TSMC (SMIC) has started construction on its European wafer factory with a subsidy of €5 billion from the German government.

As TSMC (TSMC.US) breaks ground on its first European factory in Dresden, Germany, in the eastern part of the country, in its quest to secure its chip supply in the European continent. The new plant, which is expected to be operational in 2027, is estimated to cost over €10bn (US$11bn), with the German government providing €5bn in subsidies for the factory’s construction.

Speaking at the groundbreaking ceremony for the new factory, German Chancellor Olaf Scholz said: “Our future technologies are dependent on semiconductors, but we must not rely on semiconductor supply from other parts of the world.” Germany is leading the EU in its effort to produce a quarter of the world’s semiconductors by 2030, as the EU seeks to expand its semiconductor capacity in the region amid supply chain bottlenecks caused by the Covid-19 pandemic and geopolitical tensions.

Mr Scholz has become the biggest supporter of the European semiconductor industry, seeking to promote Germany’s technology sector and ensure the supply of critical components for the country’s manufacturing industry. The German government plans to spend €20bn to support domestic semiconductor production, including the €5bn in subsidies for the TSMC factory and €10bn in subsidies for the planned Intel (INTC.US) factory in Magdeburg.

The new TSMC factory will help Europe reduce its reliance on imported chips. German carmakers including Volkswagen and Porsche have expressed interest in boosting domestic semiconductor production. The factory will produce power semiconductors for the automotive industry, aimed at meeting the EU’s demand for localisation of chips for cars and industry, according to reports.

However, some industry insiders are sceptical about the EU’s plans to boost its semiconductor capacity. The EU’s chip bill was published in 2022, but according to the bill, the European Commission has only approved two subsidies so far, and few factories are under construction. Peter Bien, former chief executive of ASML, the Dutch chipmaker, said in an interview earlier this year that the EU did not have enough capacity to build production facilities fast enough to meet its goal of raising its share of the global semiconductor market to 20 per cent by 2030, and that the goal was “completely unrealistic”.