Stay on top of the viability of industrial strategy

 

• Ambrose Evans-Pritchard

Europe’s quest for ‘industrial sovereignty’ has gone horribly wrong

A semiconductor renaissance in the Continent is going nowhere

Ambrose Evans-Pritchard

Related Topics

• UK economy, 
• Industry, 
• Automotive industry

17 September 2024 1:33pm

Europe’s grand plans for battery gigafactories are falling by the wayside Matthias Rietschel/REUTERS

Europe’s grand plan for industrial rearmament and tech sovereignty is at risk of disintegration on multiple fronts. Critical components are proving impossible to deliver.

The semiconductor renaissance is going nowhere. The lynchpin was supposed to be a €30bn (£25bn) project by US chip giant Intel to build two world-class “fabs” near Magdeburg in eastern Germany, a third paid for by German taxpayers in the most expensive undertaking in the history of Deutschland Inc.

These Intel fabs were to make chips down to the technological frontier of 1.8 nanometers (nm), soon to be de rigueur for AI, 5G, autonomous driving, and advanced weapons. They were to be the beating heart of Silicon Saxony, and Europe’s hope of playing itself back into the chip game after two decades of decline.

Intel should have started construction in early 2023 but was held back by wrangling over state aid and by surreal disputes over a neolithic burial site and what to do with the local “black” soil. The company said on Monday that the whole project – and another site in Poland – is on ice for another two years.

Intel is itself in trouble after missing the smartphone boom and the first stage of the AI boom. It is shedding 15,000 workers worldwide and retreating to Fortress America, focusing on four advanced fabs already in Arizona and Ohio under the spur of the $280bn (£212bn) Chips and Science Act – Washington’s national security plan to restore US self-reliance across the semiconductor spectrum.

Europe produced a quarter of the world’s chips in 1990. This has since fallen below 10pc. Almost none of it is at the cutting edge below 10nm.

The EU has passed its own Chips Act, pledging a non-existent €43bn to capture 20pc global share by 2030. World demand is expected to double by then, so the EU must quadruple its output. “It is totally unrealistic,” said Peter Wennink, ex-head of the Dutch lithography group ASML.

True funding at the EU level is just €3.3bn, and some of that comes from cannibalising Horizon Europe (science). It would take at least €500bn to reach scale and the 2nm threshold from a standing start, even if the EU had all the specialist skills, which it does not.

Wage costs are 40pc lower in Taiwan, and the island has a nexus of technical institutes geared to the industry. “The capabilities required to domestically innovate this technology are virtually non-existent in the EU,” said last week’s Draghi report on EU competitiveness.

Europe’s electricity prices are 158pc higher than in the US on average, and large fabs consume 100 megawatt per hour each. It is surprising that Intel was ever tempted.

In my view, Germany should consider itself lucky that Intel has halted this exorbitant prestige project, which was going to cost €3.3m in subsidies for each permanent job, only to replicate chips that can be bought on the open market from allies.

Furthermore, these 1.8nm chips may themselves be heading for obsolescence before long.

There is a limit to how far you can miniaturise silicon circuits. Advanced materials such as graphene and gallium nitride may soon leap-frog ahead. Cambridge start-up Paragraf is developing 2D graphene chips for sensors that are one-atom thick and a thousand times faster.

The UK is concentrating its £1bn semiconductor fund on niche areas where it has an edge. The EU should be doing the same, thinking like a mid-sized power rather than indulging in great power illusions. It should leverage its core strengths in sensors, lithography, optics, or quantum computing.

Europe’s other grand plan for battery gigafactories is scarcely in better shape. BMW has cancelled a €2bn order for lithium battery cells from Sweden’s Northvolt, Europe’s best-funded tech start-up and the great hope of the car industry. It could not deliver the cells in time. The contract will go to Samsung SDI in Korea.

Northvolt is an excellent company, and at least it makes sense to build a green gigafactory in northern Sweden where hydropower delivers Europe’s lowest electricity costs. But the company got ahead of its skis in a brutal world market.

It bet on standard NMC batteries made with nickel and cobalt just as China switches to cheaper and safer lithium iron phosphate (LFP) batteries for the mass market.

Northvolt is having to take drastic measures, halting cathode production at its core plant in Skellefteå. It will have to buy the cathode material from Asia. Other plants in Germany, Sweden, and Canada are under review. The Swedish state has refused a state rescue, leaving the company in talks with creditors. Such are the woes of the meteor once billed as Europe’s new Airbus.

Norway’s Freyr has given up trying to make EV batteries in Europe, switching to America to profit from the Inflation Reduction Act, although that is not plain sailing either.

Only one of Volkswagen’s six gigafactories has progressed beyond the drawing board. The company has axed a proposed plant in Saxony and is building just one of its two planned cell plants in Salzgitter.

“Western carmakers are just passengers travelling at the back of the bus. Others decide where it goes,” said VW board member Thomas Schmall.

“Batteries are a core technology of EVs but today the car industry is totally dependent on Asian battery suppliers. We must change that,” he told the Frankfurter Allgemeine.

Note that he did not join the political backlash against EVs and warned that any delay in the 2035 combustion ban would be fatal. “We all agree that the future belongs to e-mobility. There is no alternative”

Volkswagen is going through its own corporate hell as it pays the price for letting China steal a march on EV technology. But the immediate problem is that China ramped up battery capacity last year to 800 GWh, more than the entire global demand. It will have tripled again by late next year. This galactic excess is landing in Europe.

One European battery-maker said privately that the EU had not offered his company “a single inch of flexibility” on financing, which is extraordinary after all the talk of the European Battery Alliance. But that is the point. The EU’s lofty declarations have no serious funding.

Mario Draghi, economist and former Italian prime minister, is right to call for a double Marshall Plan of €800bn a year in extra investment to make Europe fit for the 21st century. But to do that the EU needs its own Hamiltonian treasury with the full borrowing powers of a unitary state. Such a Europe does not exist.

Either the EU grasps the nettle and goes the whole way with radical treaty change or, more likely, given the political currents in Germany, it devolves economic and legal power back to the nation states. The hybrid status quo is demonstrably failing.

Another great post on why we have such crappy transport systems

 

Why do trams cost more to build in Britain

One reason: we move too many pipes and wires

Ben Hopkinson Sep 23 ∙ Guest post

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Building a mile of tramway in Britain costs more than double what it does in the rest of Europe (on average). The UK’s high costs have meant that fewer British cities have mass transit than any other wealthy Western country. Otherwise promising tram schemes are frequently canned as a result. Leeds, Bristol, Hampshire, and Liverpool have all seen tram projects cancelled on cost grounds. Many cities don’t even consider tramways because they know how expensive British projects can be.

Britain Remade and Create Streets spent months talking to people who actually build trams to figure out why our costs are so high. 

We found that there is no innate reason why French, German or Spanish cities can build trams for a fraction of recent projects in Manchester and Birmingham. Rather, our high costs are the result of policy choices. It is possible to dramatically cut tram-building costs by copying what other countries do right and ditching the things we uniquely do wrong.

Four key factors stood-out. All can be fixed.

• Too many utilities are moved at almost entirely the tram project’s expense,

• Our planning system creates too many hurdles and slows down projects, 

• There is no pipeline of projects or shared standards, and

• Centralised funding for local transport slows projects down and leads to a misalignment of incentives between funder and promoter.

This post focuses on the first factor (further posts will cover the other three). 

Here’s how British tram projects move more pipes and wires than their European equivalents all the while paying more to do it.

“I thought my city was getting a new tram network, but it turns out it is really getting a new utility network”

Before a tram project even begins laying the tracks, the project encounters one of the costliest parts of the whole construction. There are many pipes and wires that run beneath streets and currently a British tram project generally has to dig up the road and move all of them. 

All of this digging of the roadway doesn’t come cheap. The utility bill for the Sheffield tram in 1994 was £60 million (£154m in 2024). Moving utilities can regularly cost up to a third of the construction costs. 

“When we get the utilities moved they effectively have new for old and that is generally really expensive, [which is] a significant portion of the cost, up to a third of the cost of the track works.” Martin Fleetwood, Board member of UK Tram

While dealing with utilities is always going to be a challenge for any tram project, new trams in Britain face three extra and unnecessary hurdles compared to projects in Europe and America:

1. Tram projects have to move nearly all of the utilities.

2. They are required to pay for almost all of the cost of the relocation.

3. Trackbeds are dug much deeper than in other countries out of excessive caution.

The issue: We replace too many below ground utilities

British tram projects move too many of the utilities that are beneath the future line. This is partly a consequence of utility companies having such favourable terms on the cost division of moving utilities that they prefer to replace as much as possible with new apparatuses. Utilities are moved for two primary reasons: firstly it allows for easier access for repairs, and secondly because the track may physically conflict with utilities. New projects in the UK start from an approach of moving every utility in case access is needed in the future. 

“We (the U.K.) just went down the route of you need to move all the utilities to remove disruption risk.”  Martin Fleetwood, Board member of UK Tram

Utility diversion is legislated by section 84 part three of the New Roads and Street Works Act 1991 (NRSWA). The legislation is sound, but a code of practice written by the Highway Authorities and Utilities Committee (HAUC), now over thirty years old, has created a cost burden to tram schemes by establishing a default position that all utilities should be moved from beneath new tram tracks at far greater cost to the tram project than the utility company. 

As one tram engineer put it, “we’re spending fifteen to twenty million pounds for a once a decade occurrence of repairing utilities.” Another added that ,“It’s more likely the track will be replaced before the utilities.” 

The solution: adopt a do not move by default approach to utilities

Future British tram projects should take a more pragmatic approach to diverting utilities and accept that maintenance may close networks overnight. We should only replace what is necessary. While iron Victorian pipes should be replaced, funded to a greater extent by the utility company, modern plastic water pipes, telecoms and electrics should, by default, not be moved.

Update the Code of Practice to give clear rules, based on the principles below, on which utilities to move and which to replace. This will remove the cost and time burden of utility negotiation.

• Telecoms: do not move by default. Slew cables and lower if necessary and ensure tram tracks are not built on the pavement. 

• Electrics: do not move by default. Add backup ducting alongside new track. The default position that anything under one metre deep should be moved should be updated. A National Grid statement should be issued updating this position. 

• Gas and Water: only move metallic pipes. Leave plastic pipes that are not in physical conflict with track beds.

• Waste water: do not move pipes, but align manhole covers between or next to tracks. At the moment, manholes and their pipes are moved further away from tracks to permit access out of a belief that manholes close to the track are more dangerous for workers. If access is needed, night time works should be prioritised, and in emergencies, the line should be severed, and services on each of the branches should run. 

Section 82 of the NRSWA 1991 deals with the cost of damaging a utility asset. At present if a utility company were to temporarily need to remove track and access utilities, they may be liable for loss of revenue of the tram company were services suspended or any subsequent repairs to the track. The West Midlands addressed this with Severn Trent via a waiver for section 82. The DfT should adopt a nationwide waiver specific for utilities left in place on tram routes for Section 82 of the NRSWA 1991.

We should accept there will be times when access to buried utilities is needed. Works will be done at night or in some instances, tram services should terminate at the two stops nearest the disruption, enabling a quick walk between them. This is the norm in continental Europe if sections of the tramway have to close for works. When significant work is required on Vienna’s trams, the tramline will be divided into multiple sections that each run services. It is far better to bring down the cost of building a tram line that occasionally must be severed than to build no tram because it is too expensive to replace and move every utility. We are letting the best tram be the enemy of the good tram or indeed of any tram at all.

The issue: The cost and liability burden falls on the developer or council. 

Since 2000, tram promoters have had to pay 92.5% of the cost of moving utilities, while the rest is covered by the utility companies. With utility companies only picking up 7.5% of the cost, there is no incentive for them to keep the costs of work down or to be selective about which pipes actually need to be moved or replaced. Instead, the utility companies get newly installed apparatuses, using expensive sub-contractors, at the expense of the tram project. This results in a significant subsidy to utility companies. Perversely, were utilities diverted for highways improvements not tram improvements, companies are obliged to pay 18% of the costs.

Other countries have more reasonable approaches to splitting the costs of any utility diversions. In France, utility diversion costs for private utilities like electricity, gas, and telephones are covered by the private owners of utilities. Of Lyon’s €34 million spend on moving utilities for 16 miles of new tramway, the electricity and gas companies covered €12 million of these costs, while the telecom company covered another €11 million. Utility companies are most able efficiently to reroute their cables and pipes because of their experience and incentive to do so cheaply. Since they are covering the costs, they will only divert the utilities that need to be moved. Private companies are also encouraged to keep detailed records of their utilities, which limits the chances of unexpected delays due to unknown utilities being found.

The solution: ask utility companies to contribute a fairer share of diversion costs 

Update the statutory instrument ‘The Streets Works (Sharing of Costs of Works) Regulation 2000’ to rebalance the cost of diverting utilities from tram projects to utility companies. 

The issue: we build our tracks too deep. 

British tram track beds are often deeper than European or American counterparts. The West Midlands Metro rides on top of 600mm of concrete, which is following British standard practice of protecting utilities which go under tram tracks with large concrete slabs of between 500 to 1000mm in depth. This is borne out of a cautious desire to protect against Heavy Good Vehicles running over the tracks. Yet, digging this deep and pouring this much concrete adds significant cost.

Left: workers completing the track bed on the West Midlands Metro, which is deeper than the European norms, requiring significant concrete (source: Midlands Metro Alliance). Right: the shallower and simpler track bed of Vienna’s trams (source: courtesy of Amey ltd).

The solution: take advantage of shallower track beds

Many non-British projects use shallower trackbeds that create fewer conflicts with utilities. Constructed for only one quarter as much per mile as the average British tram, Portland, Oregon’s streetcar, only dug 12 inch (305mm) deep trackbeds, which were built as shallow slabs. Strasbourg, France and Vienna, Austria have both laid tram tracks in a shallow bed and then covered them with grass, which are approximately 300-400mm deep. Coventry’s experimental Very Light Rail uses 300mm trackbeds that can be laid in weeks, not years.  These tracks are far easier to remove if future utility access is required and demonstrate resilience to heavier vehicle loads.

Future British tram projects should study and implement cheaper, shallower trackbeds such as Portland and Coventry’s low cost shallow-slab method of track construction. These track beds are proven to sustain heavy HGV vehicles without damage or disruption to utilities. 

***

Britain’s high tram-building costs standout, but they’re not inevitable. Updating outdated regulations with unintended consequences and moving our practices in line with the rest of Europe is one way to bring them down.

It’s not the only way however, in the next post, we will cover another of the four factors: planning (or why it takes longer to get spades in the ground in Britain than almost anywhere else).

This post was an edited version of Back on Track: How to Build New Trams in the UK and Get Britain Moving, which was a joint project between Create Streets and Britain Remade.

Analysis of our position re debt and growth

 

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• Jeremy Warner

Politicians have hidden behind the Bank of England for far too long

The days of ducking the difficult economic decisions are over

Starmer and Reeves caved into union demands for political reasons rather than economic necessity Christopher Furlong/Getty Images

Jeremy Warner

18 September 2024 7:30pm

A certain lack of interest surrounds this week’s decision by the Bank of England’s Monetary Policy Committee on interest rates and so-called “quantitative tightening”.

I say this not as a “stop reading here” warning to all but central bank obsessives, but to highlight what until recently would have been seen as a rather remarkable development – that monetary policy is again becoming “boring”.

This was always the ambition of Mervyn King when he was Governor the Bank of England – for the Bank’s role in maintaining price and macroeconomic stability to be seen as so dull, repetitive and reliable that it would be largely taken for granted.

A gentle nudge of the tiller here and there would be all that was needed to keep the economy on the straight and narrow.

King’s goal was sadly interrupted by the financial crisis, and it has been monetary fireworks and almost laughably inaccurate forecasting more or less ever since.

So “interesting” did monetary policy become, and so apparently devoid of alternative macroeconomic levers were the politicians, that central banks became known as “the only game in town”. To keep them afloat, economies became almost entirely reliant on a constant stream of free money.

Having failed to anticipate the financial crisis, central bankers were again caught napping by the sudden surge in inflation that followed the pandemic and Putin’s invasion of Ukraine.

This was initially dismissed as merely “transitory”, but almost inevitably proved far more persistent than the “lords of finance” expected, requiring a severe monetary squeeze to rid the system of inflation.

With this objective now broadly achieved, monetary policy is returning to the predictable and dull state of affairs that used to reign before the financial crisis.

The argument is merely about how quickly rates and balance sheet size should be cut, and to what level. Much the same thing can be said about both the Federal Reserve in the US and the European Central Bank in the eurozone.

In deciding monetary policy, we are back to what Sigmund Freud called the narcissism of small differences, where decision-makers are reduced to arguing ever more furiously among themselves about comparatively trivial and unimportant adjustments to interest rates and balance sheet size.

Whether the Bank of England cuts by a quarter of a percentage point, or leaves rates on hold at this week’s meeting, is in practice very unlikely to make a significant difference to the economy, either in the short or long run.

If there is no longer any need for monetary fire fighting, it puts the pressure back on the politicians to come up with alternative, supply-side solutions to the state of near paralysis the economy finds itself in.

For too long they have relied on the anaesthetic of the Bank of England’s printing press for economic sustenance, ducking the difficult decisions needed to boost productivity, education and enterprise and to ultimately generate the resources needed to sustainably raise living standards.

The urgency for such action was laid bare in two reports published last week on debt sustainability – the Office for Budget Responsibility’s “fiscal risks” report, and the House of Lords Economic Affairs Committee’s “National debt: it’s time for tough decisions”.

On present policies, the OBR concludes, the national debt is destined to swell to a jaw-dropping 274pc of GDP over the next 50 years. This is not of course what will happen, because it can’t. It’s a projection, not a prediction or a forecast.

In practice, markets would intervene long before such a threshold was reached; the Government would find itself facing a buyers’ strike in debt markets and the currency would collapse. Like Argentina, the country would be sucked into a succession of fiscal crises, with plunging relative living standards to match.

It’s true that Japan manages to muddle along with public debts which in gross terms are already approaching that sort of level, but structurally Japan is a very different economy with sustained current account and savings surpluses.

Sadly, this is not the case with the UK, which has come to rely heavily on what Mark Carney, another previous governor of the Bank of England, called “the kindness of strangers” – overseas investors – to fund both its budget and current account deficits.

In any event, it has long been clear that we cannot go on like this. To deliver us from the clutches of never-ending austerity and relative decline in living standards, we need growth, and lots of it. On that, virtually everyone can agree, whatever their political views. It is on how to deliver that growth that the argument begins.

Today’s Labour Government talks a good game, but unlike its Blairite predecessor it doesn’t seem to grasp what wealth creation is all about, and on what we have seen of its actions so far looks almost certain to fail.

We should of course wait until Rachel Reeves’s first Budget on Oct 30 before reaching final judgement, but already the promise of an investment-led economic strategy has been substantially watered down, with spending on public sector pay awards taking priority over spending on the green transition and infrastructure renewal.

On the revenue side of the ledger, an expected crackdown on capital gains, wealth transfer, and pension savings is likely only to further undermine already shamefully low levels of business investment. The promised workers’ rights charter threatens to act as a further deterrent.

None of it looks like the enterprise-friendly growth strategy Starmer and Reeves promised on the campaign trail, the need for difficult decisions on the public finances notwithstanding. Caving in to union pay demands was a political choice, not a matter of economic necessity.

We have entered a new economic age in which the power of the central bank to manipulate demand is no longer as important as it was, but the need for radical structural reform to underpin investment and productivity growth has rarely looked more urgent.

Hiding behind the Old Lady’s petticoat is no longer an option, but does the new Government have the stomach for what’s required? Don’t hold your breath.