China is increasingly producing its own chips, mostly based on older technology. The European Commission is now starting talks with the European industry to examine the impact of chip production.

China has significantly increased the production of microchips based on older technology. This is a consequence of the American economic sanctions against the country. They target the export of microchips, so China has to rely on its own research and production. The expansion of internal production of these so-called legacy chips is subsidized by the Chinese government.

The EU is watching this process with suspicion. In the short term, China is reducing its dependence on foreign imports, but the long-term consequences are unclear. After all, the type of chips that the Chinese produce are also relevant for European industry. Don’t think of CPUs for laptops, but of smaller microchips that perform all kinds of functions in cars, for example.

The European Commission fears an oversupply of cheap Chinese chips, two anonymous sources told Reuters. This oversupply could harm domestic manufacturers such as Germany’s Infineon, France’s STMicroelectronics and the Netherlands’ NXP. After all, Chinese production directly competes with what these companies produce.

ASML Benefits

However, the situation is not so simple. The Dutch company ASML, for example, is currently benefiting from the Chinese plans. After all, ASML builds the machines that the Chinese companies use to produce the old chips.

Christophe Fouquet, CEO of ASML, has already pointed out that customers such as the German car industry need the chips that China is currently investing in. Demand for them is increasing, while production has low margins and European companies are not investing enough.

“Europe cannot cover half of its needs itself,” said Fouquet. “If someone wants to slow down Chinese production, for whatever reason, they need alternatives. It is nonsense to stop someone from producing something they need.”

The European Commission hopes to gain a better picture of the situation by investigating the European chip industry. It is no secret that the EU is not a fan of competition subsidized by external countries. Import tariffs to compensate for the alleged state aid and to adjust prices are then an option.