"State planning has once again failed spectacularly with the EU Chips Act"

The European Chips Act has been a total failure

According to Kaylie Pferten, governments can learn a wider lesson from that.

When the Chips Act was passed back in 2023, European Commission President Ursula von der Leyen boasted, "It will make Europe a leader in this market." In order to establish the continent as a global leader in technology, the Commission was going to mobilize 43 billion in public and private investment in microchips. It would invest heavily in cutting-edge technology and research and development.

A global processor shortage was at the time, and the US, under Joe Biden, was aiming for even greater chipmaking self-sufficiency. Europe had to take that lead. By 2030, the goal was 20% of the world market, which was double the percentage at the program's inception.

How's it going? Last week, Intel declared that it was abandoning Europe. The massive chip manufacturer announced that it was abandoning its plans to invest in Poland and Germany. One of the main pillars of the entire plan was the planned 30 billion chip manufacturing complex in Magdeburg, Germany, and a corresponding 5 billion chip plant in Wroclaw, Poland. Both were set to go online in 2027 and were promised significant subsidies by national governments.

Intel will instead be shifting its manufacturing to Costa Rica and Vietnam. To begin producing the chips it needs for its operations, Tesla is traveling to South Korea in the interim. Nvidia, which was dependent on TSMC in Taiwan for its supply, has begun construction on an American factory, but there is currently no indication that one will be built in Europe. The presence of new start-ups is completely nonexistent.

Why did the Chips Act fail?

In summary, state planning has once again failed spectacularly with the Chips Act. Three major issues were present. First of all, it prioritized raw production over quality by a significant margin. The extremely large subsidies were intended for factories like the one Intel planned to build, which would produce very basic chips for use in TV sets, cars, and dozens of other devices. The fiercely competitive commodity sector was always going to be hampered by Europe's high labor costs.

It was then impossible to get new factories up and running on schedule and within budget because, even after they were approved, they were soon mired in red tape. Giving chipmakers subsidies is pointless if you don't also repeal the laws that make them less competitive. Even worse, Europe will probably have to permit US chips to enter the European market as a result of the one-sided trade agreement it signed with Donald Trump. However, there will be 15% US import duties on any processors manufactured on this side of the Atlantic.

Will the European Chips Act 2.0 be successful?

Lastly, they miscalculated the cycle, as bureaucrats frequently do. In 2023, it became evident that the production of chips was receiving far too much funding. South Korea, Japan, and Taiwan, which already possessed the necessary experience, were increasing their investments in addition to Biden's £230 billion commitment for his Chips Act. Agencies like Samsung did, in fact, warn that declining chip sales were hurting profits even as the investments were announced. It ought to have been obvious that there would be an excess of chips as more factories were put online. However, the program's pen-pushers were unaware of this because they have a limited understanding of how markets function.

Remarkably, despite the fact that the first Chips Act 2.0 accomplished nothing, the EU is now planning a second one. Europe's market share is expected to decline to 5 percent, and possibly even less, by the 2030s rather than reaching 20 percent. Here's the bigger picture. Selected winners and industrial strategies have been the focus of governments worldwide. However, the result is consistently the same.

Almost nothing is accomplished, and a lot of money is wasted. There is a straightforward formula for governments who sincerely wish to compete in high-tech industries. Forget about trying to choose the technologies of the upcoming decade, industrial strategies, and alliances with a few large corporations. Instead, concentrate on promoting entrepreneurship, making regulations less onerous, particularly for new businesses, and eliminating obstacles to expansion.