Europe’s call for semiconductor factories: A solution looking for a problem?

Supply chain bottlenecks and chip shortages for the automotive industry have led Europe to develop its own semiconductor capacity. But divisions have already emerged between those who support the idea and those who think Europe should stick to what it does well. Bob hanke takes stock of what is not said in the debate.

Semiconductors – also known as computer chips – seem to be in the news all the time today. The big changes in the industry and related services which are entered under the heading Industry 4.0, the (slow but increasingly rapid) transition to AI-based products and services, the now likely irreversible shift to electric vehicles that require much more electronics, and a variety of other changes in geopolitics , product market strategies and organizations dramatically increased demand for crisps just as their supply dried up due to Covid-19, other cyclical events, and dark clouds over the free. trade between Asia, which produces the lion’s share, and the rest of the world.

No wonder, then, that many talk about the need for Europe to build its own semiconductors in Europe to increase its strategic autonomy. While some of the problems may be cyclical, others, such as the dark clouds over Asia’s status as a workshop of the world, appear to have taken on a longer-term threat.

Semiconductor manufacturing is a sector with several characteristics that potentially make it one of the few areas where Europe could thrive. It combines products with high added value, the need for high quality design and production, high skills of the workforce, and they must be manufactured in complex manufacturing environments (called “rooms white ”). As such, the idea of ​​developing this sector in Europe is therefore not false.

Comparative advantage and opportunity costs: back to the future?

But some counter-arguments – more profound – are often ignored by the neo-commanders. First, what is often overlooked is that “strategic autonomy” must also imply a reduction in trade, far from the finely honed specialization and the comparative advantages that Europe and the rest of the world with which it trades. have built over the past seventy years. Autarky is very rarely a sensible idea in a deeply integrated world, neither is import substitution (the Soviet bloc ran on this idea …), and governments are, on the whole, not very good at choosing the right ones. winners.

Second, and related, we are where we are for a reason. It might be good to have a strong semiconductor industry, but it’s a lot easier if you start one. Building one now, after decades of (benign) neglect because imports were cheap and safe, is much more difficult work if you weren’t there in the first place (i.e. 1970s ). Not only is such an industrial policy project likely to cost a lot of public money; at best, it would probably only have the effect of revenge on the rest of the world, without getting a head start.

Perhaps a discussion should also take place on how such a sectoral policy should consider a wider range of possible industrial policy projects that are unfunded due to the millions allocated to pull even with Taiwan and Korea in semiconductor production. In sum, the clamor for a European semiconductor industry is (and remains), therefore, tinged with a flavor of yesterday’s battles – and therefore ignored those of tomorrow.

Europe’s inferiority complex

But there is a larger problem here. In the area of ​​innovation more generally, Europe has developed over the last decades a huge inferiority complex, often unnecessarily. In the early to mid-1990s, European politicians often bemoaned the absence of a European Microsoft or Apple and expressed deep concern about the benefits that the Silicon Valley and Route 128 biotech sector will have. conferred on the United States in global competition. Innovation, it seemed, would go through Europe.

Interestingly, however, a few years earlier, policymakers and academics in the United States questioned the secret to the success of European industry – notably at MIT, with its classic 1989 study of American manufacturing and that by Lester Thurow in 1993. Face-to-face. In fact, following the Democratic victory in 1992, Clinton Labor Secretary Bob Reich called for a review of worker participation regimes modeled on German co-determination because of its beneficial combination of efficiency and effectiveness. ‘equality.

The biotech deficit in turn turned into a significant advantage in the late 1990s, when companies across the continent began to carve out new stable (and very lucrative) niches in a biotech industry. now much more mature, built, for example, on diagnostic tools rather than on upstream syntheses or downstream therapies. Once again, a sensible international division of labor that has played on Europe’s strengths by innovating on the back of what others have done.

Two types of innovation in the EU

Recurring calls for a strong presence in high tech sectors ultimately reflect a precarious balance in the EU itself, fueled by the naive fear of European politicians to miss out (FOMO). Somewhat schematically, the EU embodies within it two very different traditions of innovation and innovation policies.

In one corner is France, where innovation almost always takes the form of a “mission” that can only be fulfilled by a strong government with focused plans – but often at the expense of other industrial policies. ‘We can do the Ariadne [space missile – BH], but you can’t make washing machines, ”complained at the end of the 1980s one of the most astute observers of French economic policy. This interventionist conception of innovation, which today finds echoes in Mariana Mazzucato’s approach in this area, conceals a long list of successes: high-speed trains, aerospace, armaments, nuclear for example. So if you think building computer chips is like space travel (take a moment to think about the analogy), only the government, in this case the EU, can fix the problem.

The other corner is populated by Germany and many small economies in northwestern Europe. Politicians, academics and business leaders may wonder about the deficits of the German-style business model and innovation system, but export statistics and case studies tell a different story. In a nutshell, Germany did not become one of the world’s leading exporters by accident. Circumstantial support may have been available through an undervalued euro or smart trade policies, but the way things are done in the country certainly played a role as well.

In addition, innovation in Germany often takes a different form than what foreigners think it should be (the Microsoft syndrome mentioned above). Innovation in this part of Europe is based on a deep understanding of technology, from the CEO to the shop worker; on everyone’s ability to anticipate the needs of their historical customers in order to personalize high added value niche products; and on a training system, always from the workshop to the CEO, which is organized around technical knowledge within this “relational” organizational model. It is based on a gradual upgrade, involving everyone: trained workers, suppliers and customers.

Northern Europe’s success in innovation and trade

Those who think this model of incremental innovation is no longer viable in today’s world have ignored it (as Krugman would say). German is a world leader in the manufacture of cars, trucks and other sophisticated transportation systems, machine tools and pharmaceuticals. Ditto for the surrounding economies, which have become de facto extensions of Germany in the single market – Belgium, the Netherlands, Denmark, Austria and Switzerland. These countries are also at the forefront of specialized business services, including software, and, as mentioned earlier, of adapting radical innovations in biotechnology to meet new market demand.

No one is suggesting that this way of doing things doesn’t pose challenges, but it’s also true for more radical forms of innovation (we only see the winners after all, but many startups never even make it onto the market. the market). And, in principle at least, being able to draw on the sophisticated capabilities of engineers, workers and suppliers in a decision-making model that invites all views to be expressed should facilitate adjustment. The shift to automation, higher and new skills and newly integrated manufacturing models expressed in the concept of Industry 4.0 is an example. (It may be useful to point out here that this strategy of innovating in small steps while keeping everyone on board is not without its dangers: sunk costs in dedicated capital and specific skills, for example, push the envelope quickly to emission-free cars less likely without careful accompanying measures).

Gallic ambition and Germanic anguish

The EU therefore suffers from a combination of Gallic ambition and German FOMO, which makes the latter jump on the bandwagon of the former. If you think Europe has a deep innovation problem, and if you think it’s a bit like sending someone to the moon, the EU is the solution. But if what I wrote above is correct, EU mission type innovation is a solution looking for a problem.

Note: the author would like to thank Saul Estrin, Laurenz Mathei and Toon Van Overbeke for their helpful comments. the The article gives the author’s point of view, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: European Council

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