Europe’s Struggle for Industrial Sovereignty: A Troubling Journey

Europe’s Industrial Ambitions Face Critical ChallengesEurope's ambitious plan for industrial revitalization and technological sovereignty is encountering significant hurdles on multiple fronts. Key components of this strategy are facing delays, and the much-anticipated semiconductor renaissance appears stalled. Central to this initiative was a €30 billion project by Intel, the American semiconductor giant, aimed at establishing two state-of-the-art fabrication plants near Magdeburg in eastern Germany. A third facility was to be funded by German taxpayers, marking the most expensive project in the history of German industry.

These Intel facilities were expected to manufacture chips with advanced technology down to 1.8 nanometers (nm)—a crucial requirement for emerging technologies such as AI, 5G, autonomous vehicles, and advanced defense systems. They were seen as the cornerstone of Silicon Saxony and a vital element in Europe’s efforts to regain its position in the global chip market after decades of decline.

However, construction, which was slated to begin in early 2023, has been delayed due to protracted negotiations over state subsidies and bizarre disputes regarding the handling of an ancient burial site and local soil conditions. As a result, Intel announced that the entire project, along with another site planned in Poland, is now postponed for an additional two years.

Meanwhile, Intel is grappling with its own challenges, having missed opportunities in the smartphone market and the initial phase of the AI boom. The company is laying off 15,000 employees globally and shifting its focus back to the U.S., concentrating efforts on four advanced fabrication plants in Arizona and Ohio, spurred by the $280 billion Chips and Science Act—a U.S. initiative aimed at ensuring national security and semiconductor self-sufficiency.

Once a leader in chip production, Europe accounted for 25% of the world’s semiconductor output in 1990. Today, that figure has plummeted to below 10%, with almost none of its production occurring at cutting-edge technology nodes smaller than 10 nm.

EU's Ambitious Chips Act Faces Stark RealitiesThe European Union has enacted its own Chips Act, promising an ambitious €43 billion investment to secure a 20% share of the global semiconductor market by 2030. However, with world demand projected to double in the same timeframe, the EU would need to quadruple its current output to meet this target. Peter Wennink, former head of Dutch lithography company ASML, described this goal as “totally unrealistic.”

The actual funding available at the EU level is only €3.3 billion, with some of this budget redirected from Horizon Europe, a science and research initiative. Experts estimate that achieving the necessary scale and developing 2nm technology from scratch would require at least €500 billion. Furthermore, Europe lacks the specialized skills needed to innovate in this sector. Comparatively, Taiwan benefits from 40% lower wage costs and has a robust network of technical institutes tailored to semiconductor manufacturing.

A recent report by Mario Draghi highlighted the EU's competitiveness challenges, stating, “The capabilities required to domestically innovate this technology are virtually non-existent in the EU.” Additionally, Europe faces significantly higher electricity costs—158% more than in the U.S.—with large fabrication plants consuming about 100 megawatts per hour.

Given these circumstances, one might question why Intel considered such a venture in Europe. In hindsight, Germany might be fortunate that Intel has paused its high-profile project, which was projected to cost €3.3 million in subsidies for each permanent job created—jobs that would primarily produce chips easily sourced from allied nations. Moreover, the proposed 1.8nm chips could become obsolete soon due to the physical limits of silicon miniaturization. Emerging advanced materials, such as graphene and gallium nitride, are on the horizon and could outpace current technologies. For instance, Cambridge-based start-up Paragraf is working on 2D graphene chips that are only one atom thick and boast speeds a thousand times faster than traditional silicon chips.

The UK and EU's Divergent Paths in Semiconductor and Battery ProductionThe UK is strategically focusing its £1 billion semiconductor fund on niche sectors where it possesses a competitive advantage. In contrast, the EU would benefit from adopting a similar approach, aligning its efforts with the mindset of a mid-sized power rather than chasing grand ambitions. The EU should capitalize on its strengths in areas like sensors, lithography, optics, and quantum computing to drive innovation.

Europe's aspirations for battery gigafactories are facing challenges as well. Recently, BMW canceled a €2 billion order for lithium battery cells from Northvolt, Sweden's leading tech startup and a key player in the automotive industry. The reason? Northvolt was unable to deliver the cells on schedule, resulting in BMW awarding the contract to Samsung SDI in South Korea.

While Northvolt is recognized for its potential—especially given its plans to establish a green gigafactory in northern Sweden, powered by hydropower at low electricity costs—the company overextended itself in a competitive global market. It initially focused on standard nickel-cobalt-manganese (NMC) batteries just as the industry shifted towards more affordable and safer lithium iron phosphate (LFP) batteries favored by Chinese manufacturers. As a result, Northvolt is implementing drastic measures, including suspending cathode production at its primary facility in Skellefteå and resorting to sourcing cathode materials from Asia. Other plants in Germany, Sweden, and Canada are currently under review, and the Swedish government has declined to provide a bailout, leaving Northvolt in negotiations with creditors.

These challenges reflect the struggles of what was once hailed as Europe's new Airbus. Meanwhile, Norway's Freyr has abandoned its plans to manufacture electric vehicle batteries in Europe, opting instead to relocate to the U.S. to benefit from incentives provided by the Inflation Reduction Act, although this move is not without its own difficulties. In the case of Volkswagen, only one of its six planned gigafactories has moved beyond the planning stage, with the company scrapping a proposed plant in Saxony and only constructing one of two intended cell facilities in Salzgitter.

Western Automakers at the Mercy of Asian Battery Suppliers“Western carmakers are merely passengers at the back of the bus, while others dictate the direction,” stated Volkswagen board member Thomas Schmall. He emphasized the critical role of batteries in electric vehicles (EVs), noting that the automotive industry is currently heavily reliant on Asian battery manufacturers. “We must change that,” he asserted in an interview with the Frankfurter Allgemeine. Schmall also refrained from participating in the political backlash against EVs, cautioning that any delay in enforcing the 2035 ban on combustion engines would be disastrous. “We all agree that the future lies in e-mobility. There is no alternative.”

Volkswagen is facing significant challenges as it grapples with the repercussions of allowing China to advance ahead in EV technology. The immediate concern is that China has increased its battery production capacity to an astounding 800 GWh, surpassing the total global demand. By late next year, this capacity is expected to triple, resulting in a surplus that is flooding the European market.

A representative from a European battery manufacturer expressed frustration, revealing that the EU has not provided “a single inch of flexibility” in financing options, despite the discussions surrounding the European Battery Alliance. This highlights a critical issue: the EU's ambitious proclamations lack substantive financial backing.

Mario Draghi, the former Italian prime minister and economist, advocates for a double Marshall Plan, calling for an additional €800 billion annually to prepare Europe for the challenges of the 21st century. However, achieving this would require the EU to establish a centralized treasury with borrowing capabilities akin to those of a unified state—something that currently does not exist.

If the EU fails to take decisive action and pursue significant treaty reforms, it may devolve economic and legal powers back to individual nation-states. The existing hybrid structure is proving inadequate, and without radical changes, the EU's ambitions risk being undermined.