Germany wants more chipmakers, but they won’t come cheap

BERLIN – Intel, the Silicon Valley chipmaking giant, paved the way last year when it picked the eastern German city of Magdeburg as the site for its first semiconductor factory in Europe, pledging to invest 17 billion euros (about $18.3 billion) – provided that Berlin throw in nearly 7 billion euros in subsidies.

Wolfspeed, a North Carolina-based maker of silicon carbide chips used in electric cars, decided in February that southwestern Germany would be the perfect place for it to invest 2.5 billion euros to build its first European factory. Again, the agreement was contingent on hundreds of millions more from the government.

Infineon, Germany’s largest chipmaker, is looking to add two plants at its manufacturing site in Dresden, spending 5 billion euros, but it wants the government to cover about one-fifth of that.

Each of the projects promises to help ease the shortages of microchips that German industries have faced since the pandemic and create thousands of jobs, fueling an ecosystem that could bolster the economy for decades. For the chipmakers, Germany offers a location in the heart of Europe near many of their customers, including the country’s 410 billion-euro auto industry.

But each project is also conditional on millions, if not billions, in government subsidies. Germany and the European Union find themselves in competition with the United States and other countries seeking the security of a robust domestic chip industry. Dangling bountiful subsidies and other benefits is the price for landing these companies.

Handing out subsidies is complicated in the European Union, because Brussels strictly controls such aid to avoid distortions within its single market. The assistance for these chipmakers will be financed by the national and regional governments, as well as EU funds to stimulate investment.

The pots of public money being lavished on these companies reflect the critical need for their tiny slivers of silicon, which are essential for an endless list of modern devices, including cars, refrigerators and military equipment.

“The shift toward electric vehicles is highly dependent on semiconductors. The shift toward renewable energy is also highly dependent on semiconductors,” said Thomas Kirschstein, an expert on electronics and microchips with Roland Berger, a consulting firm. “All of the megatrends that you have in the world rely on semiconductors to produce the end product.”

Right now, German companies rely on factories in Taiwan and North America for most of their microchips, a potential national security threat.

The Economy Ministry has not commented on how much it is willing to spend on individual production sites, but it has already pledged billions that require approval by the European Union as part of the proposed EU Chips Act. National governments are still negotiating that 42 billion-euro program, one of several existing or proposed large-scale investment funds set up to attract more technology manufacturing to the European Union’s 27 countries.

But critics warn that even the enormous European pledges pale next to efforts in the United States, which has its own CHIPS Act and is offering at least $76 billion in grants, tax credits and other subsidies to encourage domestic chip production. Some in Germany have questioned the wisdom of lavish public spending on companies with healthy earnings, in an age of stubbornly high inflation and high interest rates.

“Why don’t we let the Americans subsidize the chip production and we could just buy cheap chips from them?” asked Reint Gropp, an economist who is president of the Halle Institute for Economic Research.

Others suggest that the US approach, such as the Inflation Reduction Act, which encourages billions of dollars in clean-energy investment, could be a model for Europe.

“With the IRA, the Americans are showing the EU how it can be done,” said Siegfried Russwurm, president of the German industrial lobby association, BDI.

The push to expand semiconductor production is also about Germany’s race to meet the European Union’s goal of net-zero carbon emissions by 2050. That means replacing fossil fuels with renewable energy generated by chip-hungry devices, such as wind turbines.

Symbolically, the Wolfspeed facilities will be built on the site of a shuttered coal-fired power plant in Saarland, a center of coal mining for hundreds of years.

“Some people speak nostalgically of the good old days,” Chancellor Olaf Scholz said in announcing the project in February. “But, ladies and gentlemen, the fact that the good old days are over does not mean that a good new era cannot dawn.”

Part of that new era, its supporters say, will mean capitalizing on the skills of the many experienced and highly trained engineers and workers in the region. The European Union is the world’s third-largest economy, after the United States and China, but accounts for only about 10% of the global chips market. The EU Chips Act has a goal of bringing at least 20% of the world’s microchip production into the bloc by the end of the decade.

Others argue that even if microchips are produced locally, they require imported raw materials. China dominates the processing of rare earth minerals, which are essential to chip manufacturing.

“You know, if we really wanted to be independent of Taiwanese production, then we need to have the whole supply chain here – not just the production but the rare earths that go into them,” Gropp said.

Germany is also facing not having enough young people entering skilled jobs, especially in mechanical and automotive engineering, electrical engineering, and software development and programming – exactly the employees needed in the microchip industry.

Plans are in the works to revamp German immigration laws to attract more talent, but that might not be soon enough.

“Firms that already exist have real trouble finding skilled labor,” Gropp said. “Do we want to make that even worse and put those firms that didn’t benefit from the subsidies out of business?”

The city of Magdeburg saw the situation differently. Home to a number of technology research centers and a university with a long tradition of engineering, it lost most of its heavy industry – and those jobs – after German reunification in 1990. The new Intel site is expected to hire about 3,000 permanent employees.

Attracting a company that draws on the skill sets in the region could help ensure the area’s future, said Sandra Yvonne Stieger, deputy mayor of Magdeburg, who helped negotiate the Intel deal.

“R&D is the keyword, and we Europeans are really good at that,” Stieger said in an interview. “We should stay focused on that advantage and not squander it.”

But it appears that the billions in government subsidies promised for Intel may not be enough. Even as trucks began preparing its site for construction, Intel was seeking several more billions in government support, German media reported.

A spokesperson for Intel, Lisa Malloy, confirmed that the company was speaking with officials in Berlin, as it contended with a jump in the cost of energy and construction materials since it signed the agreement last year. But she insisted that the project was moving ahead.

“We appreciate the constructive dialogue with the federal government to address the cost gap that exists with building in other locations and make this project globally competitive,” Malloy said.

Although economists question how much is too much to invest for chip production, Stieger said that in Magdeburg, the calculation was clear: “If we want to attract the kind of high-quality production that depends on such research, I believe that we have to use financial support to do so.”

This article originally appeared in The New York Times.