The New Jedi Order: global chip war and the semiconductor industry

Executive Summary

•  A new hope: the ongoing recovery in the chip market. The chip market generated almost USD700bn of revenue last year, up by +21% y/y, and is expected to record a CAGR of roughly +10% over the upcoming year to become a trillion-dollar market by 2029/2030. The rebound has followed two years of weak performance (+1% in 2022 and -10% in 2023) inherited from the painful period of post-pandemic chip shortages and the sudden boom in demand for computing devices. Future revenues are expected to be mostly driven by the gradual integration of generative AI tools into electronic devices (+8% CAGR over the 2024-28 period for wearables) and computing solutions (+12% CAGR), but also a full-scale deployment of the 5G technology into the mobile market (+12% CAGR) and skyrocketing investment into data centers (+15-20% CAGR).   
• Fragmented across the galaxy: the chip supply chain has become increasingly complex and scattered around the globe. The semiconductor supply chain is divided into different pools of expertise/lead capacity, where one or two countries tend to dominate. In a nutshell, China controls raw material supply via its large reserves and refining capacities of rare earth elements, while the US is leading the IP and design segments, China and Taiwan have the biggest manufacturing capacities and Southeast Asia has specialized into the Assembly, Test & Packaging (ATP) segment. Europe looks like the underdog in that industry but shows a real expertise in the equipment market, as well as in automotive chips, thanks to strategic partnerships with the biggest European OEMs.  
• The Empires strike each other: geopolitical tensions are on the rise. Economic superpowers have implemented competing chip policies as trade tensions intensify. Like China and the US, Europe unveiled its own version of chip industrial policy with the European Chip Act and set a bold target to reach 20% of domestic production of chips by 2030. But unlike its peers, Europe’s target looks to be out of reach at this stage, notably given a huge differential in capital investments with China and the US, which have both deployed over USD100bn in grants and loans to develop their capacities and strengthen their industries. We are also seeing a race for tech leadership between nations, putting semiconductors at the center of a geopolitical game in which they are being used as a bargaining chip to increase economic influence and/or contain expansion from rivals. From a market perspective, further trade tensions will not challenge the AI-driven rally over the long run but they could pave the way for further “Deepseek-like” episodes as investor scrutiny is increasing.
• Europe needs to use the force of its brain rather than showing muscles. The chip industry is a very cost-intensive one, both in the R&D phase and the industrial phase: a modern fab costs about USD15-20bn. Europe is starting from too far behind to expect to narrow the gap with peers quickly while low productivity limits its ability to be competitive in the market. Besides, from an industrial standpoint, it would not be relevant for Europe to start producing chips for consumer electronics and computers as such products are not manufactured in Europe. Instead, it would make sense to target and develop chip capacities on the basis of potential synergy with industries in which Europe has champions, such as automotive, chemicals, defense or health care.  
• How can the European Jedi make a return? As chips are core to many sectors from auto to defense to AI, we stress that investments to support these sectors should partly be directed towards semiconductors. In particular, we outline the following five steps for Europe to get back into the global chip race:

1. Set up a clear and coordinated roadmap to develop semiconductor expertise in industries in which Europe has an economic or strategic interest (i.e. auto, defense or health care). An early investment could favor economic synergy while supporting the development of an expertise leadership that would be helpful, especially when Europe intends to increase and modernize its military capacities. A portion of the expected increase in defense spending (~3% of GDP with a targeted 35-40% ratio allocated to equipment/R&D) could help in funding new chip capabilities.
2. Develop and support its expertise in semiconductor equipment to defend current leadership in this segment. This would imply investing further to increase capacities while replicating success to help develop new actors, and also protecting against unfair competition and industrial espionage.   
3. Increase further partnerships between corporates and engineering schools to create a proper domestic ecosystem dedicated to AI and new-technology R&D. Europe should leverage its engineering expertise to reduce by half the current 40-50% mobility ratio of European PhDs in the tech sector In this context, realigning the European chip act target of 20% of market share by 2030 with a specific focus on upstream activities would be more appropriate.  
4. Dedicate at least 0.5% of GDP annually (EUR35-40bn) to R&D and new capacities via the promotion of investments from Asian and US foundries on European soil (tax reduction, favored loans, public funds, fast-track process for acquiring land etc.). Complementary to the Chip Act funding scheme, this could be implemented by tapping into existing funds and facilities such as the Connecting Europe Facility, the InvestEU capability of the EIB etc.  
5. Devote at least 10-15% of the European InvestAI initiative (i.e. EUR20-30bn) to broad-scale investment into data centers and to the sourcing and development of a secured supply-chain entirely dedicated to Europe.