Economic Warfare: Microprocessors At The Heart Of Global Tensions – OpEd

The microprocessor, a marvel of miniaturization, is the engine of the 21st century. These tiny chips are essential for virtually every aspect of modern life, which makes them a critical component in geopolitical ambitions and the economy of any country. The global balance of power in the industry is uneven, and Europe is still lagging behind the U.S. and China. However, there’s a chance for the region to improve its position, and all it needs is to focus on its own producers.  

Europe is a favorable place for the microprocessor industry to grow and flourish: the region has numerous strengths throughout the value chain, such as top-tier research and a supportive scale-up environment. The current reality, however, matches neither the ambition nor the potential. The region trails behind global competitors in the sector, as investments and profits are primarily dominated by the U.S. European entities exhibit a weak presence at critical supply chain bottlenecks. Analysts trace the origins of the problem to investment gaps and difficulties in translating R&D strengths into manufacturing and commercialization. And no less important, global tensions between the U.S. and China contribute substantially.

The geopolitical clash isn’t just about trade deficits or tariffs; it’s a technological arms race with profound implications for global power. Consider the recent U.S. restrictions on the import of graphics processing units (GPUs), used in various kinds of computer data processing, or another series of technology export constraints imposed by China. For now, the bans don’t directly concern most European countries, yet the situation itself highlights the danger of over-reliance on imports. A world where nations vie for crucial technologies and resources (like the U.S. seeking access to Ukrainian rare earths, primarily mined for the tech industry) is creating a fractured landscape where access to technological components dictates economic and military might, and caught in the crossfire is Europe.

Microprocessors and modern economy are interdependent

The connection between microprocessors and the economy is clearly illustrated by the crisis caused by the post-COVID industrial surge, which resulted in a subsequent global microchip shortage. Although the United States and China experienced strong economic recoveries after 2020, Europe fell behind.

The current situation is different. For now, there are enough chips in the region, but the problem is that almost all of them are imported. This oversupply creates unhealthy competition as buyers continue to choose products from other countries. The predicament has already endangered domestic manufacturers. For instance, Infineon, a member of the “big three” European microprocessor firms, revised its revenue outlook for fiscal year 2024, anticipating particularly challenging circumstances in the second quarter. Similarly, STMicroelectronics provided a negative forecast which has been widely confirmed. The company may have missed opportunities to remain a key player, for instance by focusing on microcontrollers that have nothing to do with the processors used to develop artificial intelligence.

Import restrictions might seem like an obvious solution to save domestic manufacturers—but they won’t actually help, analysts say: “A more proactive approach is needed for economic security, based on support and incentives rather than relying on restrictive and protective defensive measures,” explains the European Microprocessor Industry Association. However, replacing imports with development on European soil will not be easy, even if it is a matter of urgency.

Stalling German industry and talent scarcity

The importance of having domestic chip design and production is perfectly illustrated by the example of the automotive industry. Recently, Tesla, an American automaker, emerged as an unexpected competitor to the largest chip designers with its proprietary D1 AI chip. Tesla asserts that the technology will process computer data four times faster than current systems, allowing the company to achieve full autonomy for its self-driving technology. But why would the automaker design its own chips when it could simply buy them from other companies? The answer is simple: sourcing the technology for digitizing cars is a significant problem, and Germany has already experienced this firsthand.

Recently, U.S. Intel revealed it would postpone its plans for two chip plants valued at €30 billion ($33 billion) in the eastern German city of Magdeburg. Consequently, for the German government, which relied on the international partner, Intel’s decision has become a major problem. Not only were the European Union’s chipmaking ambitions jeopardized, but also the country’s entire automotive industry.

Furthermore, Intel’s reluctance suggests concerns about a potential brain drain tied to a looming job shortage and an ensuing talent deficit. Constructing a new microprocessor facility typically requires three to four years. However, assembling a new group of skilled microprocessor experts may require even longer. Moreover, a wave of retirements is approaching in Europe. With more than one-fifth of its population aged 65 or older, the European Union has a significant number of engineers and production workers nearing retirement age. As the older generation exits the workforce, younger workers enter it with a different mindset. They have matured in an era of open borders and are open to new opportunities wherever they arise, including outside Europe. Navigating this shift requires implementing timely action to revitalize the industry not only in Germany but in the region as a whole—while seasoned engineers are still available to support the younger generation and before the EU economy begins to falter due to the production gap. But without European production, chip imports will pose other problems beyond our dependence on these critical components.

Imported chips create critical vulnerability for European climate goals

For most, Western Europe is not currently threatened by U.S. sanctions. Nevertheless, dependence on American chips already exerts a less obvious but equally damaging pressure on the region, and the situation with the environmental requirements in European high tech is a good illustration. The sector exhibits a significant reliance on chips primarily sourced from the United States, with companies like Intel providing a substantial portion of the processing power for data centers and other critical infrastructure. While these chips offer high performance capabilities, their operational characteristics result in substantial energy consumption, projected to increase significantly: according to a new report from McKinsey, power consumption by data centers in Europe is set to triple, rising from 10 gigawatts (GW) today to 35 GW by 2030.

This energy demand necessitates further improvements in energy efficiency, a factor outside of Europe’s direct control, as producers of imported chips are not required to comply with European standards. The situation is particularly noticeable in the AI data center industry, where European centers are currently forced to choose between high computational power and energy efficiency, with one coming at the expense of the other, says Michael Winterson, chair of the European Data Center Association (EUDCA): “The problem we’ve got with the chipmakers is [that] AI is now a space race run by the American market where land rights, energy access and sustainability are relatively low on the pecking order, and where market domination is key.”

However, there are still opportunities to improve the situation, and one of these is using ARM-based processors, designed to execute a limited variety of computer instructions, enabling them to function at increased speeds. The introduction of ARM technology delivers the required performance while using less power—and the best part is that Europe already has a chip manufacturer that can offer an ARM chip that can be integrated into existing structures. The company, based in France and called SiPearl, has developed Rhea, a high-performance microprocessor that uses ARM technology and is expected to cut energy use in half from one generation of processors to the next: “The arrival on the market of SiPearl’s microprocessor Rhea, which will power European supercomputers with a limited environmental footprint, will be another decisive step for Europe’s technological independence and sovereignty,” says the company’s CEO Philippe Notton. The chip was designed with local requirements in mind, which, as we have seen above, are important, and was made possible thanks to the support of the European Union. With its support, SiPearl was able to leapfrog one of the most dangerous and painful moments in the life of startups: the investment gathering phase. They delivered a chip that can be used not only in scientific supercomputers but in other industries as well such as AI inference. This result emphasizes the importance of such support for the emerging European microprocessor industry and the region’s ability to stay the course—and not only for this industry, as explained above.

In this regard, the expected European Chips Act 2.0 is encouraging. It outlines new assistance strategies, focusing on incentives and collaboration, speeding up subsidy distribution, and implementing open trade policies to align economic security with market needs. Coupled with other initiatives and the existing production base, the Act offers a glimmer of hope and provides a foundation for Europe’s competitive presence in the global chip race. However, these are just initial steps. While the seeds of future success have been planted, the EU must act decisively and boldly to nurture them if it hopes to truly challenge the established dominance of the U.S. and China and secure its place in the future of technology.