Over the next decade, British semiconductor scaleup Pragmatic wants to build around 100 manufacturing plants — or fabs. It's raised $186m from investors, including from the CIA’s VC arm, In-Q-Tel.
Half of the fabs will be sold directly to clients, but the location of the other half will largely depend on local governmental incentives, says Scott White, the company’s founder.
But that’s not likely to happen on Pragmatic's home turf. With incentives in the EU “opaque” and in the UK “even more opaque”, White is looking to the US and beyond.
Stories like Pragmatics aren't uncommon, a sign that Europe’s big push for a homegrown manufacturing base for chips — which power everything from phones to advanced weapons, and are overwhelmingly made in Asia — may be overlooking domestic startups.
The EU recently passed a €43bn incentive plan, the Chips Act, to boost semiconductor manufacturing in the EU — but for now it seems the biggest beneficiaries of the scheme are tech incumbents, not startups.
“The funding and most of the modality of the Chips Acts is for the big players already on board,” says Philippe Notton, the founder and CEO of SiPearl, a French supercomputer chip designer.
“I just don't see that it’s enough in favour of startups to create new value. And that's exactly what Silicon Valley is doing,” he says.
European policymakers have been trying to encourage domestic capacity in light of post-pandemic supply chain backlogs and growing tensions between the two largest manufacturers, China and Taiwan. The EU wants to double its current global market share in chipmaking to 20%.
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In the meantime, the UK government still hasn’t published its long-deferred semiconductor strategy, which will lay out how it plans to support the industry.
“We're in a little bit of limbo,” White says. He stresses that he’s in talks with the UK government and he has an idea of what’s going to be in the plan. “But until it gets announced you're never entirely sure exactly what's going to be covered. And certainly what's very unclear is how much funding is going to be associated with that.”
Europe’s chips push is part of a global trend: the US CHIPS and Science Act includes over $52bn of funding to boost domestic semiconductor manufacturing, while China is reportedly preparing a more than 1tn yuan (€130bn) package for its chip industry.
The EU’s new package is “a very good wake-up call”, says Notton at SiPearl. “[But] I don’t think it’s going to solve everything.”
He complains that only a fraction of the money will be targeted at research and development and supporting startups — the majority will likely end up with incumbents.
The sector’s leading companies both from Europe and the US, such as Intel, GlobalFoundries and STMicroelectronics, have already lined up to invest across the EU, counting on preferential treatment.
Mark Halfman, CEO of iPronics, a Valencia-based photonics startup which raised a €3.7m seed round last year, says that the initiative is an “encouraging opportunity”, and hopes to access some of the scheme’s subsidies. But he says startups need more clarity on the implementation of new rules, requirements and timing.
“So that from a startup perspective, we can then plan accordingly, and understand how this may or may not fit within their overall strategies.”
Amelia Armour, a partner at Cambridge-based VC firm Amadeus, which has invested in semiconductor companies such as Graphcore and Paragraf, says the EU should think of the whole supply chain, including startups and smaller companies.
“It's [about] making sure that that money and resource doesn't just go into funding very large fabrication sites, and then avoids the rest of the market, which is designing the chips or coming up with new chips,” she says.
White at Pragmatic also says that for now, he finds applying to the scheme quite confusing — as opposed to what he has experienced in the US, where the whole process was very transparent, clear and easy.
“It's very opaque in terms of understanding who would we, as a small British company, engage with if we thought we wanted to put a fab in France or Germany or wherever else? Who do we actually go talk to? What are the kinds of incentives we could expect?
“It feels like most of what's been announced to date is a lot of bespoke negotiation between the very big semiconductor manufacturing companies, like Intel and TSMC, and the governments, so it feels less accessible as a smaller company to actually engage in that.”
The policymaker response
“In the shorter term it’s true that if we want to hit the EU’s 2030 target of doubling current global market share to 20%, we also need the big players to invest in the EU,” admits Eva Maydell, one of the EU lawmakers who led the negotiations for the package.
But she also stresses that the negotiators made sure the law “delivered for the whole chips ecosystem and wasn’t just a tool for delivering state aid to large incumbent players”.
It's expected that the entire ecosystem will benefit from increased production capacity, a spokesperson for the European Commission adds. “The presence of semiconductor fabs in a region attracts the collaboration of many types of companies active in different fields across the entire value chain.”
In addition to the €43m already pledged, which is supposed to be spent specifically on filling the “current gap in production facilities in Europe”, the EU will allocate €6.2bn of public funds to research and development and capacity-building activities, such as the development of a design platform and setting up of pilot lines to accelerate innovation and production.
UK at a standstill
Meanwhile, in the UK, the industry is still looking for answers. The country’s government was meant to publish a strategy last autumn, but it’s still in the works.
That uncertainty has pushed companies like Pragmatic to look for investment outside of the country.
The understanding is that the UK, as a smaller market, won’t be willing to participate in the subsidy race — instead it will try to attract investment and support local startups by creating favourable investment conditions or specialising in certain technologies. Latest reports suggest that public aid may not exceed £1bn.
But, if the UK eventually manages to build that model, it may actually be more conducive to startups than the EU's regime.
“What the UK will be doing will be, I think, more beneficial towards SMEs, because it's focused on specialist next-generation technologies, which by definition, are not the things established major players are focused on,” says White at Pragmatic.