By Marshall Reid
For Germany, the past three years have been something of a wake-up call, particularly in terms of economics and trade. For decades, Berlin has pursued a highly globalized, export-driven model of economic growth, relying heavily on its substantial industrial capacity and manufacturing expertise to fuel its expansion. While this approach has proven undeniably successful – Germany currently ranks as the world’s fourth-largest economy by GDP, as well as the third-largest exporter – recent geopolitical crises have brought its long-term viability into question.
Amid unprecedented supply chain disruptions caused by the COVID-19 pandemic and mounting energy shortages linked to the Russian invasion of Ukraine, the German economy has struggled to adapt, posting its first trade deficit in over a decade in 2022. These challenges have been particularly pronounced in Germany’s semiconductor sector, where global shortages have exacerbated insufficient domestic production capabilities. For a high-tech economy like Germany’s, the resultant decline in semiconductor availability has been especially devastating.
In light of these concerns, the German government has increasingly sought to improve its semiconductor manufacturing capacity. While Berlin has focused some of these efforts on domestic firms, it has also attempted to entice foreign companies to invest in Germany.
To date, this campaign has proven successful in securing investments from several US firms. However, these initial investments could pale in comparison to a potential investment by Taiwan Semiconductor Manufacturing Company (TSMC, 台灣積體電路製造股份有限公司), the world’s leading producer of advanced semiconductors. Though still in the planning stages, such an investment could revolutionize Germany’s role in the global semiconductor market, helping to safeguard its economy from future shocks and positioning it as a leader in Europe, while also providing Taiwan with unprecedented access to European markets.
Semiconductors and a shaky German economy
For decades, the German economy has been dominated by large, well-established manufacturing firms, ranging from automotive giants like Volkswagen and Daimler to technology leaders like Siemens and Zeiss. Trading on Germany’s historical reputation for producing advanced, high-quality goods, these firms helped to transform Germany into an economic powerhouse. For its part, the German government encouraged the growth of these companies, placing considerably more emphasis on its manufacturing sector than many other advanced economies. As a result, manufacturing currently accounts for roughly 24 percent of Germany’s gross domestic product (GDP), a percentage roughly double that of the United States.
While this manufacturing-focused model was highly effective in driving economic growth, it also left Germany highly vulnerable to external shocks, particularly disruptions in the global supply chain. These vulnerabilities were especially evident during the COVID-19 pandemic, when a global shortage of semiconductors effectively crippled Germany’s manufacturing sector. Given Germany’s highly advanced, technology-oriented approach to manufacturing, semiconductors have become – and will continue to be – absolutely indispensable to the country’s economic growth. Unfortunately for Berlin, the German semiconductor industry currently leaves much to be desired.
Despite its impressive manufacturing capacity, Germany currently plays a relatively minor role in the global semiconductor industry. While firms like Bosch and Infineon Technologies are significant suppliers, overall German production of semiconductors continues to lag far behind that of South Korea, China and—most notably—Taiwan. In the past, this shortfall was of little concern to Berlin, as German companies could reliably source semiconductors from foreign firms like Samsung, TSMC, and Qualcomm.
However, the pandemic effectively exposed the risks of Germany’s overreliance on foreign chip imports. Since 2020, many of Germany’s vaunted manufacturing firms have been heavily impacted by semiconductor shortages, as delayed shipments and order cancellations have restricted production capacity. This has been particularly true in Germany’s automotive sector, where companies like Volkswagen were essentially paralyzed. For a German government sorely in need of economic recovery, developing a substantive solution for its semiconductor needs has become increasingly necessary.
Germany and TSMC
In response to the devastating semiconductor shortfall, Germany has taken steps to develop its own domestic chip-making capacity. In September 2021, then-minister for economic affairs and energy Peter Altmaier announced that Germany would be investing roughly EUR €3 billion (USD $3.2 billion) to “reclaim production sites along the entire value chain of semiconductor production.” Then, in May 2022, Altmaier’s successor Robert Habeck announced that Berlin would be providing EUR €14 billion (USD $14.9 billion) in financial support, with the goal of attracting foreign chipmakers to invest in Germany.
At least initially, the returns on these investments appear promising. Domestically, several German technology firms have pledged to increase investment in semiconductor production, including Robert Bosch GmbH, which recently announced that it would spend EUR €3 billion (USD $3.2 billion) to construct development centers in Reutlingen and Dresden. On the international side, a number of leading chipmakers have announced investments in Germany. The most notable of these has been Intel, which announced in March 2022 that it would be investing EUR €17 billion (USD $18.1 billion) to construct a “fab mega-site” in Magdeburg. (Notably, Intel has since backed away from its planned 2023 start date, citing the “difficult market situation.”)
While these investments have been welcome news for Germany, it is notable that Berlin has yet to secure an investment from the global leader in advanced semiconductor production: TSMC. However, recent developments suggest that a TSMC facility in Germany could be closer than ever. In December 2022, reports emerged that the Taiwanese chipmaker was in “advanced talks” with suppliers about establishing a production plant in Dresden.
While TSMC leaders had previously expressed concerns about the wisdom of such an investment – largely due to the Russian invasion of Ukraine – Germany’s massive automotive industry and proximity to the broader European market seems to have increased the company’s interest. These reports were later bolstered by remarks from TSMC CEO C.C. Wei, who stated that the company would be working with European partners to “to evaluate the possibility of building a specialty” foundry.
For both Germany and TSMC, such a partnership could be highly productive. For Berlin, hosting a TSMC plant would allow it to substantially reduce its reliance on semiconductor imports. In doing so, it could more effectively safeguard its economy from the sorts of shocks that have rippled through the global economy in recent years. Additionally, such an investment would help to solidify Germany’s position as a European leader in semiconductor production, a role for which German Chancellor Olaf Scholz has recently advocated. And while it must be noted that a TSMC investment would not be without geopolitical risks – China would almost certainly not be pleased with such a development – the economic and political gains would likely be substantial.
For TSMC, investing in Germany could present similar advantages, as well as similar risks. In recent years, the chip giant has taken steps to expand its international footprint, most notably through highly publicized investments in Arizona and Japan. These expansions have not come without controversy, particularly in Taiwan, where many have expressed fears that investing abroad could result in declining production at home. Once again, however, the potential risks of investing in Germany are unlikely to outweigh the potential benefits.
By establishing a presence in Germany, TSMC could gain unprecedented access to the vast European marketplace, while also enjoying close proximity to Germany’s many advanced manufacturing firms. As several commentators have noted, TSMC investment in Germany could also yield important geopolitical gains for Taiwan. While such an investment is unlikely to induce Germany to explicitly express support for Taiwan – particularly given Berlin’s close economic ties with China – it could nevertheless contribute to stronger, more comprehensive ties between Taiwan and Germany.
It is worth noting that the recent reports of TSMC investment in Germany closely follow broader European Union (EU) discussions on reducing reliance on foreign semiconductor imports. In the wake of the COVID-19-induced chip shortage, lawmakers from across the continent pushed for increased domestic chip production. These talks culminated in 2022’s European Chips Act, which calls for “€43 billion [USD $45.8 billion] of public and private investments” to bolster European innovation and self-reliance, with the ultimate goal of increasing the EU’s share of the global semiconductor market to 20 percent.
While some commentators have noted that achieving such a goal may prove difficult – if not impossible – due to East Asia’s overwhelming dominance in the sector, the Chips Act nevertheless suggests that the EU is taking semiconductor production seriously. For both Germany and TSMC, this could prove to be a productive environment for investment.
Following several years of supply chain disruptions and economic shocks, Germany is facing stark realities. Its highly globalized, export-oriented model of economic growth has been exposed as fragile and unreliable, while its famed manufacturing sector has been paralyzed by shortages. In light of these concerns, Berlin’s recent efforts to encourage domestic and foreign investment in its semiconductor industry are understandable.
While TSMC investment in Germany would not be without risks, the potential economic and strategic benefits could be substantial. For TSMC, meanwhile, investing in Germany could present unprecedented access to the European market, while potentially helping to expand Taiwan’s ties with Berlin. As the recent flurry of semiconductor-related news suggests, Europe is currently in the midst of a shift in its thinking about chip production. For both Germany and TSMC, the time could be right for a deal.
The main point: In the wake of a crippling semiconductor shortage, Germany is increasingly encouraging domestic and foreign investment in its semiconductor sector. If Berlin and TSMC can reach an agreement on building a chipmaking facility in Germany, both could experience substantial gains.
Marshall Reid is the program manager at GTI, as well as the host of GTI’s podcast, GTI Insights.
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