This article first appeared in Forum, The Edge Malaysia Weekly on March 31, 2025 - April 6, 2025

The semiconductor story has always focused on the dominance of the US and China, hardly mentioning Europe other than iconic semiconductor equipment manufacturers such as the Netherland’s Advanced Semiconductor Materials Lithography (ASML). Over the past few decades, for a variety of reasons, Europe lost nearly 80% of its production capacity to the US, Japan, South Korea, Taiwan and China.

On March 21, nine European Union (EU) member states — Austria, Belgium, Finland, France, Germany, Italy, Poland, Spain and the Netherlands — formed an alliance to accelerate Europe’s semiconductor industry. The alliance aims to develop advanced semiconductor technologies, reduce dependence on foreign supply chains and strengthen Europe’s global role in semiconductor research and development (R&D).

In the 1990s, European companies were dominant semiconductor manufacturers due to the early mobile phone market successes of Nokia (Finland), Ericsson (Sweden) and Siemens (Germany). But cheaper labour costs and taxation in Asia attracted manufacturers out of Europe, while higher R&D and capex costs caused many Europeans to exit the semiconductor market or pivot to niche sectors like automotive and industrial semiconductors. As Europe was a conglomeration of smaller nationalistic markets (no single market), European businesses were not able to achieve economies of scale in either software platforms (unlike Google or Alibaba), nor were they able to build the vertical or horizontally integrated device manufacturers (IDMs) like Intel, Samsung or Huawei. Despite its strength in universities and basic science research, the lack of entrepreneurial tech platforms at scale undermined Europe’s ability to develop cutting-edge technology.

Last year, the Draghi Report on European competitiveness stated, “In fact, there is no EU company with a market capitalisation over €100 billion [RM477 billion] that has been set up from scratch in the last 50 years. All six US companies with valuations above €1 trillion have been created in that period of time.” Both Huawei and TSMC (Taiwan Semiconductor Manufacturing Company Ltd) were founded in 1987.

In 2024, only four of the top 20 global semiconductor companies by revenue were based in Europe. ASML is the only photolithography equipment vendor used in chipmaking, while STMicroelectronics (Switzerland), GlobalFoundries (Luxembourg) and Infineon (Germany) manufacture semiconductors but specialise in niche segments. This has resulted in Europe lacking semiconductor manufacturing capacity, particularly for legacy chips, which they import heavily from East Asia, particularly China.

China’s rapid growth in legacy chip production is primarily driven by strong clustered domestic sourcing, where suppliers and manufacturers operate in close proximity, creating a highly integrated local supply chain ecosystem. In contrast, Europe’s limited foundry presence and dependence on distant suppliers, mostly in Taiwan, South Korea, Japan and the US, stifle the growth of its semiconductor ecosystem, restricting both innovation and scaling capacity.

The EU consumes about 20% of the global chip supply, largely driven by its automotive sector. But its contribution to high value-added segments, particularly in electronic design automation (EDA) and intellectual property (IP), is only 13% compared with 67% in the US, despite having a strong research base with over two million researchers. Fabless design houses rely heavily on access to EDA software and IP to design almost all types of chips. EDA software vendors have invested over 30% of their revenues on R&D to constantly update existing tools for advanced nodes. The three largest EDA vendors (Synopsys, Cadence and Siemens EDA) control 74% of the market. While there are over 200 EDA start-ups in Europe, they struggle to take off due to fragmented funding geared for short innovation cycles and lack of backing from strong and leading semiconductor companies.

Moreover, Europe’s core industries such as automotive systems, industrial automation and telecommunication, which depend on semiconductors, are under huge competitive threat. Many battery producers in Europe are being undercut by Chinese battery makers’ dominance in cost, scale and market demand. Meanwhile, industrial robot installations in Europe have increased but the region’s industrial base is shrinking as production continues to relocate to lower-cost countries with stronger demand. According to the World Economic Forum Annual Meeting 2025, Europe is falling behind on digital technologies, including artificial intelligence (AI), cloud computing, and 5G and beyond connectivity. The decline of Europe’s core industries has led to weakened domestic demand, making the region less attractive for semiconductor companies and start-ups to invest in R&D and manufacturing.

The EU Chips Act was introduced to counter the region’s declining share in the global semiconductor market, giving US$46 billion (RM204 billion) in funding to boost production capacity to 20% by 2030. In other words, Europe is going for semiconductor production from the lens of national security and resilience in the event of war or disruption. Major companies such as Intel, GlobalFoundries, Wolfspeed and TSMC will be receiving substantial support packages to establish fabs located in Europe. Even as Europe is raising defence expenditure to as much as 5% of gross domestic product from the current levels of less than 2%, there will be greater demand for semiconductor capacity and related dual-purpose chips, AI and robotics, where small companies can play a crucial role in developing new product technologies. Remember that defence expenditure in the US spurred the creation of Silicon Valley.

Europe’s push for semiconductor sovereignty will depend on the attractiveness of its subsidies and domestic market size. Intel’s former CEO Pat Gelsinger promoted the idea that the share of production in the US is more important than global growth. Like Intel, TSMC president C C Wei stated that “the first priority is Taiwan, the second priority is Taiwan, and the third priority is Taiwan”, but recently, TSMC committed US$100 billion to expand its production in the US.

Although foreign investment and external know-how are crucial to support Europe’s semiconductor ambitions, for latecomers, the success of Asian countries suggests that localisation of foreign knowledge and domestic capital have been key to gaining competitive position in the tech industry. Taiwan and China were able to compete with dominant players and gain market share from the US, Japan, and South Korea when they built up their domestic tech champions and reduced their dependence on foreign companies. Once the domestic semiconductor industry achieves scale and tech depth with manufacturing excellence, together with strong domestic capital funding, it can reinvest profits and attract more talent into advanced semiconductor R&D that consolidates its competitiveness at the global level.

The EU Chips Act holds good lessons for emerging markets like Malaysia in securing semiconductor and tech competitiveness. The leading semiconductor multinational companies have the capital, technology and management to locate their production anywhere. They will go where there is the largest market power, incentives and best pool of human talent. Before geopolitical rivalry surfaced, human talent drifted to the best pay and working environment, including clusters of research or entrepreneurial skills. Most countries accept that large companies grow from small and medium enterprises (SMEs). It is through thousands of competitive SMEs which generate the skilled labour and innovative ideas that grow into national, regional or global champions.

Hence, the next critical step is fostering start-ups to accelerate the scaling of advanced technologies into domestic future giants. As technology becomes more and more expensive to invest in, Europe must either build the next generation of semiconductor leaders or risk continued decline.

Tan Sri Andrew Sheng writes on Asian global issues. Loh Peixin is a research associate at the George Town Institute of Open and Advanced Studies, Wawasan Open University. The authors are engaged in a major study of the tech industry in Penang.

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