The chip industry must go full throttle, but is it possible in the Netherlands?

The Netherlands has the largest chip industry in Europe. That industry will grow very rapidly in the coming years. The Netherlands is faced with a choice: will it make way for this growth, or will it let the sector wither away?

This is part 2 in a series of articles on the chip industry.

• Read part 1 here: These are the largest chip companies in the Netherlands
• Part 3 will be: What does China's advance mean for Dutch chip companies?

You can also read this article in English by clicking on 'Dutch' at the bottom right and adjusting the language.

Almost single-handedly, ASML saves Dutch industry from contraction. While many industries have been stalling for years - such as chemicals and base metals - the entire Dutch industry is now producing slightly more (6%) than before corona. That's because the machinery industry, dominated by ASML, has grown by as much as 80% in six years. 'Chip companies now account for 60% of the machine industry,' says Edse Dantuma, sector economist at ING.

And the chip machine maker's triumphal march is not over yet. ASML expects its own sales to grow from 28 billion euros last year, to 44 to 60 billion euros in 2030. Roughly a doubling, in other words.

Chip sector set to grow 9% a year, ASML expects

That's great news isn't it? Certainly also for all ASML's Dutch suppliers, such as VDL, Neways, NTS Group, Aalberts Industries and Demcon who are assured of a customer whose hunger cannot be stopped in the coming years.

Or is it not that simple?

In fact, the growth of the chip sector is so gigantic that we are simply not used to it in the Netherlands anymore. With the revolution in artificial intelligence (AI), the demand for chips is growing even faster than in the past. ASML states that the chip sector grew by 6% per year between 2013 and 2023, but expects growth to reach 9% per year until 2030. In particular, the demand for the most advanced chips is increasing. Those chips can only be made with ASML's EUV machines.

9% growth sounds nice. But if you consider that the International Monetary Fund (IMF) expects the Eurozone economy to grow by only 1.2% during that period, you can see the gap. Everything here is set to quietly chug along, while the chip sector needs to make very big strides very quickly. Otherwise, American and Chinese companies will run off with the growth.

Where are the bottlenecks? And how can they be resolved?

Innovative people

It's bizarre, what is being developed here," says ING sector economist Jan Frederik Slijkerman. 'If you look at semiconductor technology, but also radio technology via radio frequency chips and sensors, there is so much knowledge at universities. And the knowledge network between universities and companies is traditionally super in the Netherlands, you don't really find that anywhere else.' The Dutch polder mentality, with short lines of communication and a lot of cooperation, pays off here.

Especially in the chip industry, it is crucial to keep investing in innovation. ASML estimates that roughly half of the margin made by companies in the industry (revenues minus costs) is spent on Research & Development (R&D). Dutch chip companies also do plenty of that.

On a dime

So the Netherlands has a good starting position here, with renowned technical universities and good knowledge exchange with companies. Although: it is actually quite extraordinary that the Netherlands does so well, considering the meager amounts our country invests.

The EU has a target that member states put 3% of their total economy into R&D. Almost all countries (outside the EU) that have a large chip sector do, except the Netherlands. You could say: it is another miracle that the Netherlands competes in the international chip top, given these numbers.

It is not so much companies that are failing here, but the government. Companies, as a percentage of the total economy, have been spending more on R&D. Higher education, on the other hand, less.

It is quite a risk for the Netherlands to gamble on being able to keep up with the global innovation violence, while hardly throwing any money at it. Politicians who want to be on the safe side therefore invest more in innovation. This can be done by allocating more money to education, or by giving companies more tax incentives when they invest in R&D.

No betas

But there is perhaps an even more pressing problem in higher education. Indeed, students in the Netherlands hardly ever opt for technical programs. Only 1.5% of people in their twenties have completed a beta or technical education, far below the EU average of 2.3, according to figures from the Rathenau Institute. With a population of 18 million, the Netherlands is not only a small country, but the people who are there often choose an education that makes them unsuitable to work in the chip sector.

No wonder ASML in Veldhoven has employees from 121 different countries roaming around: they simply cannot find the people in the Netherlands.

Disclaimer: the author also (obviously) has no technical training.

There are now 50,000 people working in the Dutch chip sector, the government calculated last year. Another 38,000 jobs are expected to be added until 2030. Especially in Brainport Eindhoven (26,000). The government hopes to solve that problem by throwing 450 million euros of public money at it. But it remains to be seen whether that will work, and what the consequences will be.

In Brainport Eindhoven there is not only a shortage of people in the chip sector, but also a strong IT sector. And a strong healthcare cluster including Philips and VDL. And DAF makes more than 100 trucks a day. In total, as many as 50,000 extra technical people are needed in the region, the region itself expects.

So the growth of the chip sector could easily come at the expense of other industries, because there just aren't enough technically skilled workers available. Because chip companies are highly profitable, they can also pay higher salaries than many other industries.

The Brainport region has come up with a plan to partially solve the shortages. The plans are obvious: let more young people do technical work, retrain people and get more people into work. But the biggest battle is still to be struck primarily by bringing in more people from abroad, the region notes.

Show me the money

Fortunately, the chip sector is about more than people. 'In the 1980s and 1990s, Europe lost market share in chip production as Asian countries opted for an aggressive growth strategy, helped by low labor costs,' says ING's Slijkerman. 'But modern chip factories are actually very capital-intensive.' That's good news for Europe, where cheap labor is scarce but capital is plentiful. Or rather: should be.

'Some good startups can't grow through because there's no money'

'The Chinese are just laughing at us,' says Alain le Loux, partner of Dutch-American venture investor Cottonwood. 'They invest much more money and go much faster.' The Netherlands and the entire European Union are running up against the problem of limited availability of venture capital: money invested in ambitious but also risky startups.

Beginning startups can still get money in the Netherlands, but those who want to grow further and need really large amounts of money often have trouble finding the money to do so. 'A number of good startups cannot grow through because there is no money in the Netherlands for the scale-up phase,' says Le Loux.

Want more depth on the shortage of venture capital in the Netherlands? Then read this story: Why a 100 billion euro National Investment Bank is a very bad idea

Only four startups in the chip industry managed to raise more than 100 million euros in growth money in recent years, Techleap figures show. Two of them are in the still young market for photonics: chips that do not work with electricity, but with light. That makes them faster and more energy efficient. 'The Netherlands is still ahead in this, with the emphasis on still,' says Le Loux. Because China and America are scaling up faster than the Netherlands.

No big sell-out to foreign countries

The good news is that Dutch investors are waking up, though. All four companies that have raised more than 100 million have brought both Invest-NL and Innovation Industries on board as investors. The first invests government money, the other large amounts from pension funds, especially those in the industry (PME and PMT). ASML, VDL and NXP think it is so important for photonics to get off the ground in the Netherlands that they too have put money into Smart Photonics.

So there is no question of selling out promising Dutch chip companies to foreign countries. And slowly more and more money is becoming available. The hope is that pension funds will dare to take a little more risk because of the major pension reform, and there is talk of expanding Invest-NL.

Whether that will all happen fast enough to free up substantial amounts of money already in the coming years, however, remains to be seen. The smaller Nijmegen-based chip company Trymax (€19 million in revenue) was sold to a Singapore industry peer at the beginning of this year, providing more money and economies of scale to continue growing.

The proud family business NTS Group, a major supplier to ASML, also concluded that it could not grow fast enough on its own. The Wintermans family sold a minority stake in NTS Group to NPM Capital (the investment company of family-owned SHV) so that there was money for scaling up.

That even a company like NTS with 264 million euros in sales does not have enough scale to innovate and invest on its own says something about the enormous pressure the Dutch chip sector is experiencing. Certainly ASML's suppliers.

You cannot become too dependent on ASML

This is because the vast majority of parts in an ASML machine do not come from the company itself, but from suppliers. So they are highly interdependent, because some suppliers make items that are so unique that ASML cannot possibly get them from elsewhere.

To prevent suppliers from becoming too dependent on ASML, the company requires that suppliers get a maximum of 35 to 40 percent of their sales from ASML. Even if ASML goes through a lean period and orders fewer parts, the suppliers will then remain afloat - is the idea. For example, the important Dutch ASML suppliers VDL, Prodrive, NTS and Demcon are also very active in co-building equipment for the healthcare sector.

But ASML's requirement does mean that if you already supply a lot to ASML as a supplier and you want to grow along with the expected doubling of the Veldhoven company, you also have to let your other activities grow substantially. Otherwise you will become too dependent on ASML.

It is one thing to want to grow, but it is another to be able to grow. It is already difficult to find technical personnel for the chip industry, let alone when you also have to expand your technical departments for healthcare or defense.

Turning the rudder

For years, the Netherlands has miraculously created Europe's largest chip cluster. With relatively little R&D spending, few technically trained people and little growth money. But the question is whether this can continue, now that the chip sector is kicking into high gear and both America and China are doing their utmost to attract this strategic sector to themselves.

The days when the Netherlands could sit on the front row for a dime are over. Without more money for research, more technical students, more foreign talent and greater investment amounts, there is a good chance that the Netherlands will let this growth diamond slip out of its hands.