EU hopes €43bn plan will fix chip shortages as supply chain crisis bites

Ursula von der Leyen

The European Union has announced a €43bn ($48bn) plan to overcome its dependency on Asian computer chip makers as governments and businesses around the world battle with a global supply chain crisis that experts believe could persist for much of the year.

With consumers having to wait months for cars, dishwashers and other durables thanks to chip shortages, the bloc’s plan marks one of the most significant developments yet seen as a result of the tectonic shifts in the global economy set off by the coronavirus pandemic.

European commission president Ursula von der Leyen said on Tuesday: “Chips are at the centre of the global technological race. They are, of course, also the bedrock of our modern economies.

“The pandemic has also painfully exposed the vulnerability of its supply chains,” von der Leyen said. “We have seen that whole production lines came to a standstill. While the demand was increasing, we could not deliver as needed because of the lack of chips.”

Von der Leyen said a “chips act” would link research, design and testing and coordinate EU and national investment. The plan pools public and private funds and allows for state aid to get the massive investments off the ground.

The plan still needs the backing of the EU parliament and the member states.

The EU move mirrors Joe Biden’s $52bn push to invest in a national chip-producing sector to make sure more production occurs in the United States, and one expert said it highlighted how the pandemic was reshaping the world economy.

Per Hong, a partner and supply chain specialist with the US consultancy Kearney, said the disruptions could go on for months because the Omicron strain was still having a huge impact on all areas of the economy, especially in China.

“We’re still in the early days of the disruption from Omicron running through every stage of the system, from suppliers to distribution to retail,” he said. “China is seeing its most serious surge of Covid cases since the original outbreak in Wuhan. The government is showing little sign of backing down from its zero-Covid approach so mass lockdowns, forced quarantines, and much stricter checks at ports to prevent cases from coming in are continuing.”

The impact had been felt particularly in the manufacturing hub of Zhejiang, home to the world’s largest cargo port, Ningbo. Authorities had quarantined tens of thousands of residents and closed shipping terminals and suspended operations, forcing ships to reroute. In Xi’an, Samsung suspended operations at its semiconductor factory and staff were in full lockdown for three weeks in January, with disruptions extended by the week-long Lunar New Year holiday.

Supply chain managers were adept at adjusting to unexpected natural disasters such as typhoons and fires, he said, but the consequences of the pandemic had been “far reaching” and went beyond contingencies.

Shifts in geopolitics, the rise of nationalism and climate change were adding to the mix and were leading companies – as well as governments dealing with the computer chip crisis – to rethink how they do business.

Hong said: “They are looking at shortened lead times, and moving production nearer consumption. But we are moving from just-in-time to just-in-case. There are a number of factors at play reshaping the economy, forcing companies to reassess what they’re doing.”

Along with delays with key products and materials, businesses continue to be dogged by labour shortages thanks to ongoing surges of the virus and lockdowns, as well as by inflation not seen for decades.

The recent round of company reporting in the US, Europe and Asia Pacific was punctuated by a litany of references to the problems managers are facing because of the supply chain issues.