In a move to get closer to clients, Taiwan’s semiconductor cluster is setting up shop in Germany and beyond.

For AmCham Taiwan’s Taiwan Business Topics

Taiwan’s largest company and the world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Co. (TSMC), held a ceremony on August 20 in Dresden, Germany, to mark the official start of construction for its first semiconductor manufacturing plant in Europe – a milestone for the company’s global production ambitions.

TSMC had announced a year earlier that it would team up with Stuttgart-based Robert Bosch GmbH, Neubiberg-based Infineon Technologies, and Netherlands-based NXP Semiconductors to set up the European Semiconductor Manufacturing Co. (ESMC) as a joint venture. ESMC will provide advanced semiconductor manufacturing services to industries with rapidly expanding needs, such as the automotive and industrial sectors. The Taiwanese partner holds a 70% stake in the plant, and the three European partners each own 10%.

The project’s anticipated level of investment is around €10 billion (US$11 billion), funded by equity injection and debt borrowing from ESMC’s stakeholders and strong support from the EU and German governments. The German government has reportedly allocated grants up to €5 billion (US$5.6 billion) toward building the new fab, US$1 billion short of the subsidies provided by the U.S. federal government under the CHIPS and Science Act for the mammoth project TSMC is undertaking in Arizona.

Japan, for its part, has granted subsidies to TSMC equivalent to more than 40% of its planned investment for the company’s two-fab project in Kumamoto. TSMC is currently running production trials for the first plant, which is expected to start commercial operation in late 2024.

In Dresden, mass production is targeted to begin by the end of 2027, using TSMC’s 12-nanometer and 16-nanometer FinFET process technologies, as well as its 22-nanometer and 28-nanometer planar CMOS for producing automotive electronics and specialty industrial devices.

“Given TSMC’s continuous revenue growth in the automotive chip sector, this fab will play a critical role in supplying automotive chips in Europe,” says Cheng Kai-an, an analyst at the Taipei-based Market Intelligence & Consulting Institute (MIC).

“The new fab is expected to roll out about 480,000 12-inch wafers a year to boost Germany’s share in the global market,” ESMC President Christian Koitzsch, the former head of Bosch’s Dresden plant, said at a Berlin semiconductor forum in June. These 40,000 wafers per month will represent only about 3% of TSMC’s total capacity.

ESMC will hire about 2,000 people from Germany and other European countries to work at the plant. TSMC will dispatch hundreds of Taiwanese engineers to Dresden over the next three to five years to help the operation get started.

“ESMC’s clean room will have an area of about 45,000 square meters, while the facility’s economies of scale are expected to cut operating costs, strengthen competitiveness, and create tremendous job opportunities in the supply chain,” Koitzsch added.

Germany grew comfortable with the idea of granting TSMC a substantial subsidy for constructing a factory in Dresden after the pandemic exposed deep faults in global supply chains and a chip shortage that slowed the production of cars, smartphones, and refrigerators around the world. The unprecedented suspension of production by German automakers alarmed policymakers, as the auto sector is a major source of the country’s employment.

Against this backdrop, the European Commission introduced the European Chips Act in February 2022, allocating €43 billion (US$48 billion) in public and private investments. The aim is to significantly increase the EU’s market share in global chip production, with the ultimate goal of raising its market share from 9% to 20% by 2030.

The situation became even more urgent in the second half of 2022 after then-U.S. House Speaker Nancy Pelosi visited Taiwan, provoking Chinese military exercises that suggested the possibility of a blockade of Taiwanese ports. Concerns about future disruptions fueled automakers’ fears of an abrupt and complete breakdown of the chip supply chain.

Supplier status

The German Trade Office Taipei (AHK Taiwan) notes that as part of the plan, TSMC has been encouraging its key suppliers to set up facilities in the Dresden area. Over the coming weeks, AHK Taiwan expects a string of investment announcements for production facilities and warehouses to materialize. The office sees the deteriorating security situation in the Red Sea, which has driven up freight costs and raised the specter of logistics bottlenecks, accelerating these efforts to establish a cluster of suppliers around the Dresden site.

“We are told by Taiwanese companies considering investment in Dresden that the biggest remaining headache is that the German authorities are slow in processing German visas and work permits,” says Eva Langerbeck, chief representative and executive director of AHK Taiwan. She notes that bureaucratic bottlenecks are also delaying the issuance of business permits, raising concerns about the availability of affordable electricity and water – both critical for chip production.

The logistical challenges for TSMC extend beyond bureaucratic hurdles. For example, Langerbeck mentions that logistics has been a concern for some Taiwanese suppliers, as the drive to Dresden from Frankfurt airport takes five hours. Prague, the capital of Czechia, is emerging as a potential alternative, being only about a two-hour drive from Dresden.

While TSMC’s Arizona plant has faced some delays, shifting its projected start from 2024 to 2025 due to a shortage of specialist workers, the Dresden facility remains on schedule. However, observers note that attracting the 2,000 skilled engineers and workers needed for the plant to become operational will also pose significant challenges.

In response to the talent shortage, a Semiconductor Talent Incubation Program Taiwan (STIPT) has been jointly launched by Germany’s federal state of Saxony (of which Dresden is the capital), Dresden University of Technology, and TSMC. This program is open to students from all universities in Saxony who are pursuing degrees in STEM fields. In March, Germany sent an initial cohort of 30 seed students to Taiwan for the program, which includes practical training at TSMC’s advanced plants in central Taiwan. The program is expected to expand significantly, eventually accommodating 100 or more students.

“Although Saxony is home to a cluster of technical universities, the industry still faces a shortage of trained mechatronics engineers, so our program aims to attract STEM students to Taiwan for semiconductor-specific training to assume middle management positions in 2027,” says Josef Goldberger, liaison officer at the Saxon Science Liaison Office Taiwan.

The STIPT program runs parallel to another initiative in which the Taiwan Semiconductor Research Institute is training talent at a recently opened training center in Prague. Meanwhile, in Taiwan, Taiwanese students of German language and literature studies are trained in operating chip-making machines.

 Goldberger suggests that recruitment and retention may be smoother in Dresden compared to Arizona. He notes that the Dresden site’s less remote location makes it more attractive for employees and their families. Additionally, TSMC’s local joint venture, ESMC, managed by the experienced Christian Koitzsch, is overseeing the establishment of the Dresden plant. In contrast, TSMC’s direct management of the Arizona facility has proved challenging. Media reports have attributed these difficulties to the company’s struggle to bridge the gap between Taiwanese and American professional and cultural norms.

“Nevertheless, the media’s prevailing narrative of the Japan project going smoothly and the Arizona project going terribly is to be taken with a big pinch of salt, as, after all, Arizona is still roughly on schedule,” Goldberger says.

Beyond TSMC

TSMC is not alone in expanding its European footprint. Hsinchu-based GlobalWafers has received a development grant of up to €103 million (US$115 million) from the European Commission and the Italian government for its 12-inch chip plant project in Italy. Topco Scientific, a longtime supplier to Japanese chip material makers Shin-Etsu Chemical and Fujimi, is also eyeing new business in Europe. Nikkei Asia recently cited Topco Chairman Jeffrey Pan saying that his company has selected Prague as its first destination to tap growing European demand for onshore semiconductor production.

The European Economic and Trade Office (EEAS) in Taipei points out that since 2016, Taiwanese investment in the EU has increased significantly. That observation is supported by statistics from Taiwan’s Ministry of Economic Affairs, which reveal a 751% growth in Taiwanese investment in the EU in 2023 compared to the previous year. This upward trend has persisted into 2024, with Taiwanese companies registering 17 investment cases in the EU, totaling US$1.24 billion, in just the first six months.

EEAS attributes this rise to the EU’s global leadership role in clean energy development and carbon emission reduction, as well as its high-consumption population of 450 million people.

“Guided by the EU’s Green Deal policy, industries across the EU are shifting toward sustainable development, creating a surge in business opportunities in low-carbon and green energy sectors, attracting many Taiwanese companies to invest,” an EEAS spokeswoman says. “Moreover, in response to geopolitical dynamics, Taiwanese businesses are strategically positioning their investments globally, aiming to be as close as possible to their end markets.”