The EU is concerned that it could soon become overly reliant on legacy chips from China. Legacy chips are of strategic importance as they are irreplaceable in a wide range of sectors ranging from the automotive industry to medical appliances to defence and aerospace.
The challenge poses a threat to the EU’s economic security, as China could exploit this dependency to exert influence. However, contrary to widespread belief, the challenge does not primarily arise from Chinese overcapacity. Chinese chipmakers benefit from favourable domestic conditions and localisation trends combined with a specific business model. But Chinese supply aligns with actual demand, rather than representing an overcapacity.</p><br> <p>This has concrete policy consequences: ‘Protect’ measures alone will not solve the issue. The EU needs to complement protective instruments with ‘promote’ and ‘partner’ tools.
These are the main takeaways from the figures shown below and of a new EUISS Policy Brief that can be found here.
Click here for a Brief on the same topic.
The EU is increasingly concerned about its growing strategic dependency on Chinese legacy chips. China’s global market share is likely to grow significantly. This figure illustrates that China will account for 40% of global legacy chip buildout between now and 2030.
The 40% share of global buildout as captured in the previous figure comes on top of China’s market share of around 30%. Numbers may vary slightly depending on the specific process node. This figure summarises global market shares for the 20-45 nm and 50-180 nm process nodes in 2023, and estimates market share based on announced buildout up until 2030.
Europe’s demand for legacy chips significantly exceeds its local supply. The supply gap is projected to be 12.7 million wafers per year by 2030, while the fabrication plants currently planned in the EU are expected to only produce 4.5 million wafers per year. Hence, EU companies will need to import at least 8.2 million wafers per year.
If the EU aimed at closing 80% of this local supply gap, it would require enormous additional buildouts . This figure illustrates that the supply gap is smallest for advanced semiconductors (with node sizes of ≤ 14 nm). The main supply gap exists in legacy chips. To meet 80% of European demand for locally produced legacy chips by 2030, it would require the equivalent of at least 3 additional fabrication plants (fabs) with node sizes between 22-65 nm, along with 18 additional fabs with node sizes of ≥ 90 nm.
A wide range of industrial manufacturing sectors relies on legacy chips. Therefore, we can use the share of overall chips demand (not just legacy chips) and the overall share of global industrial production by country or region as proxies to assess demand. It then becomes clear that Chinese wafer capacity is roughly proportional to its share of global chip demand and share of global industrial manufacturing, while Taiwan and – to a lesser extent – Japan have clear overcapacities.
A more granular analysis illustrates that China’s self-sufficiency rate varies across different chip types. With the exception of the relatively simple LED chips, however, its self-sufficency remains low. As a result, China has to import legacy chips from abroad. This indicates that Chinese semiconductor manufacturers still have ample opportunities to expand their domestic market share, implying that overcapacity is unlikely to emerge as a concern in the foreseeable future.
Economic security risks across different legacy chip types
While overcapacity is not the issue as shown above, growing import dependencies are likely to pose economic security challenges.
However, the extent and speed at which this risk materialises will vary across different legacy chip types. Legacy chips encompass a wide variety of semiconductors, each fulfilling different functions across a broad range of products and sectors. Sales markets differ in their dynamics, and the technical specifications and product characteristics of legacy chips do not equally favour Chinese firms across all sectors.
Five factors determine (a) the market structure and (b) technological characteristics that are crucial for understanding the likelihood of economic security risks emerging in legacy chip submarkets. These factors are:
- the concentration of supply;
- the geographical origin of demand;
- the risk of supply shortages;
- the technological substitutability of a chip; and
- the duration of the product life cycle in which the respective chip is used.
Three examples illustrate the varying degrees of risk: Microcontrollers, NAND flash memory and Power MOSFET semiconductors.
The following table provides an overview. Click on the colours to find out why risks are considered high , medium or low for European economic security.