Intel's EUR10 billion (approx. US$10.5 billion) semiconductor plant in Magdeburg, Germany, has hit a major roadblock as the country faces a critical budget tug-of-war between funding cutting-edge semiconductor manufacturing and advancing lithium battery technology. The delay in Intel's project, originally slated to be a key pillar of Europe's semiconductor ambitions, underscores growing tension within the German government over resource allocation.
With semiconductors being essential to the automotive and tech industries and lithium batteries driving the future of electric vehicles (EVs), this budget battle could reshape Germany's industrial landscape. As lawmakers consider redirecting funds toward battery research, the fate of Intel's ambitious chip plant hangs in the balance, putting Germany's tech sovereignty goals at risk.
Budget reallocation: Intel's German funding at risk?
The German government, unable to assist European battery maker Northvolt with its financial crisis, is also planning to freeze funding for lithium battery research. Specifically, it will end support for the new battery research projects of Bundesministerium für Bildung und Forschung (BMBF, the Federal Ministry of Education and Research) by 2025.
According to a report from Politico, Europe's semiconductor strategy is also facing challenges. Intel's delayed construction plans in Germany could further jeopardize Europe's goal of achieving a 20% global market share in semiconductors by 2030, with current forecasts indicating that the figure may only reach 11.7 percentage points.
According to a Deutsche Welle (DW) report, the German government has provided approximately EUR10 billion in subsidies for Intel's semiconductor plant in Magdeburg. However, this funding is now at risk of being reallocated. German parliament members and researchers believe that these funds should instead be redirected toward research and development in lithium battery technology, as this area is critical to the country's future energy transition.
In light of the promising future of lithium batteries, German parliament members and researchers have recently been advocating for a reallocation of funds, targeting the EUR4 billion earmarked for Intel's semiconductor plant in Magdeburg, which has been delayed by two years due to financial pressures. The project might face further difficulties in the mid-term, potentially freeing up the EUR10 billion in government subsidies for reallocation.
According to consolidated reports from international media, while BMBF's funding is set to end in 2025, new incentive measures can still be proposed in the 2024 budget, potentially extending support until 2028. However, with significant budget cuts, launching new battery research initiatives will be challenging, a move that researchers have criticized as detrimental to the country's long-term prosperity.
SiliconANGLE reports that Intel's construction delays are largely driven by its need to establish a more competitive global cost structure. The company's current financial pressures have also led it to request further government subsidies. These setbacks have only further weakened Germany's standing in the global semiconductor race.
China and South Korea come into play: reshaping Germany's battery and chip competition
Supply chain insiders pointed out that both lithium batteries and semiconductor chips are critical industries for Germany's automotive electrification transition. Yet, the planning phase coincided with a global shortage of automotive-grade chips and a peak in reliance on Asian manufacturers for lithium batteries. As a result, the German government has heavily invested in building a strategic moat to secure these essential resources.
The strategic moat remains unfinished, yet issues have already surfaced. European lithium battery production lags far behind expectations, especially compared to more cost-efficient competitors from China and South Korea, who are rapidly establishing factories in Europe.
This intensifies pressure on the German government to cut battery research funding according to DW. Meanwhile, as Taipei Times reports, TSMC's construction in Germany progresses smoothly, while Intel's plant faces serious setbacks.
In contrast, the Japanese government has recently increased support for automakers investing in solid-state battery development, while the US has leveraged the Inflation Reduction Act (IRA) to boost domestic lithium battery production and limit the entry of "foreign entities of concern" (FEOC). With such strategic moves by other countries, is Germany's decision to cut lithium battery research funding a move against the tide?
Germany's "Big Three" automakers—Volkswagen, Mercedes-Benz, and BMW—are facing increased costs as vehicles produced in China and shipped to Europe are now subject to tariffs. In retaliation, China has targeted Europe, potentially inflicting further damage on these companies, which have a significant presence in the Chinese market.
According to the latest data, the European Union has launched an anti-subsidy investigation into Chinese EVs and is planning to impose tariffs on EV imports from China to counter their low-price impact on the European market. This has created significant financial pressure on German automotive giants Volkswagen, Mercedes-Benz, and BMW, which rely heavily on production and exports from the Chinese market. According to a report by Bloomberg, sales in China account for nearly 40% of these companies' total revenue, and China's retaliatory measures could further hurt their global earnings.
Meanwhile, the cut-throat competition in China's auto market, particularly the rapid rise in market share of Chinese new energy vehicles, has caused significant difficulties for the German Big Three. The rapid growth of China's new energy vehicle market, led by Chinese automakers such as BYD Auto, has already surpassed the sales of many international brands.
According to Bloomberg, China's new energy vehicles accounted for 50% of the market share in the first half of 2024, posing a major threat to Germany's automotive giants. Recently, these companies have all revised their annual financial forecasts downward, with Volkswagen even launching large-scale layoffs and shutting down some factories, aiming to save hundreds of millions of euros in costs.
Moreover, in the first half of 2024, many European Tier 1 and component suppliers had already raised alarms. To mitigate the financial crisis caused by losses, they began divesting assets and restructuring to secure sufficient funds for survival.
Leading European suppliers like Bosch and Continental, both Tier 1 companies, are facing increasing financial pressure. According to a report by Reuters, these companies have begun selling off non-core assets and cutting research and development spending to reduce losses and maintain cash flow. This trend highlights the vulnerabilities in Europe's supply chain and further challenges Germany's competitiveness in the global market.
