – Monitoring and Crisis Response

Chapter IV contains a mechanism for coordinated monitoring of the semiconductor value chain and responding to disruptions of the supply of semiconductors that have an impact on the proper functioning of the internal market.

Section 1 (Monitoring) sets out a monitoring and alerting system of the semiconductor value chain. The system is based on regular monitoring activities of Member States consisting of, in particular, the observation of early warning indicators and the availability and integrity of the services and goods provided by key market actors. The Commission provides the basis for the monitoring activities through a Union risk assessment in which it identifies the early warning indicators. To ensure industry participation, the Member States will invite relevant stakeholders and industry associations to inform about significant fluctuations in demand and disruptions of their supply chain. Member States should provide regular updates and exchange their findings in the European Semiconductor Board. If Member States become aware of a potential semiconductor crisis or the occurrence of a relevant risk factor in the frame of their monitoring activities or through an update from stakeholders, they shall alert the Commission. Upon this alert, or upon an alert through other sources including information from international partners, the Commission shall convene an extraordinary meeting of the European Semiconductor Board. The meeting will serve to assess the need to activate the crisis stage and discuss potential coordinated procurement ahead of a shortage. Furthermore, the Commission shall enter into consultations or cooperation, on behalf of the Union, with relevant third countries with a view to seeking cooperative solutions to address supply chain disruptions.

Section 2 (Crisis Stage) provides the rules to activate the semiconductor crisis stage and details the emergency measures that can be used to respond to the crisis.

The Commission is enabled to activate the crisis stage by means of an implementing act when there is concrete, serious, and reliable evidence of a semiconductor crisis. Such a semiconductor crisis occurs when there are serious disruptions in the supply of semiconductors leading to significant shortages, which involve significant negative effects on one or more important sectors of the Union, or prevent the supply, repair and maintenance of essential products used by critical sectors. The implementing act will specify the duration of the crisis stage or its prolongation. Before the expiry of the crisis stage, the Commission shall assess, taking into account the opinion of the European Semiconductor Board, whether the activation of the crisis stage should be prolonged. During the crisis stage, the European Semiconductor Board will hold extraordinary meetings to allow for Member States to work closely with the Commission and coordinate any national measures taken with regard to the semiconductor supply chain.

When the crisis stage is activated, the Commission may take certain emergency measures set out in this Regulation. The Commission may request representative organisations of undertakings, or, if need be, individual undertakings operating along the semiconductor supply chain for information necessary for assessing the semiconductor crisis and identifying potential mitigation measures. These entities are obliged to provide the Commission with the requested information. The requested information can consist of information regarding their production capabilities, production capacities, current primary disruptions or any other existing data necessary to assess the nature of the semiconductor crisis or to identify and assess potential mitigation or emergency measures at national or Union level. Where appropriate, the Commission may oblige IPFs, OEFs, semiconductor manufacturing facilities which have previously accepted this possibility in the context of receiving public support, or undertakings along the semiconductor supply chain which have been subjected to a priority rated order request from a third country to an extent that significantly impacts the operation of critical sectors, to accept and prioritise the production of crisis-relevant products for critical sectors. Additionally or alternatively, upon the request of two or more Member States, the Commission may, on their behalf, act as a central purchasing body in order to procure crisis-relevant products for critical sectors. The Commission will, in consultation with the European Semiconductor Board, assess the utility, necessity and proportionality of the request. For the definition of critical sectors, this Regulation refers to the sectors enlisted in Annex of the Commission proposal for a Directive of the European Parliament and of the Council on the resilience of critical entities 48 , and additionally the defence sector and other activities that are relevant for public safety and security, and provides that the Commission may limit these emergency measures to certain sectors within this list.

1.5.Chapter V – Governance

Chapter V sets up the governance systems at Union and national level. At Union level, the proposal establishes a European Semiconductor Board, composed of representatives from the Member States and chaired by the Commission. The European Semiconductor Board will provide advice on the Initiative to the Public Authorities Board of the Chips Joint Undertaking (pillar 1); provide advice and assistance to the Commission in order to exchange information on the functioning of the IPF and OEF (pillar 2); discuss and prepare the identification of specific critical sectors and technologies, address monitoring and crisis response issues (pillar 3), and to provide support in the consistent application of the proposed Regulation and facilitate cooperation among Member States. The European Semiconductor Board shall support the Commission in international cooperation. It shall also coordinate and exchange information with relevant crisis structures established under Union law. The European Semiconductor Board will meet in different compositions and hold separate meetings for its tasks under pillar 1 and for its tasks under pillars 2 and 3. The Commission may establish standing or temporary sub-groups of the European Semiconductor Board and invite organisations representing the interests of the semiconductor industry and other stakeholders to such sub-groups as observers.

At national level, Member States will designate one or more national competent authorities and, among them, a national single point of contact for the purpose of implementing the Regulation.

1.6.Chapter VI, VII, VIII – Final Provisions

Chapter VI emphasizes the obligation of all parties to respect the confidentiality of sensitive business information and trade secrets. The obligation applies to the Commission, the national competent authorities and other authorities of the Member States, as well as all representatives and experts attending meetings of the European Semiconductor Board and the Committee. The Chapter also establishes rules on effective, proportionate, and dissuasive penalties and fines for noncompliance with the obligations under this Regulation, subject to appropriate safeguards. The Commission may impose periodic penalty payments for failure of the relevant undertakings to accept and prioritise certain orders in a semiconductor crisis. Furthermore, the Commission may impose fines on an undertaking that provides incorrect, incomplete or misleading information, or does not supply the information within the prescribed time limit.

Chapter VII sets out rules and conditions for the exercise of delegation and implementing powers. The proposal empowers the Commission to adopt, where appropriate, implementing acts to allow for procedural specification and ensure uniform application of the Regulation and delegated acts to amend Annex I (the activities set out therein in a manner consistent with the objectives of the Initiative) and Annex II (the measurable indicators and the provisions on the establishment of a monitoring and evaluation framework to supplement this Regulation).

Chapter VIII contains amendments to other acts, including the Digital Europe programme, and an obligation for the Commission to prepare regular reports for the evaluation and review of the Regulation to the European Parliament and to the Council.