In the Alpine city of Villach, Austria, industrial engineer Andreas Wittmann surveyed his latest project — the EU’s newest chip factory.
“Twenty years ago it was not on our mental horizon to build a [semiconductor plant] in Europe,” he said, days before the €1.6bn facility’s official opening on Friday. But “the increase in automation has decreased the advantage of Asia”.
The executive at Europe’s largest chipmaker, Germany’s Infineon, did not have to labour his point.
The 60,000sq metre facility he masterminded — roughly the size of eight football pitches — was abuzz with robots delivering silicon wafers via an overhead rail system, their LED lights blinking reassuringly in red and green. Unlike a “legacy” facility nearby that has roughly 140 staff on the factory floor, the new plant requires about 10.
This reduction in personnel costs was one of a number of reasons that Infineon decided to expand the picturesque site in 2018. The plant specialises in power semiconductors, largely for use in cars, which contain dozens of such chips to support everything from electric windows to navigation systems.
An existing facility in the German city of Dresden — which supplies Volkswagen, among many others — was already bursting at the seams, and with automakers increasingly focused on electric vehicles, many of which require even more power chips, the investment case was straightforward.
But the opening of the plant, which makes semiconductors on modern, 300mm thin silicon wafers, also coincides with a chronic shortage in the supply of chips that has devastated the auto sector, idling assembly lines and causing the production of millions of cars to be cancelled.
As a result, European Commission president Ursula von der Leyen announced plans for a new “Chips Act”, to “jointly create a state-of-the-art European chip ecosystem, including production”.
Infineon said its Villach site would help ease bottlenecks for its major clients, many of which were located nearby. “Our message to customers is that we can supply,” chief executive Reinhard Ploss told a press conference on Friday, even though there is at least a four-month lead time for producing power chips.
“They will not be for free,” he added, as the cost of supplies have gone up in the crisis. “We do believe that the prices will increase a lot in the summer.”
Although Infineon did receive some subsidies for the Austrian factory, which Ploss said “helped cushion and compensate the global distortions”, he is not among those who believe that supply constraints, and supply security, will necessarily be solved by putting more plants in Europe.
The largest customers for chips overall, smartphone and PC makers, were not based in Europe, he told the FT this year, and they would continue to be at the front of the queue for global supply regardless of where factories were located.
Villach’s engineers added that it would still take at least three years for a new plant to be built if a decision was taken today. “Semiconductor fabs are more or less the Champions League of industrial building,” said Wittmann.
Worse, the rest of the industry was “behind by 18 months to a year of regular investment”, said Jalal Bagherli, chief executive of Dialog Semiconductor, a rival European chip company that has just been bought by Japanese group Renesas, which also supplies automakers.
Dialog relies on external contractors to manufacture its chips, but Bagherli said some of the third parties were not interested in ramping up capacity when demand for consumer electronics led to a rush on chips during the pandemic.
“When we asked them: ‘Are you investing?’ they said: ‘Well, this is all temporary. It is going to only last three months, I’m not going to invest another $10bn and build a [semiconductor factory] just because somebody is working from home’.”
It also remains to be seen whether current levels of demand will be sustained. “Because it is capital-intensive, you spend money only when you are sure you have demand,” said Thomas Reisinger, a board member at Infineon in Austria.
“If you don’t get your components, you tend to over-order,” said Holger Schmidt, an analyst at German bank Metzler, “and even though semiconductor companies deduct these double orders, you can never be sure [that the orders are true to demand]”.
On Friday, Infineon — one of the few European companies to design and manufacture most of its chips in-house — was lauded by politicians including Austrian chancellor Sebastian Kurz and EU representative Martin Selmayr, who said Infineon was a “key partner” in creating “a top-class European chip ecosystem”.
But the labour-intensive, “back end” process for the semiconductors built in Villach — in which “wage costs play an important role” — will still take place in Malaysia, where Infineon has a finishing plant.
It is a trend that Reisinger, who spent time in the Malaysian facility, does not see reversing. “We have expertise, we have the engineers there, I think we will be staying in Asia [for the back end],” he said.
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