Back on the Microchip Map

For decades, the United States and Asia have dominated semiconductor production. But now Germany is poised to become one of the leading chip makers in Europe and the world. With the ongoing global microchip shortage, it’s high time for such a shift.

November 2022

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Your cell phone. Your laptop. Your flatscreen TV. Your car. All of your essential devices rely on microchips. And if you tried to upgrade any of those items in the past year, you may have noticed shipping delays, increased prices or lack of stock. The global microchip supply chain problems are to blame. Average wait times for orders more than doubled between 2020 and 2022, according to business news agency Bloomberg.

This is bad news for a country like Germany that specializes in manufacturing sophisticated technological products. The solution? Diversifying supply and value chains, which includes the strategy of relocating production to Europe and the continent’s economic heartland.

That’s the background to a number of international tech firms’ decisions to expand to and within Germany – most prominently, the US giant Intel with its record-setting, 17-billion-euro, new semiconductor production facility in Magdeburg in the eastern state of Saxony-Anhalt. It’s the largest foreign direct business investment ever on German soil.

“The past years have shown how delicate supply chains are and what sweeping consequences their collapse can have,” says Christin Eisenschmid, managing director of Intel Germany (you find an extensive interview with her here).

“Europe, and especially Germany, is back on the map,” says semiconductor expert Max Milbredt, who was the project leader for the Intel site selection process. So how did the sector get to the point where it needed to shift its geographical configuration?

The Bottom Line

Diversified supply chains and more microchip production in Europe and its commercial heartland Germany offer longterm opportunities for international companies.

A pain in the bottleneck

The ongoing semiconductor shortages were initially spurred by shutdowns during the coronavirus pandemic. But they’ve been exacerbated by other factors, including trade wars and actual wars.

Tensions between the US and China have created concerns about global over-reliance on chip manufacturing in Taiwan. And the sanctions on Russia after its invasion of Ukraine have made it more difficult to obtain raw materials such as palladium, used in manufacturing semiconductors. Moreover, Ukraine is a major supplier of neon gas, which is also crucial in the semiconductor manufacturing process.

Across the board, industries that depend on chips – from automobiles and personal electronics to telecommunications and the Internet of Things – have been held back by the squeeze. And it’s not clear when the bottlenecks will cease.

KPMG’s Global Semiconductor Industry Outlook 2022 found that, as of the fourth quarter of 2021, 56 percent of industry insiders expected the chip shortage to be resolved in 2023, while another 3 percent thought it would persist until at least 2024. A further survey from the second quarter of 2022 showed that 65 percent of insiders expected the chip shortage to be resolved in 2023, and 18 percent thought it would last until at least 2024.

European and German response

The EU and Germany have reacted with rapid measures to boost domestic chip production capacity and develop supply and value chain resilience. The European Semiconductor Act, announced in February 2022, sets the target of increasing EU production capacity to 20 percent of the global market by 2030. That would require quadrupling current capacity. The European Commission has earmarked EUR 43 billion for that purpose.

The European Union also declared microelectronics an Important Project of Common European Interest (IPCEI), which opens the door to public funding in 20 countries, including Germany. Meanwhile, the German government is investing EUR 14 billion in companies working on 32 projects in energy-efficient chips, power semiconductors, smart sensors, advanced optical equipment and new compound materials. All told, Germany has pledged to spend up to EUR 50 billion and is striving to become the undisputed heart of Europe’s semiconductor industry.

That makes Germany even more attractive as an expansion location for multinational tech companies. And advantages like a highly skilled labor pool outweigh factors like the cost of labor. “Semiconductor manufacturing requires well-educated people,” says Michael Pritzer, partner and COO Audit at KPMG Germany. “Labor costs are increasing in Germany, as they are in the US, due to the competition for qualified talent, but I believe Germany is still attractive.”

6 factors that attract semiconductor producers to Germany

1

Domestic demand

Europe uses 9 percent of all microchips produced worldwide, and 37 percent of them go toward auto manufacturing, according to ZVEI. As Europe’s largest economy, Germany’s appetite for chips is only expected to grow. In 2021, the market for power semiconductors in Europe’s auto industry was USD 9 billion; by 2030, it’s expected to reach USD 36 billion.

2

The qualified workforce

Of Germany’s roughly 43 million employed people, 83 percent have completed apprenticeships, vocational training or university courses.

3

Political stability and EU access

Germany ranks highly for political and economic stability. Its central location in the European Economic Area provides fast access to the rest of the continent via road, rail and ship.

4

Research institutions

Germany’s R&D landscape is a unique tripartite constellation of the private sector, universities and research organizations. Companies in Germany invested EUR 22.7 billion in third-party R&D in 2019.

5

Sufficient space

There is ample land available at competitive costs for major industrial projects in Germany’s east and other areas undergoing structural change. For instance, the site of Intel’s Magdeburg mega fab facility has an area of 380 hectares and borders on the Autobahn.

6

State assistance

The EU and Germany offer generous subsidies to chipmakers expanding to or within the bloc. State funding programs help companies to set up in areas of the country undergoing structural transformation.

Benefits for Magdeburg and beyond

Magdeburg and Saxony-Anhalt now stand to reap big rewards. Intel estimates its “Silicon Junction” site there will create 3,000 permanent high-tech jobs for producing next-generation, two-nanometer-wide chips. The “mega fab” facility is scheduled to start operations in 2027.

The eastern German location is the keystone of Intel’s plans to spend a total of EUR 80 billion on its European operations over the next decade. “Together with the Magdeburg fab, our investments in France, Ireland, Italy, Poland and Spain play a crucial role in building a state-of-the-art semiconductor ecosystem in Europe,” says Intel’s Eisenschmid.

And the sector in neighboring Saxony will benefit as well. “Intel’s investment will bring the companies in the region even closer together,” said Dirk Röhrborn, head of the Silicon Saxony industry association, on the group’s website. “Above all, the big winners will be the SMEs right on their doorstep which will support Intel in getting production up and running. Our member Intel is enabling new perspectives for cooperation in the field of research and development. The Silicon Saxony region will also benefit and continue to grow in terms of international skilled workers.”

How Intel came to Magdeburg

In December 2020, Intel reached out to the German Chancellery and contacted Germany Trade & Invest in early 2021. Finding a suitable site for such a huge project was a major task, and Germany wasn’t the only country the company was considering for its European expansion.

“After our initial meeting and learning about the very demanding requirements, I immediately called up all of our partners in all 16 German states,” recalls Max Milbredt, former GTAI expert. He was able to provide a list of potential sites within three business days. Magdeburg featured from the very beginning because the site was so close to the city center. But there was a snag: “The initial plot under discussion was too small to meet the requirements,” Milbredt says. “And to be honest, Magdeburg was a bit of an underdog because they don’t have a long history of semiconductor design or manufacturing as other places did.”So he went back to the city and asked if there was a way to expand the proposed plot of land. The solution was the neighboring municipalities of Wanzleben and Sülzetal offering more space. “I had never seen a single site of this size in ten years in this job,” Milbredt says.

Magdeburg managed to propel itself to the top of the list of contenders. “The city’s deputy mayor and her team responded incredibly quickly and efficiently to all the issues that came up over the many months,” Milbredt recalls. For example, the city ensured the supply of electricity and water needed to run a state-of-the-art semiconductor fab. And it prepared the fab sites’ potential future neighbors while still operating with confidentiality – all this in the midst of a global pandemic.

“I never imagined how much work it would be for me to personally drive Intel VPs across almost all of Germany to look at sites with masks on the whole time,” he remembers. “I am not a professional chauffeur, so that was a new experience for me. We basically did whatever it took.”

(picture: An architectural rendering of the new Intel plant currently being built in Magdeburg, eastern Germany)

»Semiconductor manufacturing requires well-educated people.«

Michael Pritzer,

partner KPMG Germany

A growing tech trend

Other global tech leaders are also expanding their presences in Germany. In May, US tech company Qualcomm won a major order for system-on-a-chip (SoC) wafers from Volkswagen to power its future autonomous driving solutions. CARIAD, the Volkswagen Group’s software company, is collaborating with Qualcomm to design Snapdragon Ride SoCs tailored to the automaker’s needs.

“Germany in particular is the heart of our European operations and home to around half of our European workforce,” says Enrico Salvatori, president of Qualcomm Europe/MEA. “Our expansion in Germany has, in part, been driven by our close working relationship with the big car brands and tier-one suppliers. The opening of the automotive office in Berlin was part of our expansion to work with, and provide services to, the German automotive industry.”

Qualcomm has also collaborated with BMW and Audi in the automotive sector, as well as Bosch and Siemens on manufacturing automation. “Germany has a rich and deep pool of R&D, engineering and automotive talent,” Salvatori says.

American electronics manufacturer Vishay Intertechnology is investing at least EUR 320 million in the first phase of a new chip factory in Itzehoe in northern Germany. “Geopolitically, it is important to have a European location to strengthen independence from China,” says Dr. Gerald Paul, Vishay’s president and CEO. “Germany is an important automotive market. The new 12-inch-chip manufacturing facility in Itzehoe is clearly focused on the automotive business.”

Vishay’s existing 8-inch-wafer production facility in Itzehoe was a major factor in the location of the new project, as was having good neighbors. “Itzehoe provides stability and all the infrastructure needed to support expansion. The semiconductor industry pool with the Fraunhofer Institute offers the right environment,” Paul says.

Meanwhile, Apple is investing more than EUR 1 billion in its European Silicon Design Center in Munich. The 30,000-square-meter facility, which will focus on mobile wireless semiconductors, should be operational by the end of 2022. Finally, Bosch has put EUR 1 billion in a state-of-the-art production facility in Dresden that opened in 2021. The plant is Europe’s first fully digitalized semiconductor production facility, making chips and sensors for the auto industry. Bosch received EUR 140 million in IPCEI funding for the project, which has created 700 new jobs in the eastern state of Saxony.

Average wait time for chip orders

Long-term solutions

No one is under any illusions that these projects will solve the semiconductor problem at the drop of a hat. Production facilities, after all, take time to construct and go operational. The protagonists in Germany and elsewhere in Europe are in it for the long haul. “It will be interesting to see these large investments continue,” says Milbredt, who notes that some of the companies now expanding into Germany are doing so even without government subsidies. “But there will still be a strain on the system since the factories being built will take about three years to come online.”

Milbredt is also keen to see how capacity develops in conventional models of semiconductors. “There isn’t sufficient investment into these ‘older’ chip types, but that’s what the automotive industry mostly needs,” Milbredt says. “The new sub-10-nanometer fabs are most relevant for smartphone and PC manufacturers.” Demand for microchips and nanochips will grow exponentially as the transition to green energy and electric mobility progresses and as big data and artificial intelligence become increasingly important. That’s true for Germany and for many global economies.

“The semiconductor industry is international,” says KPMG’s Pritzer. “Any individual chip in a product could probably qualify for frequent flier status with Lufthansa, considering how many times it goes around the world.”

Many companies are diversifying their suppliers to become more resilient where semiconductors are concerned. Flexibility and adaptability are key to remaining competitive despite disruptions. Pritzer cites the example of automakers, whose overall volume was down during the pandemic but whose profits were up because they focused on higher-value, technologically advanced vehicles. “Despite the huge global financial problems, these companies are all doing very well.”

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