Europe is running out of semiconductors – here’s what it can learn from tech survivor Osram
The shortage of semiconductor chips has exposed the vulnerability of European high-tech manufacturers that rely heavily on chip imports from Asia. The automotive sector alone, traditionally a European high-tech stronghold, is expected to take a US$110 billion (£79 billion) hit over the coming years as a result.
In 2020, high-tech products represented approximately 20 per cent of total exports from the European Union by value, with other major sectors including pharmaceuticals, telecoms, aerospace and armaments. Enjoying annual growth rates upward of 10 per cent before the semiconductor shortage and employing more than 3.5 million workers, high-tech is the fastest-growing European industry by far.
Considering the importance and apparent vulnerability of the sector, the EU is scrambling to implement initiatives to encourage domestic chip manufacturing and reboot innovation at home. After all, Europe accounted for about 44 per cent of global semiconductor manufacturing in 1990, compared to only around 10 per cent today. This slow decline was the result of manufacturers failing to adapt after domestic first-generation cellphone makers Nokia, Ericsson and Siemens were usurped by American and Asian competition.
Yet in the midst of this struggle for technological self-sufficiency, a European powerhouse in high-tech manufacturing was created by the acquisition of German LED (light-emitting diode) manufacturer Osram by Austrian sensor specialist AMS. The combined company is among Europe’s largest semiconductor firms and holds the largest market share in chips supplied to the automotive sector.
It is the latest in a series of mergers and takeovers in semiconductors that are representative of what has been happening in high-tech industries as a whole. Products that were once the exclusive domain of western manufacturers have become increasingly commodified as Asian manufacturers catch up, boosted by government subsidies that have left established companies struggling to compete. Yet at the same time, highly profitable and strategically important niche applications are emerging, which point to opportunities.
To understand why some companies have failed to adapt to a rapidly changing business environment, while others are driving innovation, it’s worth looking at the history of Osram in more detail.
Spotlight on Osram
Osram traces its roots back some 115 years to Austrian chemist Carl Auer von Welsbach, who greatly improved on Thomas Edison’s light-bulb designs with the use of a metal filament in 1906. Osram-branded bulbs started manufacturing the same year and went on to become the flagship product for one of the biggest lighting companies in the world. Osram later played a key role in the development other lighting technologies, including compact fluorescent light bulbs.
Key to Osram’s survival over the years has been its ability to adapt by proactively seeking out new markets. Following the global effort to phase out incandescent lamps in the 2000s, Osram was well placed to capitalise. Scientists at Osram and the German Fraunhofer Institute had patented a white LED as early as 1996. This was only weeks after the Japanese researchers that would go on to win the 2014 Nobel Prize in physics for their ground-breaking invention, and Osram’s early start in LED research established its IP portfolio.
But when highly subsidised Chinese companies entered the market after 2010, LEDs for general illumination became increasingly ubiquitous and less profitable. Osram instead focused on developing market segments that demanded high-performance LEDs.
Backed by its in-house strength in research and development, fruitful university collaborations, and production capacity in the EU, Osram secured market leadership positions in niche applications like horticultural lighting for high-yield agriculture, infrared sensors for heart rate monitoring and lights and sensors for the automotive industry.
High-performance LED development
Osram stayed ahead of the competition by moving to niches where higher device performance and electrical efficiency were of paramount importance, rather than low manufacturing cost. The company’s product and IP portfolio today remains among the industry’s largest in key patent classes. And the takeover by AMS shouldn’t be seen as a sign of failure. It creates a global leader in high-tech optical solutions that has a much better chance of staying ahead of emerging Asian competition in these niche sectors.
Other western companies have not navigated the lighting sector as successfully. General Electric, a long-time competitor, had opted against developing its own LED research department, instead of procuring chips from overseas manufacturers to include in its lamps. Faced with increasing economic pressure, and unable to fall back on more specialised products, the company that traces its roots back to Edison had little choice but to sell its lighting unit in 2020.
Lessons to learn
My department’s research has shown that maintaining in-house research capabilities and academic collaborations will be key to the survival of European high-tech companies in the near future. Governments can support these efforts of private industry by strengthening the academic landscape in Europe. This can be achieved through projects like the Horizon Europe Programme, which funds both basic university research and collaborative efforts with industry.
In the long run, the best way to ensure the resilience of Europe’s high-tech industries is to “backshore” manufacturing of these products to Europe. With Sino-US tensions only expected to mount in the coming years, this would largely decouple strategic industry sectors from economic sanctions and mitigate geopolitical risks. It would also reduce the risk of IP theft in overseas manufacturing.
Two of Europe’s largest suppliers of semiconductor components have already moved a significant part of their production back to Europe: Infineon Technologies in Austria and Bosch in Germany. This was enabled by unprecedented levels of factory automation and advanced robotics that is known as the fourth industrial revolution. As the Osram experience shows, controlling the most important parts of your technology is often the secret to long-term survival.
Where East meets West, Torishima bridges the hemispheres
Gerry Ashe, Deputy CEO, Torishima Pump Mfg Co Ltd
Torishima is a leading Japanese company specialising in the design and manufacture of engineered pumping equipment. The products are used in a variety of applications in desalination plants, on water transmission and wastewater schemes, and extensively in large power plants. Although established more than 100 years ago, during the past 20 years Torishima’s objective has been to expand its markets, transitioning from a predominantly domestic company to a global player in the engineered pump market.
As a Japanese company, Torishima has taken the unique approach of embracing these new markets, with a strong focus on a multicultural approach to the management team. The business set up its Torishima Global Team (TGT) in 2002. At the end of 2020, Torishima’s export business accounted for almost 60 per cent of its total revenue. TGT has set up and manages a network of service businesses, sales offices and manufacturing plants, from Michigan in the USA, all the way through Europe, the Middle East, the Indian subcontinent, Asia and as far east as Melbourne in Australia.
Torishima’s strength has been its products and its people. In a highly competitive industry Torishima’s design and manufacturing capabilities have ensured its products are not only reliable but are manufactured on time and within budget. Torishima’s customer-focused approach ensures it works in partnership with large engineering contractors to ensure major infrastructure projects are completed as planned. Torishima is fully committed to its environmental responsibilities. Extensive research and development goes into the design of its products, resulting in high hydraulic and mechanical efficiencies, which, in turn, reduce the energy needed to drive the pumping equipment.
Torishima’s plan is to continue to grow and expand within its core business. As the world’s population continues to grow, the demand for water and power will also increase. Torishima is in the business of water supply and there are few things more important than making sure people have access to clean water. That’s why what Torishima does is more than just manufacturing pumps – it plays a critical part in the supply of water across the globe.
Torishima is fully committed to engineering excellence in the Water Market. For more information please click here.
How a radical interpretation of the Great Depression became the orthodoxy behind solving the Covid economic crisis
At the start of the Covid-19 pandemic in March 2020, US Federal Reserve System governor Jerome Powell made an extraordinary declaration: “We’re not going to run out of ammunition.” The central bank stood ready to take any action necessary to stem the mounting economic crisis. Three months later, the Fed injected nearly US$3 trillion dollars of liquidity into the US economy.
Such radical action by central banks – quantitative easing (QE) – has its critics on the right and left. Just as striking is that many prominent economists and economic historians have rallied in support of QE in responding to the threat of economic crisis. Their remarkable certainty reveals a story about how our understanding of present crises came to be dominated by lessons drawn from past crises and in particular the Great Depression in the 1930s and its interpretation by economists, Milton Friedman and Anna Schwartz, in their 1963 book, A Monetary History of the United States.
Friedman and Schwartz claimed that the Federal Reserve System was responsible for turning an ordinary economic downturn into the Great Depression. When a massive financial crisis led to a sharp decline in the stock of money in the US economy, the Fed failed to take action to mitigate the problem.
By the end of the 20th century, their interpretation of the Great Depression had become sufficiently dominant in economics and economic history to qualify as the orthodoxy. When the global financial crisis struck in 2008, the Federal Reserve System proposed aggressive policies of monetary expansion to avoid its supposed mistakes during the Great Depression.
That flood of liquidity into capitalism’s financial system is remarkable from a historical perspective, surpassing all previous records for monetary interventions, outside of wartime, since the beginning of the 20th century. It defines our economic reality to such an extent that the fictional story of a mysterious “Professor”, who meticulously plans a raid on the Royal Mint of Spain to print billions of euros, became the basis for the wildly popular television series, La Casa de Papel. As the Professor explained:
In 2011, the European Central Bank made €171 billion out of nowhere. Just like we’re doing. Only bigger … ‘Liquidity injections,’ they called it. I’m making a liquidity injection, but not for the banks. I’m making it here, in the real economy.
The Professor made these remarks long before central banks responded to the coronavirus crisis with an even greater flood of liquidity.
Historical analysis as economic heresy
The onset of the Great Depression coincided with “a golden age” of theoretical and empirical research on business cycles and crises. Although they did not agree on the causes of cycles, economists tended to look for explanations of the recurrent fluctuations in economic activity in the internal dynamics of the economic system. This emphasis is readily apparent in the work of Wesley Clair Mitchell, an American economist in the early 20th century who was the foremost global authority on business cycles.
Mitchell began his career as a monetary economist at the University of Chicago where he met Thorstein Veblen and was inspired by the unconventional economist’s criticisms of orthodox economic theory and, in particular, its neglect of the process of “evolutionary” economic change.
To Mitchell, it was the “precarious dependence” of material wellbeing on an economy organised for profit-seeking that generated business cycles: “Where money economy dominates, natural resources are not developed, mechanical equipment is not provided, industrial skill is not exercised unless conditions are such as to promise a money profit to those who direct production.” He looked to the dynamics of enterprises’ profit-making to explain the recurrent phases of business activity and how they “grow out of and grow into each other” in a process of cumulative change.
The depth and persistence of the Depression, especially in the country that seemed to embody capitalism in its most sophisticated form, reinforced the importance of understanding fluctuations in economic activity. A novel perspective proposed by John Maynard Keynes attracted particular attention: Keynes looked to the internal dynamics of the economic system for the roots of cycles, echoing other economists’ scepticism about its capacity for self-adjustment, but identified a significant new role for government in ensuring economic stability.
The significance of the interpretation of the Great Depression that Friedman and Schwartz laid out can be appreciated only by understanding the continuity and rupture it marked in economists’ analyses of business cycles. Their book was based on a combination of theory and history that bears an uncanny resemblance to Mitchell’s distinctive methodological approach to the study of cumulative change. But just as Mitchell had used historical annals and statistics to challenge the economic orthodoxy of his day, Friedman and Schwartz employed their historical research to confront not only what Mitchell and Keynes believed but what many economists believed about the inherent instability of a capitalist economic system.
In a Monetary History, Friedman and Schwartz conceived of the norm in capitalism as stability, as characterised by a harmonious covariance of money and income, interrupted only by aberrant cycles. It was during these unusual historical moments, they claimed, that money mattered a great deal. Insofar as the Great Depression was concerned, they posited that it was the drop in money that caused income to fall. While they acknowledged the monetary collapse originated in the waves of banking crises that ravaged the US financial system in the early 1930s, they blamed the US monetary authority for failing to inject enough liquidity into the system to counter the collapse. In doing so, they held the government responsible for what seemed to most people to be a crisis of capitalism.
To defend their bold claims, Friedman and Schwartz embraced a methodological approach inspired by Mitchell but increasingly castigated as old-fashioned against the growing influence of econometric analysis in economics. Econometricians agreed with Mitchell on the importance of integrating economic theory and evidence but they cast economic activity in terms of stable mathematical relationships that belied the importance of cumulative change that Mitchell emphasised.
Friedman and Schwartz refused to be swayed by methodological fashion, opting instead for history to discriminate among different explanations of “statistical covariation” by going “beyond the numbers alone” to “discern the antecedent circumstances whence arose the particular movements that become so anonymous when we feed the statistics into the computer”.
Based on historical research, they purported to reconstruct the temporal sequence of events that they claimed led to a “catastrophic contraction” during the Great Depression. They also used historical reasoning to go further, to transcend a story that would otherwise locate the collapse of the US economy in the failures of its private financial system. The Federal Reserve System had “ample powers”, they suggested, “to cut short the tragic process of monetary deflation and banking collapse” but did not use these powers “effectively”. Through the use of counterfactual history, therefore, they created the impression of a crisis that did not have to occur.
Money, money, money
Asking why the Great Depression occurred in the US was a difficult question. Friedman and Schwartz’s answer was provocative and plausible, but much was left out and a great deal added in. We would expect criticism of their claims, and a plethora of alternatives. Yet, despite criticism over the years, many historians have extended the money hypothesis or qualified specific elements of it, rather than confront or evaluate the core claims on which it was constructed.
By the end of the 20th century, the radical interpretation of the Great Depression that Friedman and Schwartz proposed had become historical orthodoxy. The few scholars who were impertinent enough to directly confront it were subject to an onslaught of criticism. And for those unwilling to buy into the claim of capitalism’s inherent stability, neglect proved to be a powerful weapon. That such neglect was by design as much as ignorance can be seen in the writing of an academic economist, Ben Bernanke, who was to build an even more dazzling career as a central banker.
Bernanke acknowledged an important gap in the money story and proposed to fill it. Friedman and Schwartz’s interpretation of the Great Depression relied heavily on a banking panic, in which depositors pulled their money out of healthy and unhealthy banks, but without offering any serious explanation of the disruption of the US financial system. Bernanke came to the rescue but only by ruling out the few contemporaries like Hyman Minsky to whom he might have turned for insights on the instability of the US financial system since their work departed “from the assumption of rational economic behaviour”.
That Bernanke’s paper garnered so much academic attention suggests the crushing effect of academic orthodoxies on purportedly scientific inquiry. But the stakes suddenly became a great deal more important, and the action more dramatic, when the historical orthodoxy of the Great Depression passed from academic minds into the policy sphere in the early 21st century.
Some sense of what was to come was in evidence at a celebration of Friedman’s 90th birthday in 2002. By then, Bernanke was a member of the Board of Governors of the Federal Reserve System and in an oft-cited tribute, he said: “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
Bernanke’s words surely gave the nonagenarian as much pause as pleasure. In Friedman’s presidential address to the American Economic Association, a few years after A Monetary History’s publication, he worried that “we are in danger of assigning to monetary policy a larger role than it can perform”. Still, he could hardly have imagined what Bernanke would dare when the opportunity presented itself.
Friedman may not have been around to witness the aggressive policies of monetary expansion that Bernanke implemented in his determination not to “do it again”. However, Schwartz suggested he was fighting the wrong war since the 2008-2009 crisis had nothing to do with liquidity. Ironically, many economists once believed much the same thing about the Great Depression of the 1930s. Just imagine what it would imply about our understanding of that crisis, not to mention the current fashion for quantitative easing if they were right.
This article is adapted from the Economic History Society’s annual Tawney Lecture
How global tax dodging costs lives: new research shows a direct link to increased death rates
Tax abuse is an expensive business. According to a recent report by the Tax Justice Network, avoiding or evading tax deprives governments across the world of around US$427 billion (£302 billion) every year. This is money that could otherwise be spent on things like clean water, sanitation, education and health care.
The same report also claims that the laws and practices of just four countries – the UK and its network of overseas territories and crown dependencies, along with Switzerland, the Netherlands and Luxembourg – are responsible for 55 per cent of tax losses suffered around the world.
Now for the first time, we can realistically assess how these huge gaps in tax receipts directly affect the mortality rate of young children and their mothers. We do this using the Government Revenue and Development Estimations (GRADE) tool, which uses government revenue data from the United Nations University World Institute for Development Economics Research and models the impact of government revenue on child and maternal mortality. Thus we can quantify the human cost of revenue losses through tax avoidance (which is legal) and tax evasion (which is not) for every country in the world.
Unsurprisingly, the biggest impact is felt by the populations of low and middle-income countries, when, for example, a multinational corporation under-reports their profit to minimise the tax owed locally and instead reports profit in another country with a very low or zero tax rate.
Nigeria, for example, was calculated to have lost almost US$11 billion or US$57 per person in 2020 due to unpaid tax revenue. Projecting this annual loss over a ten-year period, we estimate almost 150,000 child deaths could have been averted if these losses had been curtailed. Imagine the potential for multiple countries and multiple decades. https://player.vimeo.com/video/500133131
These kinds of shocking numbers have already had an impact. The Global Legal Action Network, Action Aid and others used them to make a submission to the United Nations Committee on the Rights of the Child (UNCRC).
Their concern was Ireland’s responsibility for the impacts of cross-border tax abuse which may deprive low-income countries of revenues to spend on children’s economic, social and cultural rights. Following the submission, the UNCRC asked Ireland to explain what it is doing to ensure its policies do not contribute to tax abuse by companies operating in other countries.
This is the first time the UNCRC has examined the consequences of a country’s tax policies on the rights of children living overseas. Hopefully, it is just the beginning. If campaigners elsewhere make similar submissions, the handful of countries responsible for more than half of global tax abuses might be persuaded to review and adjust their approach.
Revenue for rights
Richer countries have a responsibility to the citizens of poorer countries, and this is not limited to ministries concerned with foreign aid. Multinational corporations usually have their headquarters in wealthy countries, which have a moral duty to prevent human rights violations abroad. Governments must not remain passive when organisations based within their territory harm such rights in other countries.
This is especially crucial for low and middle-income countries, but equally, the governments of those countries must seek to protect their citizens and prioritise fundamental rights over business interests.
In the future, multinational businesses ought to be required to publish profits and taxes paid in the country where the profit and tax were generated. Fortunately, momentum is gathering behind requiring this kind of public reporting. Increasingly companies appear to be publishing this information voluntarily – one example is Vodafone.
When this data is available – from both corporations and countries – the GRADE tool can be used to shine a light both on the positive impact these taxes have on lives, and the negative effects of lost revenue. We hope it could become a powerful weapon in the battle for transparency and a move away from the kind of practices that compromise fundamental human rights.
Bernadette O'Hare, Senior Lecturer in Global Health Implementation, University of St Andrews; Kyle McNabb, Research Associate, Overseas Development Institute, and Stephen Hall, Professor of Economics, University of Leicester