Legacy Chips in Poland
What makes a country a good candidate for friendshoring?
I work for the ChinaTalk Substack. We recently sponsored an essay contest soliciting ideas to reduce China’s dominance in legacy semiconductor manufacturing.
I couldn’t submit my idea to that contest for obvious reasons, so I’m posting it here instead. I’m not going to spend too much time defining the legacy chips problem — you can read the winning essays for the relevant background. Today, I’m here to talk about Poland.
Why Poland?
Poland has a bunch of advantages as a candidate for chip manufacturing:
A highly educated workforce, lots of STEM graduates, and the ability to pull from the EU talent pool;
Access to funding from the EU Chips Act;
Low costs for labor and construction — which can help ease the pain of dealing with EU regulations;
Regional clustering effects due to being located in the heart of Europe;
A pro-business, pro-NATO government takes the threat of WWIII seriously.
“Budget Germans” and the Spectre of EU regulation
As a destination for manufacturing, Europe’s biggest weaknesses are regulations and tax burdens. But that hasn’t deterred TSMC from building a legacy chip fab in Germany. Here’s Reuters quoting TSMC Senior VP Kevin Zhang:
[T]he Dresden fab would produce chips at the 22 nanometre production node, which [TSMC] first introduced in the mid 2010s.
ESMC will “allow us to basically bring the most advanced MCU technology to the heartland of automotive use,” he said, referring to microcontroller units which are used throughout cars to control windows, windshield wipers, brakes, sensors and more.
[Zhang] did not rule out later expanding TSMC's investments in Europe to include plants capable of making more advanced chips, though that would have to be some years away.
Of course, things might not be so rosy behind the press conferences. High labor costs, strict regulations, NIMBYism, and disputes with labor unions could undermine the Dresden fab’s profitability — much like at the Arizona fab. Germany also suffers from sky-high energy costs, thanks to their fear of nuclear power. That could be a kiss of death for chip production, as electricity bills can account for as much as 30% of a fab’s operating costs.
Construction in Dresden is set to begin at the end of 2024. In the meantime, TSMC is working on a plan to cut costs in Europe — by training Polish engineers in Taiwan to eventually staff the fab in Germany.
I befriended some of these Polish engineers this summer in Taiwan. They told me that some of their TSMC coworkers playfully refer to them as “budget Germans.”
It seems like it would be easier to cut the Mittelsmann1 and build fabs in Poland. TSMC opted to build in Dresden only after cinching an $11 billion investment package from the German government, which makes sense given the German auto industry’s reliance on legacy chips. But for other legacy chip manufacturers, Poland might be a better bet.
The median monthly salary for an engineer in Warsaw is less than US$2,000. Lower operating costs make investment budgets go further, freeing up resources that can be spent dealing with EU regulations.
That’s already helped Poland secure some sizeable big tech investments — both Microsoft and Google have spent billions of dollars to build data centers in Poland.
Of course, manufacturing is much clunkier than software, but 3M’s manufacturing superhub in Wrocław makes me pretty confident that Poland has what it takes to build.2 From the US ITA:
[3M’s] project, called the “manufacturing plant of the future,” has a highly automated production and supply chain, as well as modern safety and security measures controlled by drones. This year, the company also announced that it is investing 146 million USD in a new bio-pharmaceutical filtration equipment facility in Wroclaw.
After the passage of the EU Chips act, Intel invested $4.6 billion to build a new chip assembly and testing facility in Wrocław (Poland’s third largest city). Why Poland? Here’s Intel’s statement:
Next Building Block of a Pan-European Semiconductor Ecosystem
Poland was chosen as the location for the new site for several reasons, including its infrastructure, strong talent base and excellent business environment. The new site is also well positioned to work with Intel’s leading-edge wafer fabrication site planned for Germany and its existing leading-edge wafer fabrication site in Ireland. This proximity will enable close collaboration between the three manufacturing sites and help increase resilience and cost efficiency of the European semiconductor supply chain.
The Heart of Europe
Poland can benefit from regional clustering effects and short supply chains. It is nearby the appliance and car manufacturers that purchase legacy chips. It’s relatively close to ASML in the Netherlands, and (most importantly) Poland is poised to benefit from Europe’s extensive, continent-wide chemical manufacturing industry.
The EU is second only to China in chemical production, but the industry has struggled to recover post-Covid. Many of Europe’s chemical factories are on the verge of going out of business as a result of dumping by Chinese competitors. Juicing the sector with some local demand could be just what the industry needs.
Less pleasantly, Poland shares a border with both Belarus and Russia (via Russia’s European exclave/giant military base, Kaliningrad). That unfortunate reality has turned Poland into an upstanding NATO ally. As a percentage of GDP, they spend more on defense than any other NATO member — 4.12% in 2024. In absolute dollar terms, Poland outspends much richer countries like Italy and Canada.
If Poland’s government believes that chip production is a national security issue, they would stop at nothing to ensure foreign fab investments succeed. Compare this with Germany — a highly unserious country in the throes of a protracted energy crisis — which has struggled even to build wind energy transmission lines due to protests in Bavarian villages.
At this point, maybe you’re wondering if it would be dangerous to make big investments so close to the frontlines of the war in Ukraine. But Russia’s long-range missiles could bomb the fab in Germany too. Any attack on Poland would activate Article V of the North Atlantic Treaty. If things ever get that bad, it means WWIII has already started and nowhere on Earth is safe at that point.3
To close, I’ll leave you with this Polish idiom:
Kto nie ryzykuje, ten nie pije szampana.
He who does not take risks, does not drink champagne.
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German for middleman
Coincidentally, 3M invested in a bunch of manufacturing capacity in Taiwan shortly before the rise of TSMC.
Of course, this outcome becomes way less likely if Poland had an independent nuclear arsenal.