Governments across the world are getting ready to throw hundreds of billions of euro in state subsidies at chip manufacturers in a move that will raise prices, enrich incumbent firms and eventually disadvantage smaller countries like Ireland in the race for investment.
Perhaps it shouldn’t come as a surprise after the pandemic brought supply chains to a halt. Semiconductors are the building blocks of the modern economy and sit at the heart of everything from cars to computers, but that doesn’t justify these huge state handouts.
The European Union has its own €43bn package in train and Brussels-based thinktank Bruegel estimates that combined government supports announced in the US, China, Japan, South Korea and the EU amount to $721bn, or 0.9pc of 2020 global GDP.
That money certainly talks. Intel recently announced a €17bn fabrication plant in Germany, for which Bloomberg says it is getting €5.5bn in subsidies. Ireland had been in the running for that plant and was awarded a further €12bn investment in facilities here.
The argument is that China, India and Korea subsidise so much that the cost of a semiconductor fabrication plant in the US, for example, is 30pc or more than in those countries.
Having secured money from EU governments, Intel then lobbied in Washington for a share of US state aid. CEO Pat Gelsinger told a business conference in June that while “we’re not looking for handouts”, without US federal funds, it would invest more in Europe.
“And that’s a shame,” he said. “We want to go first and bigger in Ohio.”
Intel had $79bn in revenues in 2021 and profits of $19.9bn. It didn’t buy back any shares last year, but in 2020 it bought $2.4bn worth and in 2019, $14.1bn.
Intel isn’t alone in taking advantage of the new era of government generosity and looser state-aid rules. Franco-Italian firm STMicroelectronics and GlobalFoundries have announced a €5.7bn plant in, surprise, France of all places.
And there’s the rub. In Ireland, the EU’s state subsidy rules are viewed through the prism of the battle over whether Apple received tax aid for its operations here. The reality is the rules provide a level playing field for smaller countries who simply can’t compete when the likes of Germany and France open their wallets.
It's not like the European Commission isn’t aware of the risks. Margrethe Vestager warned last autumn of "a subsidy race, a race that leaves everyone poorer off”.
"In the present circumstances, it may be a temptation too hard to resist for companies to try to play governments out against one another, scanning the landscape to see who will pay more – the risk, of course, is letting taxpayers, whether European or American, pick up the bill and getting maybe very little from that investment," she said.
This all has the feeling of that zero sum game she warned of in which the loser is the taxpayer. A previous plan from 2013 to double the EU’s share of chip output to 20pc by 2020 went nowhere and it is still stuck at 10pc.
There’s no set of firms that are more than ‘national champions’ at demanding a never-ending stream of government assistance to maintain their comparative advantage.
Those costs are very, very high when it comes to semiconductors. No other industry requires the same high level of investment in both research and development, equal to 22pc of annual final semiconductor sales to electronic device makers, according to Boston Consulting Group (BCG).
There’s another cost too and it is the consumer – already on the hook for all those taxpayer billions in subsidies – who will end up paying more for goods as a result of a statist push to ‘own’ the semiconductor research to manufacturing space.
BCG says fully “self-sufficient” local supply chains in each region of the world would have required at least about $1trn in additional upfront investment to get where we are now, compared with the current distributed globalised system that allows specialisation.
That would have resulted in a “35pc to 65pc overall increase in semiconductor prices and ultimately higher costs of electronic devices for end users”, it said in a study.
It is one thing for Intel, STM or Samsung and their shareholders to decide they want to be in the business of semiconductors and to invest, it is quite another for governments to put taxpayer money on the line at a time when there is growing evidence of oversupply.
In order to make money, plants have to run at high utilisation rates.
Given the years it takes to build out capacity, it is likely that the state-sponsored expansions will exacerbate that excess production.
We also need to ask whether Europe is in fact the laggard it appears to be when it comes to chip production. The Bruegel study notes that while it is indeed a small player overall, it is not true to say the EU is a bit player.
While Europe doesn’t produce many of the chips needed for computers and mobile phones, it does already make many of those used in its major industries like car making.
While it is true that the EU is weak when it comes to fabrication, the Bruegel study notes there are world beaters like ASML, the company that makes the machines that make the chips and whose market capitalisation of €218bn is 50pc more than Intel’s.
Now that Brussels has abandoned its stance on limiting subsidies, it is going to be hard to put the genie back in the bottle. It won’t be long before the lobbyists are out in force again explaining why the firms they represent should also be beneficiaries of the EU’s new industrial policy.
Ireland has been a winner from globalisation. It is less clear that it will still be a winner in an era of chequebook-driven national champions.