Inside a German state’s bid to become the European hub for chipmaking

Inside a German state’s bid to become the European hub for chipmaking

EURACTIV — 2022-12-13

Automotive Industry

Available lands, renewable energy and political stability are all part of the German recipe to attract chip production on its territory, together with the deep pockets to heavily subsidise these costly investments, a German state minister told EURACTIV.

In March, the US chipmaking giant Intel announced a massive investment plan in Europe, totalling €80bn for the next 10 years. At the centre of this plan are two semiconductor facilities, a so-called mega fab, to produce cutting-edge semiconductors in Germany.

Both mega fabs will be built in Magdeburg, in the German state of Saxony-Anhalt, the single most significant part of the investment. Once finished, they are estimated to employ 3,000 people directly plus 7,000 via suppliers. Intel declared the total cost of the facility to be €17bn.

According to Sven Schulze, Saxony-Anhalt’s State Minister for Economic Affairs, Intel received €6bn of state aid from the German federal government to finance the project. That is, 35% of the entire investment.

“This is the biggest investment in Germany since the end of World War II,” Schulze told EURACTIV. “We are really happy that Intel decided to go to Magdeburg. It was not an easy time for us. Negotiations lasted 12 or 15 months. There were more than 80 other areas available in Europe.”

The investment will support the establishment of a new mega fab in Germany, the expansion of an existing factory in Ireland, an R&D and design hub in France, and production and research capacities in Italy, Spain and Poland.

Favourable conditions

On top of the federal government’s subsidies, the State of Saxony-Anhalt is also making crucial infrastructural work worth close to another half a billion euros to prepare for the new facilities, notably by building the related infrastructure, such as water lines and wind farms.

As chipmaking is an energy-intensive endeavour, Intel intends to use wind turbines and solar panels. Saxony-Anhalt is a leading region in green energy sources compared to other parts of the country, another strong point as Germany is preparing to phase out from nuclear power in 2023.

“It’s not a problem for the first two fabs because we have enough possibilities to have enough energy. We’ll have to discuss if Intel goes on with fab three, four, or five in the next 20 or 25 years,” he added.

Similarly, the state government does not see a problem with the water supply for the first two mega fabs. However, since semiconductor production is very water-intensive, the state authorities are already discussing with Intel to set up a so-called socket system to recycle water.

For Schulze, another favourable factor was that they could make available a massive area of 1,000 hectares, spanning from Magdeburg to the surroundings, with no street or mountains, which is quite a rarity in Europe.

The area concerned is now conducting a routine search for archaeological remains, and the facilities are still expected to become fully operational in 2027.

The European Commission will present a ‘chips package’ to upscale capacity, relax state aid rules, finance research and establish international partnerships, according to several draft documents seen by EURACTIV.

Geographical balance

Intel’s investment was announced the month after the European Commission presented a proposal for an EU’s Chips Act, an initiative intended to boost Europe’s design and production capacity of semiconductors amid a global shortage of the precious microelectronic component.

The Chips Act includes a series of conditions for EU countries to subsidise private investments like Intel’s, which are needed as producing chips in Europe is much more expensive than in Asia.

However, these measures have prompted criticism among smaller member states with less financial capacity. Although Schulze also points to the stability of the German political system as a determining factor, few European countries can put €6bn on the table for a single investment project.

For the state minister, this is a political question that needs to be addressed at the EU level. At the same time, he emphasised that an investment in Germany might also benefit neighbouring countries.

“If you have the chip industry in Europe, every member state and every region will benefit because if you go to Luxembourg or another small member state, they have, for example, suppliers of the automobile industry. They cannot work if there are no chips,” Schulze argued.

However, behind closed doors, EU diplomats from smaller countries fear that extra-European dependencies might get replaced with intra-EU ones. During the peak of the COVID pandemic, France and Germany both restricted the export of medical gear such as face masks, further adding to member states’ wariness.

The emergency measures included in the Chips Act do little to put these concerns to rest. Although the provisions would empower the Commission to place priority orders to mega fabs, many doubt the EU executive would take such extreme measures without the assent of Paris and Berlin.

At the same time, the very nature of the chip industry favours geographical concentration, as this sophisticated technology is hugely capital-intensive and requires know-how developed via decades-long research and development.

Following Intel’s decision to invest in Magdeburg, the State of Saxony-Anhalt has been contacted by other chipmakers, whose identity Schulze could not reveal, although for smaller investments compared to Intel’s two mega fabs.