Germany Readies €20 Billion in Aid to Bolster Chip Output

(Bloomberg) -- Chancellor Olaf Scholz’s government plans to dole out €20 billion ($22 billion) to bolster semiconductor manufacturing in Germany in a push to shore up the country’s tech sector and secure supplies of critical components amid growing geopolitical tension.

The money is to be distributed to German and international companies by 2027 and will be drawn from the Climate and Transformation Fund, according to people involved in the negotiations. 

The off-budget pot, known as the KTF, was originally set up to invest in the decarbonization of the economy, but its scope has been expanded as Germany seeks to rein in regular government spending. The allocation of as much as €180 billion is currently being negotiated within the government and will be published in the coming weeks, said the people, who asked not to be identified because the discussions are private.

“The draft for the economic plan 2024 and the financial plan until 2027 for the Climate and Transformation Fund are currently being prepared,” the finance ministry said in response to Bloomberg. “This process has not yet been completed.” The economy ministry didn’t respond to a request for comment.

European countries have been under pressure to attract investments amid economic uncertainty, stubborn inflation and the impact of the US’s Inflation Reduction Act. The German government has already agreed to €10 billion in aid for a new Intel Corp. plant and is in the process of agreeing to about €7 billion more in subsidies to companies including Taiwan Semiconductor Manufacturing Co. and Germany’s Infineon Technologies AG. 

The plan for chip support means at least €3 billion is available for additional projects. That could benefit other companies active in Germany. GlobalFoundries Inc. has a sizable presence in Dresden, while German supplier Robert Bosch GmbH also runs a chip plant in the city.

The subsidy offensive comes amid greater awareness of the European economy’s dependence on supplies from Asia after disruptions from the coronavirus pandemic and tensions stoked by the war in Ukraine. The German government has pledged in its China strategy earlier this month that it will strive to reduce dependences by diversifying and attracting future technologies such as semiconductors.

Germany’s carmakers and other manufacturers struggled to secure chip supplies at the height of the Covid-19 pandemic, sparking a renewed push to expand local semiconductor production. Trade spats between the US and China have also highlighted the risks of being too reliant on overseas supply chains. Still, the bulk of the money will go to non-European companies.

US chipmaker Intel has secured half of the funding, with €10 billion in aid slated for its production site in Magdeburg in eastern Germany. That amounts to about a third of the total investment in the facility. 

The government is in the final phase of negotiations with TSMC, the world’s biggest contract chipmaker, to invest in a plant in Dresden in eastern Germany. As much as €5 billion in subsidies, or about half of the total investment, has already been budgeted, the people said. 

Scholz’s administration has earmarked around €1 billion for Infineon, about 20% of the investment in a new semiconductor fab in Dresden. German automotive supplier ZF Friedrichshafen AG and US chipmaker Wolfspeed Inc. will also get state money to build a factory for the production of silicon carbide chips in the state of Saarland near the French border. The joint venture is seeking subsidies for around 25% of the costs, which would amount to roughly €750 million.

Other funding is planned under the European Union’s program to invest in the bloc’s green and digital transition as well as other key technologies, known as IPCEI projects, the people said. 

In June, TSMC Chairman Mark Liu told reporters that following the war in Ukraine, the EU has become more keen on setting up new chip plants to secure supplies.

Germany is subsidizing companies despite a return to fiscal constraint. The government plans billions in cuts to next year’s budget, including social benefits. After the high spending in the pandemic and the energy crisis related to Russia’s moves to squeeze supplies, Finance Minister Christian Lindner has insisted on returning to constitutional debt limits. 

While it doesn’t match the $50 billion the US is providing with the Chips and Science Act, Germany’s subsidy package is still higher than what other major governments have promised to boost their local chip manufacturing. Japan is prepared to commit more than $14 billion, while India is offering $10 billion to attract investment.