EU eyes ‘Airbus of chips’ amid market setbacks

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European Union companies are steadily losing ground to foreign competitors in the strategic semiconductors market, despite calls to create a European champion. EURACTIV reports from the headquarters in Taiwan of TSMC, the world’s top chip manufacturer.

Addressing an audience of technology experts in May, EU Digital Agenda Commissioner Neelie Kroes urged Europe to unite in order to face the global challenge of producing chips in a competitive manner.

“Should not we be looking for an ‘Airbus of chips’?” she asked the tech-savvy audience, urging the creation of a European world champion in the chip industry.

Kroes's call sounds appealing but it comes against a background of a steady loss of competitiveness and market share by European industry. Europe is gradually relinquishing its global share of chips production, despite the strategic importance of the electronics industry.

A recent industry report conducted by IC Insight, a market research company, shows that the Franco-Italian group STMicroelectronics is the only European company among the top ten global actors. With net revenues of nearly €8 billion in 2011, it scores seventh in a ranking dominated by US giant Intel, which alone scooped up around €40 billion, over 15% of the global revenues of the entire industry.

Second in the ranking is the Korean smartphone maker Samsung. Third comes Taiwan’s TSMC, followed by Japan’s Toshiba, the American Texas Instruments and Japan’s Renesas.

In the world’s top ten, ST is followed by the US company Qualcomm, South Korea’s Hynix and another US firm, Micron. ST's leadership position has strengthened since 2010, due to a significant loss of revenues by Hynix.

On the decline

But the good news ends there. ST registered a 7% loss in revenue between 2010 and 2011, and competitors are at its heel, with Qualcomm likely to overtake ST this year. The US patent giant recorded a massive 32% rise in revenues last year, to over €7.5 billion.

The ST trend reflects a general trend in Europe’s chipmaking industry. In April, European chip sales recorded a yearly drop of more than 14%, reflecting a crisis affecting the entire global industry. But other competitors saw much smaller decreases, according to the latest figures issued yesterday (6 June) by the European Semiconductor Industry Association (ESIA).

As a consequence, Europe’s share of the global market has dropped to 10%, in a global sector worth €19.2 billion in monthly sales. In a decade, European sales more than halved, and with poor forecasts for 2013, the situation does not seem set to improve.

“Europe region may see contraction for the second year due to overall regional economy,” says the report on global trends issued this week by the World Semiconductor Trade Statistics.

Europe misses shift to new production modes

The existing European semiconductor champion, ST, has a typically integrated model with bundled chips production, the same model used by Intel.

However, since the 1990s the industry has gone through an important change in production patterns, increasingly splitting the manufacturing process from the design of chips. This has led to the development of specialised manufacturers and specialised designers.

European companies have focused on designing chips, a production segment which does not need large manufacturing plants. This 'fabless semi-conductor companies' sector includes firms such as Qualcomm, Taiwan's Media Tek and the US company Broadcom. Europe has largely abandoned production, which is increasingly taking place in dedicated foundries.

“There is a limited foundry activity in Europe contrasted with an increasing number of fabless companies. As a result, investments in new production equipment in Europe continue to lag," warned a report from ESIA, the industry association, in 2008. "While in 2000 Europe still constituted 14% of the worldwide market for semiconductor manufacturing equipment, this percentage had dropped to only 7% by the end of 2007,” it found.

Despite these early alarm bells, the situation has worsened. The case of Germany’s X-Fab, the biggest European foundry, illustrates the continent's decline in this strategic market segment.

In 2007, X-Fab was among the top-ten foundries in the world, with an annual income of over $400 million. But tougher competition and rising production costs in Europe gradually pushed X-Fab out of the world's top-ten. By the end of 2009, it ranked 16th – with revenues down to around $220 million – and had sold one of its five European plants. In 2011, it improved slightly, ranking 14th in the world, well behind top actors in Asia, Israel and the US.

Shining model

Europe’s decline is matched by the apparently unstoppable growth of Taiwan’s foundries.

The small island off China hosts the two biggest actors in the sector (TSMC and UMC) and has literally run the production revolution in the 90s, which has generated a host of actors specialised in either designing or manufacturing chips.

TSMC is the star of the manufacturing industry. For each smartphone sold in the world, TSMC gains $7 dollars, since it produces 40% of the logic chips which are embedded in the mobile devices, according to company figures.

As a result, TSMC recorded revenues of almost €12 billion in 2011, up 10% from the previous year, and has order books filled for many years to come.

The second global foundry, Taiwan’s UMC, generated revenues well below €3 billion in 2011.

TSMC does not compete with designers and works also for integrated companies. “Intel is not a competitor. It is indeed one of our customers,” said a TSMC official during a tour of the company’s headquarters in Hsinchu, North of Taiwan.

Most of its 34,000 employees work in Taiwan, boosting jobs on the island. The spotless factory in Hsinchu is also globally recognised for it environmentally-friendly practices. Workers’ salaries even compare to those in Europe, making it hard to understand why its business model, unlike its chips, has not been exported to the old continent.

In a recent speech, the EU commissioner in charge of the Digital agenda Neelie Kroes said: “Many think we could see a fundamental change in the global chip market. Currently it is dominated by players outside of Europe – particularly in Asia, where companies benefit from a helpful environment and generous public support.”

“But some find the market is due for a consolidation – with a smaller number of key global players inventing and producing. In particular at the cutting edge of technology where next-generation fabrication plants globally might be counted on the fingers of one hand. Should not we be looking for an ‘Airbus of chips’?” she asked.

“In the absence of a full spectrum of manufacturing services offered by European companies, fabless companies will have to address their manufacturing needs to the Far East, where foundries able to provide these services are located,” warned a 2008 report from the European Semiconductor Industry Association (ESIA), which was later confirmed.

An ESIA official questioned by EURACTIV showed confidence in the future, saying that “the situation could always change,” and underlining the importance of some European foundries.   

TSMC’s Michael Kramer commented: “We do not really have a real competitor. The next biggest actor in the sector, but by far smaller than us, is just next door.” He was talking during a visit to TSMC headquarters in Hsinchu, North of Taiwan, pointing out a factory on the other side of the street which belongs to UMC, the second biggest foundry in the world in terms of sales.

Semiconductors are at the heart of the digital economy. Electronic equipment such as computers, mobile telephones, and radios all need semiconductors to work.

Minuscule integrated circuits, better known as chips, operate through semiconductors and transistors to allow electronic devices to carry out smart functions.

Production of semiconductors and chips was initially executed in a single factory. But since the 90's, it has increasingly been outsourced, and Europe has lost ground dramatically.

A new model based on autonomous foundries has emerged, with chip-designing companies, such as Qualcomm, Nvidia or Broadcom, exporting production of chips to specialised companies mostly based in Asia, notably Taiwan.

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