COMMISSION STAFF WORKING DOCUMENT Strategic dependencies and capacities Accompanying the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Updating the 2020 New Industrial Strategy: Building a stronger Single Market for Europe's recovery
Date: 2021-05-05
Institutions: Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, European Commission
Subjects: EU growth strategy, EU industrial policy, competitiveness, coronavirus disease, digital single market, economic recovery, epidemic, green economy, industrial cooperation, industrial reorganisation

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 5.5.2021  SWD(2021) 352 final  COMMISSION STAFF WORKING DOCUMENT Strategic dependencies and capacities Accompanying the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Updating the 2020 New Industrial Strategy: Building a stronger Single Market for Europe's recovery {COM(2021) 350 final} - {SWD(2021) 351 final} - {SWD(2021) 353 final}  
 
 
COMMISSION STAFF WORKING DOCUMENT 

Strategic dependencies and capacities 

Accompanying the 

Communication from the Commission to the European Parliament, the Council, the 
European Economic and Social Committee and the Committee of the Regions 

Updating the 2020 New Industrial Strategy: Building a stronger Single Market for 
Europe's recovery 

Executive Summary 

The  COVID-19  pandemic  has  tested  the  resilience  of  economies  worldwide.  Despite  severe 
disruptions  in  production,  transport  and  people’s  mobility,  most  value  and  supply  chains  have 
shown  remarkable  resilience.  Still,  the  crisis  has  also  highlighted  that  while  the  EU  gains 
resilience  from  world  markets  being  open  and  integrated  in  global  value  chains,  disruptions  in 
these  global  value  chains  can  affect  specific  essential  products  and  inputs  that  are  particularly 
critical  for  society  and  the  EU  economy.  One  of  the  key  lessons  of  the  crisis  is  that  there  is  a 
need  to  get  a  better  grip  and  understanding  of  where  Europe’s  current  and  possible  future 
strategic  dependencies  lie.  This  can  provide  the  basis  for  the  development  of  facts-based  and 
proportionate  policy  measures  informed  by  anticipation  to  address  such  strategic  dependencies 
while safeguarding the open and trade-based EU economy. In this context, the European Council 
invited  the  Commission  to  “identify  strategic  dependencies,  particularly  in  the  most  sensitive 
industrial ecosystems such as for health, and to propose measures to reduce these dependencies, 
including by diversifying production and supply chains, ensuring strategic stockpiling, as well as 
fostering production and investment in Europe”. 

Strategic  dependencies  affect  the  EU’s  core  interests.  They  notably  relate  to  areas  as  regards 
security and safety, the health of Europeans as well as the ability to access goods, services and 
technologies that are key for the green and digital transitions at the core of the EU’s priorities. 
Such strategic dependencies are more likely to be found in the most sensitive ecosystems, which 
are the focus of this staff working document. This staff working document provides a further step 
towards a more structural, systematic and cross-sector monitoring of the EU’s possible strategic 
dependencies and an additional basis to consider when taking measures to address them.  

Bottom-up mapping of strategic dependencies in the area of products (chapter 2) 

A bottom-up (quantitative) mapping using external trade flows for more than 5,000 products as 
its starting point identifies 137 products in the most sensitive ecosystems where the EU can be 
considered  highly  dependent  on  imports  from  third  countries  (representing  about  6%  of  the 
extra-EU import value of goods). The three main foreign sources of EU import value for these 
dependent products are China (representing about half of import value), Vietnam and Brazil. The 
identified  dependent  products  are  situated  mainly  in  the  energy  intensive  industries  ecosystem 

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(with  99  dependent  products  identified,  including  raw/processed  materials  and  chemicals),  as 
well  as  in  the  health  ecosystem  (including  active  pharmaceutical  ingredients  and  other  health-
related products) and other inputs and products that are relevant to support the green and digital 
transformation.  Out  of  the  137  products  identified  as  dependencies  in  the  most  sensitive 
ecosystems,  34  (representing  0.6%  of  extra-EU  import  value  of  goods)  could  be  considered  as 
potentially more vulnerable given their possibly low potential for further diversification as well 
as substitution with EU production. At the same time, the EU can also be a source of dependency 
vis-à-vis important trading partners. The analysis provides examples of products where the US is 
highly  dependent  on  the  EU  (“reverse  dependencies”)  and  vice-versa.  Furthermore,  “common 
dependencies” that the EU and the US share vis-à-vis China and the world can also be identified. 

Reliance on international trade is not a vulnerability but rather helps to sustain diversified supply 
and demand. Still, some of the identified dependencies could be considered of potential strategic 
importance. Discussing the results of this bottom-up mapping with Member States and industry 
(e.g.  in  the  context  of  the  Industrial  Forum)  will  allow  assessing  the  exact  nature  of  identified 
dependencies in more detail, including the risks they entail to the resilience and functioning of 
the EU’s industrial ecosystems as well as possible prospects for reducing these dependencies in 
the future including through the development of alternatives.  

Also  internal  dependencies  may  exist  within  the  Single  Market  whereby  the  EU  relies  on  a 
limited  number  of  sources  within  the  Single  Market,  linked  to  a  concentration  of  supply  or 
activities  at  the  level  of  individual  firms.  This  underlines  the  importance  of  a  well-functioning 
Single Market – especially during times of crisis – that also remains open to the global economy. 

Strategic dependencies in the area of key technologies (chapter 3) 

The Industry Strategy of March 2020 highlighted that the EU should build competitiveness for 
technologies that are strategically important for Europe’s industrial future. Complementary to the 
analysis of trade flows done in chapter 2, an assessment of the EU’s performance as regards the 
generation and uptake of certain key technologies shows both strengths and weaknesses. The EU 
faces  particular  challenges  in  comparison  with  its  global  competitors  for  technologies  in  the 
digital  ecosystem  such  as  cloud  and  micro-electronics.  This  provides  important  indications  of 
risks  concerning  future  dependencies  with  regard  to  these  technologies,  while  not  precluding 
possible  technological  dependencies  in  other  ecosystems.  If  left  unaddressed,  dependencies  in 
the  area  of  these  technologies  could  further  materialise  and  possibly  new  ones  might  emerge. 
Finally, when it comes to the renewables ecosystem, the EU has a strong competitive position in 
several technologies that are of key importance to achieve Europe’s climate ambitions (e.g. in the 
area of hydrogen). Still, there are indications of risks concerning possible (future) dependencies 
in this area as well and continued efforts are needed to facilitate scaling up and deployment of 
these technologies.  

Possible policy measures to address strategic dependencies (chapter 4) 

For  several  of  the  dependencies  identified  in  the  bottom-up  analysis  of  this  staff  working 
document,  work  has  already  been  initiated  since  the  March  2020  Industry  Strategy  to  address 
these  dependencies  or  assess  them  in  more  detail  together  with  relevant  stakeholders.  Such 

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actions  notably  include  the  Action  Plan  on  Critical  Raw  Materials  and  the  European  Raw 
Materials  Alliance,  the  structured  dialogue  taking  place  in  the  context  of  the  Pharmaceuticals 
Strategy, strengthened foresight in the context of the Chemicals Strategy as well as other specific 
actions with regard to essential products or inputs necessary for the green and digital transition 
(e.g. batteries, semi-conductors).  

Any  possible  additional  measures  to  address  strategic  dependencies  need  to  be  tailored  to  the 
specific  nature  of  the  dependency  and  ecosystem  concerned.  They  would  need  to  build  on  in-
depth discussion and dialogue with Member States and industry, be proportionate and consider 
all available options and tools. Policy measures can, on the one hand, reinforce the EU’s position 
in global value chains by strengthening and diversifying external trade. Actions under the EU’s 
Trade  Policy  Review  will  promote  a  level  playing  field  and  enable  international  trade  and 
investments to ensure more diversified sources of supply and demand to  cushion future shocks 
and  enhance  competitiveness.  On  the  other  hand,  the  EU  can  strengthen  its  own  capacity  in 
strategic  areas  where  necessary  with  targeted  tools  and  investments  in  key  strategic  areas, 
building on the strengths of a fully functioning Single Market and competition policy facilitating 
open and dynamic markets that promote innovation. 

When it comes to possible internal dependencies on a limited number of firms within the Single 
Market,  the  COVID-19  pandemic  has  shown  that  the  Single  Market  and  its  unhindered  Treaty 
freedoms should be at the core the Union’s readiness for potential crises. Competition policy, as 
an enabler of strong business dynamics within the Single Market, as well as the EU’s integration 
into diversified global value chains and undistorted access to export markets are also important 
in mitigating possible risks related to such internal dependencies. 

As  regard  possible  strategic  dependencies  identified  in  the  area  of  key  technologies,  the 
Recovery  and  Resilience  Facility  provides  an  important  step-up  in  investments  in  digital 
technologies,  together  with  other  programmes  such  as  Digital  Europe.  Relevant  actions  to 
identify  and  address  strategic  dependencies  are  being  taken  also  in  the  context  of  the 
Communication on the Digital Decade and the Action Plan on synergies between civil, defence 
and space industries (through an observatory on critical technologies and technology roadmaps). 
Tools  such  as  Important  Projects  of  Common  European  Interest  where  proved  well  targeted, 
justified  and  efficient  as  well  as  industrial  alliances  can  continue  to  play  an  important  role  in 
specific sectors. Targeted research and innovation efforts (such as through Horizon Europe and 
the European Defence Fund) are also key in addressing the EU’s R&I gap in comparison with its 
global  competitors  and  thereby  reducing  strategic  dependencies.  Existing  capacities  (including 
those under the EU space programmes) contribute strongly to the EU’s open strategic autonomy 
and act as a positive lever for multilateral cooperation. 

In-depth reviews of strategic dependencies (chapter 5) 

The  in-depth  reviews  presented  in  this  staff  working  document  provide  a  selected  number  of 
analyses  across  a  number  of  key  areas  that  can  be  considered  strategic,  notably  raw  materials, 
batteries,  active  pharmaceutical  ingredients,  hydrogen,  semiconductors  and  cloud  and  edge 
technologies. These assessments provide further insights on the origin of strategic dependencies 
and  their  impact  as  well  as  relevant  (ongoing)  policy  measures.  They  provide  a  first  set  of 

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analyses for a limited number of specific areas. As a follow-up to this staff working document, 
further  such  detailed  reviews  of  possible  dependencies  can  be  carried  out  covering  other 
strategically  important  areas,  including  products,  services  or  technologies  key  to  the  twin 
transition, such as renewables or energy storage.    

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Contents 
1.  Context and approach ........................................................................................................................ 6 

1.1 

1.2 

Terminology and the concepts of “dependencies” and “strategic” ............................................ 7 

Approach of the staff working document .................................................................................. 13 

2.  Mapping of EU dependencies in the most sensitive ecosystems .................................................... 16 

2.1 

Context ........................................................................................................................................ 16 

2.2  Methodology to identify foreign dependencies .......................................................................... 19 

2.2.1 

2.2.2 

Core Dependency Indicators .............................................................................................. 19 

Identifying foreign dependencies....................................................................................... 21 

2.3 

Results......................................................................................................................................... 22 

Assessing the further vulnerability of dependent products: potential for diversification and 

2.4 
substitution ............................................................................................................................................. 27 

2.5 

Single Market dependencies linked to concentration of economy activity .............................. 28 

3.  EU performance in key technologies and research & innovation ................................................ 30 

3.1 

3.2 

3.3 

Key technologies for (future) competitiveness .......................................................................... 30 

Europe’s research and innovation performance ...................................................................... 36 

Conclusions ................................................................................................................................ 41 

4 

Policy measures with a potential to address strategic dependencies ............................................ 42 

4.1 

4.2 

Relevant measures to address external and internal strategic trade dependencies ................. 42 

Relevant measures in the area of key technologies .................................................................. 48 

5  Reviews of a selected number of strategic areas ............................................................................ 51 

5.1 

5.2 

5.3 

Raw materials ............................................................................................................................. 52 

Active pharmaceutical ingredients ............................................................................................ 60 

Li-ion batteries ........................................................................................................................... 68 

5.4  Hydrogen .................................................................................................................................... 77 

5.5 

5.6 

Semiconductors .......................................................................................................................... 82 

Cloud and Edge Computing....................................................................................................... 91 

6  Conclusions ...................................................................................................................................... 103 

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1.  Context and approach 

The EU economy is both a major importer and exporter on the international stage. Ensuring an 
open  and  fair  trading  system  is  of  key  importance  for  the  prosperity  and  future  growth  of  EU 
industry and to the benefit of European consumers and citizens. The EU plays a central role in 
developing  a  more  resilient  and  open  global  economy  with  undistorted  trade,  investments  and 
mutually  beneficial  bilateral  relations.  The  COVID-19  crisis  demonstrates  how  the  Single 
Market’s integration into global value chains not only maximises economic efficiency but is also 
essential in times of crisis to absorb shocks, offer options to adjust and speed up recovery.1  

At the same time, the Industrial Strategy of March 20202 already underlined the importance for 
the EU of “reducing dependence on others for things we need the most: critical materials and 
technologies,  food,  infrastructure,  security  and  other  strategic  areas”.  The  COVID-19  crisis 
further emphasised the relevance of this issue in turbulent and challenging times, as it exposed 
further some strategic dependencies and specific disruptions caught Europe by surprise.  

One of the key lessons of the crisis is that there is a need to get a better grip and understanding of 
where  Europe’s  current  and  possible  future  strategic  dependencies  lie.  The  European  Council, 
highlighting  that  “Achieving  strategic  autonomy  while  preserving  an  open  economy  is  a  key 
objective of the Union”, invited the Commission to “identify strategic dependencies, particularly 
in the most sensitive industrial ecosystems such as for health, and to propose measures to reduce 
these dependencies, including  by diversifying production and supply chains,  ensuring strategic 
stockpiling, as well as fostering production and investment in Europe”.3  

The  Commission’s  2020  Strategic  Foresight  Report4  provided  a  broad  assessment  of  the  EU’s 
and  Member  States’  resilience.  It  also  introduced  resilience  dashboards  as  a  possible  tool 
allowing to monitor for the social and economic, geopolitical,  green, and digital dimensions of 
resilience. The Commission’s Communication on the Trade Policy Review5 makes the case for 
an open, sustainable and assertive trade policy that contributes to more resilient and sustainable 
value  chains  by  providing  a  stable  rules-based  trading  framework,  opening  up  new  markets  to 
diversify sources of supply, and developing cooperative frameworks for fair and equitable access 
to  critical  supplies.  Identifying  and  addressing  the  EU’s  strategic  dependencies  is  an  essential 
step  to  increasing  resilience.  In  addition,  it  is  equally  important  to  ensure  competitiveness  and 
stimulate  investments  in  technologies  that  are  of  key  importance  for  the  EU’s  future.  The 
Communication  on  the  Digital  Decade6  presents  a  vision,  targets  and  avenues  for  a  successful 
digital  transformation  of  Europe  by  2030.  Finally,  this  staff  working  document  should  also  be 
seen in relation with the upcoming 2021 Strategic Foresight Report on Europe’s open strategic 
autonomy. 

1 See also OECD: Shocks, risks and global value chains: insights from the OECD METRO model, 2020 and Trade 
Policy Review (COM(2021)66) 
2 COM(2020)102  
3 EUCO 13/20 
4 COM(2020)493 
5 COM(2021)66 
6 COM(2021)118 

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The  assessment  of  strategic  dependencies  involves  not  only  the  identification  of  dependencies, 
but also an assessment of whether they are of a strategic nature that leads to a vulnerability for 
the EU, taking into account the risks such dependencies may represent to the EU’s core strategic 
interests.7  This  assessment  can  contribute  to  the  development  of  facts-based  and  proportionate 
measures while at the same time safeguarding the open and trade-based EU economy. 

The staff working document takes both  a bottom-up and a top-down perspective. A bottom-up 
(quantitative) analysis taking trade statistics in products as its starting point, while characterised 
by  data  limitations  and  caveats,  can  provide  first  and  indicative  insights  into  areas  where  the 
EU’s dependence on a limited number of suppliers is most prominent in particular for a number 
of  more  sensitive  ecosystems8.  A  top-down  assessment  needs  to  complement  this  bottom-up 
approach, taking into account (at a more detailed level) other risks and possible dependencies of 
strategic nature (e.g. related to services, infrastructures, technologies, skills, etc.) that cannot be 
captured  by  relying  on  quantitative  trade  statistics  and  data.  A  first  qualitative  assessment  for 
selected areas is presented. 

The analysis presented provides a contribution and a first step to a more systematic monitoring 
of  strategic  dependencies  in  the  EU’s  most  sensitive  ecosystems.  It  complements  actions  that 
have already been initiated on the analysis and identification of the EU’s strategic dependencies 
in  specific  policy  fields.9  It  is  also  worthwhile  highlighting  that  other  countries  (including 
notably the US10) are in the process of carrying out similar types of analyses to identify possible 
risks and vulnerabilities in global supply chains as well as ways to address them.  

1.1 Terminology and the concepts of “dependencies” and “strategic”  

Key concepts used for the purposes of this staff working document are set out in box 1.  

Box 1 – Terminology and definitions 

The following concepts and definitions are used for the purposes of this staff working document: 

-  Resilience: the ability not only to withstand and cope with challenges but also to undergo 
transitions in a sustainable, fair, and democratic manner.11 Resilience is necessary in all 
policy areas, also to undergo the green and digital transitions, while maintaining the EU’s 
core purpose and integrity in a dynamic and at times turbulent environment; 

-  Open  strategic  autonomy:  the  ability  to  shape  the  new  system  of  global  economic 
governance and develop mutually beneficial bilateral  relations,  while protecting the EU 
from unfair and abusive practices, including to diversify and solidify global supply chains 

7 The concept of “strategic dependency” is further explained in chapter 1.1 
8 The concept of “sensitive ecosystems” is further explained in chapter 1.1 
9  For  example  in  the  context  of  the  critical  raw  materials  action  plan  (COM(2020)474)  and  the  Pharmaceutical 
Strategy for Europe (COM(2020)761) 
10  See  Executive  Order  on  America’s  Supply  Chains  (https://www.whitehouse.gov/briefing-room/presidential-
actions/2021/02/24/executive-order-on-americas-supply-chains/)  
11 COM(2020)493 

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to enhance resilience to future crises; 

-  Strategic capacity: a certain level of capabilities held within the EU allowing to produce, 
provide or rely on strategic goods, services, data, infrastructures, skills, industrial know-
how and technologies12;  

-  Dependencies: reliance on a limited number of actors for the supply of goods, services, 
data, infrastructures, skills and technologies combined with a limited capacity for internal 
production to substitute imports13; 

-  Strategic  dependencies:  dependencies  that  are  considered  of  critical  importance  to  the 
EU  and  its  Member  States’  strategic  interests  such  as  security,  safety,  health  and  the 
green and digital transformation. 

External and internal dependencies  

Both  external  and  internal  dependencies  co-exist.  External  dependencies  concern  the  EU’s 
reliance on external  partners (third  countries or firms).  Internal  dependencies are dependencies 
within  the  EU  Single  Market,  notably  related  to  the  possible  concentration  of  activity  at  firm 
level.  The  risks  related  to  external  dependencies  are  different  from  the  risks  related  to  internal 
dependencies.  This  is  the  case,  for  example,  in  relation  to  political  tensions  and  geo-political 
uncertainty, which can be important risks for the EU at an international level. At the same time, 
dependence  on  a  very  limited  set  of  companies  for  supplies  in  a  specific  sector  can  result  in 
vulnerabilities even if these companies are based in the EU.14 Such internal dependencies linked 
to a concentration of supplies can have a potentially important impact on the functioning of EU 
value  chains  within  the  Single  Market  (e.g.  in  the  case  of  natural  disasters  or  closing  down  of 
production).   

There  are  different  types  of  shocks  that  play  a  role  when  assessing  the  impact  of 
dependencies. Such shocks can be supply-related (e.g. a given supplier within a value chain no 
longer  producing  or  delivering  certain  goods  and  services,  or  in  reduced  quantities;  or  the 
country  where  the  supplier  is  based  imposing  certain  export  restrictions)  as  well  as  demand-
related (e.g. a sudden important drop in EU or global demand for goods and services, or a sudden 
global rise in market demand for certain  goods  or services) and they can have multiple origins 
(man-made, natural, etc.). Scarcity of resources (e.g. related to critical raw materials) is also an 
important  element  to  be  taken  into  account  when  considering  the  impact  of  dependencies  and 
shocks. Companies, through their own corporate decisions and corporate policies, play a key role 
in  mitigating  and  adapting  to  possible  shocks,  as  they  have  the  ability  to  diversify  supply  and 
demand sources to become more resilient. At the same time, they cannot always accommodate 
all types and magnitudes of unanticipated demand or supply shocks. 

12  This  may  include  the  availability  of  scalable  manufacturing  capacities  that  can  be  relied  on  during  a  crisis 
situation and increase of demand 
13  Dependencies  can  also  be  extended  to  exports  and  the  possibility  to  rely  on  internal  consumption  to  substitute 
exports 
14 Furthermore, the ownership of companies by EU entities or foreign investors may also be relevant 

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Box 2 – Demand and supply shocks during COVID-19 

The EU experienced the impact of different types of shocks to global value chains during 
the COVID-19 crisis. These shocks were both demand and supply related. 

On the one hand, the pandemic has caused significant effects on the demand side. The most 
important  impact  from  the  crisis  across  many  ecosystems  has  been  the  sudden  and  very 
significant  reduction of demand within the EU and on export markets. At the same time, other 
ecosystems  saw  large  peaks  in  demand.  Most  notably,  the  crisis  led  to  a  global  surge  in  the 
demand  for  medical  supplies  and  devices.  This  led  to  shortages  in  this  sector,  including  for 
example  with  regard  to  personal  protective  equipment  and  ventilators.  Another  example  of  a 
positive demand shock has been the global surge in demand for semi-conductors that resulted in 
shortages during the first months of 202115, entailing risks of a slowed down recovery in sectors 
that are dependent on the supply of these semi-conductors (e.g. the automotive industry). 

The crisis has also seen important supply related shocks, notably in the health sector. For 
example,  for  some  key  medical  supplies,  several  foreign  countries  introduced  measures 
restricting  or  banning  exports.  This  worsened  the  situation  of  acute  under-capacity  due  to  an 
exploding  global  demand  in  these  products  in  addition  to  the  aggravating  factor  of  reduced 
production capacity due to the fact that many businesses active across global value chains were 
forced to reduce or halt production due to the spread of the virus and health precautions such as 
lockdowns, quarantines  and social  distancing. Restrictions concerning the movement  of people 
and their impact on international transport networks represented another important supply shock. 

Disruptions  were  also  experienced  within  the  EU  Single  Market.  Several  Member  States 
introduced exports bans in particular during the early stages of the pandemic. In addition, border 
restrictions,  quarantine  requirements  and  other  measures  limiting  free  movement  of  persons, 
goods, services also hampered the functioning of supply chains within Single Market.     

Strategic nature of dependencies 

Determining the specific areas and dependencies that are “strategic” for the EU requires a 
careful assessment of the current and future interests at stake and potential risks, building 
on  a  collective  understanding  of  what  matters  most  and  what  is  critical  for  Europe. 
Dependencies that are strategic can be identified by taking into account the extent to which they 
affect these core interests. This can only be done on a case-by-case basis, taking into account not 
only quantitative data but also qualitative, ecosystem-specific elements and expert knowledge.  

Firstly,  dependencies  are  likely  strategic  when  they  impact  the  security  and  safety  of 
Europeans or limit the possibility for the EU to exercise a foreign and security policy in line 
with  its  values  and  strategic  interests.16  The  EU  framework  for  screening  of  foreign  direct 

15  Pandemic-related  spikes  in  demand  contributed  to  a  shortage  of  chips,  while  also  being  linked  to  structural 
problems such as distortive government subsidies and export restrictions. Further details are provided in chapter 5.5  
16 It should be noted that the European Council has also requested the  Commission in the context of security and 
defence  to  prepare  “a  technology  roadmap  by  October  2021  for  boosting  research,  technology  development  and 
innovation and reducing our strategic dependencies in critical technologies and value chains” (SN 2/21) 

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investment provides a reference in this regard, outlining specific infrastructure, technologies and 
inputs that are considered to be critical. Dependencies with an impact on security and safety are 
of  particular  relevance  for  the  aerospace  and  defence  ecosystem  and  may  also  exist  in  various 
other  ecosystems  (such  as  for  example  digital  and  electronics).  Examples  of  actions  which 
already address strategic dependencies in this area include the Space Strategy for Europe17 aimed 
at  reinforcing  Europe's  autonomy  in  accessing  space  in  a  safe  and  secure  environment,  the 
European Defence Action Plan18 towards a strong, competitive and innovative defence industrial 
base, the European Defence Fund19 as well as strengthening the competitiveness of EU security 
industry  through  investment  in  civil  security  research  and  innovation  in  the  Horizon  Europe 
Programme20 and most recently the Action Plan on synergies between civil, defence and space 
industries21. 

Secondly,  the  impact  on  the  health  of  EU  citizens  is  another  important  driver  to  define 
dependencies  as  strategic.  For  example,  the  COVID-19  crisis  exposed  a  number  of  strategic 
dependencies in the area of health (e.g. access to medical supplies such as personnel protective 
equipment).  The  European  Council  has  also  asked  the  Commission  to  “identify  strategic 
dependencies,  particularly  in  the  most  sensitive  industrial  ecosystems  such  as  for  health”.  The 
Commission  has  already  initiated  work  in  the  context  of  the  Pharmaceuticals  Strategy  for 
Europe22 with concrete actions to ensure accessibility, availability and affordability of medicines, 
including an assessment of security of supply chains. 

Thirdly,  in  certain  cases  dependencies  can  also  be  considered  strategic  when  they 
significantly impact the EU’s access to inputs, technologies and services that are key for the 
green  and  digital  transitions  at  the  core  of  the  EU’s  priorities.23  The  Commission  has 
recently  reconfirmed  the  importance  of  these  green  and  digital  ambitions  in  the  context  of  the 
Recovery  and  Resilience  Facility,  requiring  that  each  national  recovery  and  resilience  plan 
includes  a  minimum  of  37%  of  expenditure  related  to  climate  and  20%  related  to  digital. 
Dependencies that have  a significant  negative impact  on the ability of the EU to  remain at  the 
edge  of  innovation  and  transformation  towards  an  increasingly  green  and  digital  economy  and 
society will ultimately be detrimental to the functioning of the EU economy and the welfare of 
its  citizens.  The  Commission  has  already  recognised  the  strategic  nature  of  third  country 
dependencies  in  relation  to  its  green  and  digital  ambitions  in  several  recent  initiatives.  Such 
dependencies  are  mainly  related  to  critical  inputs  needed  to  support  the  digital  and  green 
transition24 as well as the ability of the EU to access key enabling technologies.25   

17 COM(2016)705 
18 COM(2016)950 
19 https://ec.europa.eu/growth/sectors/defence/european-defence-fund_en  
20 Horizon Europe Cluster 3 – Civil security for society 
21 COM(2021)70 
22 COM(2020)761 
23 Political Guidelines for the Next European Commission 2019-2024  
24 See for example the Action plan on critical raw materials (COM(2020)474), the Hydrogen strategy for a climate-
neutral  Europe  (COM(2020)301),  the  Commission  proposal  for  a  new  regulatory  framework  on  batteries 
(COM(2020)798/3) 

10 

 
 
                                                           
Within  these  areas,  the  individual  nature  of  the  dependency  and  the  degree  of  risks 
involved need to be assessed. It is important to underline that a certain reliance on international 
trade  and  commercial  relations  and  partnerships  with  companies  in  third  countries  do  not 
necessarily  give  rise  to  an  external  dependency  that  would  result  in  a  vulnerability  for  the  EU 
economy. To the contrary, such relations and partnerships help to strengthen the EU’s resilience 
to supply and demand shocks, in addition to the substantial efficiency  gains that help to sustain 
the  competitiveness  of  the  EU  economy  over  time.  Only  those  dependencies  that  significantly 
affect  the  EU’s  core  interests  and  limit  the  EU’s  freedom  to  analyse,  make  decisions  and  act 
according to its own priorities can be considered strategic. 

Box  3  –  FDI  screening  Regulation,  critical  raw  materials  list  and  Action  Plan  on  synergies 
between civil, defence and space industries 

The strategic nature of certain areas and dependencies has already been established in the 
EU framework for screening of foreign direct investment, the EU’s critical raw materials 
list  as  well  as  the  recent  Action  Plan  on  synergies  between  civil,  defence  and  space 
industries. 

Regulation  (EU)  2019/452  establishing  a  framework  for  the  screening  of  foreign  direct 
investments  into  the  Union  created  a  cooperation  mechanism  for  Member  States  and  the 
Commission to screen foreign investment. The mechanism (operational as of 11 October 2020) 
establishes  cooperation  and  the  exchange  of  information  between  EU  Member  States  and  the 
Commission  and  provides  the  possibility  to  raise  concerns  related  to  specific  foreign 
investments, where warranted. The Commission may issue opinions when an investment poses a 
threat  to  the  security  or  public  order  of  more  than  one  Member  State  or  when  an  investment 
could  pose  a  risk  to  a  project  or  programme  of  Union  interest.  The  screening  framework  also 
establishes  core  requirements  for  Member  States  who  maintain  or  adopt  a  national  screening 
mechanism.  In  Article  4,  the  Regulation  outlines  certain  factors  that  may  be  taken  into 
consideration  by  Member  States  or  the  Commission  in  determining  whether  a  foreign  direct 
investment is likely to affect security or public order. These include potential effects on critical 
infrastructure,  critical  technologies  and  dual  use  items  and  supply  of  critical  inputs.  Several  of 
the criticalities defined in this Regulation are of particular relevance for the analysis in this staff 
intelligence,  robotics, 
working  document 
semiconductors,  cybersecurity,  aerospace,  defence,  energy  storage,  quantum  and  nuclear 
technologies as well as nanotechnologies and biotechnologies) as well as critical inputs (e.g. raw 
materials). 

technologies  (e.g.  artificial 

including  critical 

The  EU’s  critical  raw  materials  list  provides  an  overview  of  the  raw  materials  that  are 
considered to be most important economically and having a high supply  risk.  The list26 is 

25  See  for  example,  the  White  Paper  on  Artificial  Intelligence  (COM(2020)65),  the  joint  declaration  by  Member 
States  on  processors  and  semiconductor  welcomed  by  the  Commission  (https://ec.europa.eu/digital-single-
market/en/news/joint-declaration-processors-and-semiconductor-technologies)  
26 Available in COM(2020)474 

11 

 
 
                                                                                                                                                                                           
reviewed  every  three  years  by  the  Commission,  based  on  a  comprehensive  screening  and 
assessment  methodology27.  The  Commission  takes  it  into  consideration  when  developing  and 
implementing  policies  relating  to  raw  materials,  including  when  negotiating  trade  agreements 
and  seeking  to  eliminate  trade  distortions.  It  also  helps  to  identify  investment  needs  and  guide 
research and innovation. 

The  Commission’s  Action  plan  on  synergies  between  civil,  defence  and  space  industries 
identifies  a  list  of  examples  of  critical  technologies  relevant  across  the  civil  (including 
security),  defence  and  space  industry  domains.  Using  this  list  as  a  basis,  a  new  EU 
Observatory  of  Critical  Technologies  will  start,  in  2021,  regular  monitoring  and  analysis  of 
critical  technologies,  their  potential  applications,  value  chains,  needed  research  and  testing 
infrastructure, desired level of EU control over them, and existing gaps and dependencies. Every 
second  year,  the  Observatory,  in  consultation  with  key  stakeholders,  will  produce  a  classified 
report  on  critical  technologies,  dependencies,  value  chains  and  testing  infrastructure  for  the 
defence,  space  and  related  civil  industries.  On  the  basis  of  these  reports,  the  Commission  will 
develop  technology  roadmaps  to  boost  innovation  on  these  critical  technologies.  These 
technology roadmaps may lead to the launch of new flagship projects taking into account their 
likely  impact  on  the  technological  sovereignty  and  leadership  of  the  EU,  their  sources  of 
financing and their governance.  

In  general,  the  existence  or  risks  of  strategic  dependencies  are  more  probable  in  a  few 
“sensitive ecosystems”. Ecosystems such as tourism, textiles and proximity and social economy 
might  be  unlikely  to  hold  important  risks  for  strategic  dependencies  as  a  whole.  On  the  other 
hand, dependencies within the aerospace and defence as well as the health ecosystem are more 
likely  to  be  of  a  strategic  nature.  In  addition,  certain  dependencies  within  ecosystems  such  as 
digital, electronics, renewable energy and energy intensive industries can also be strategic when 
they  impact  health  or  security  interests  or  significantly  affect  the  EU’s  ability  to  achieve  the 
green and digital transformation. Furthermore, some ecosystems are also more closely related to 
critical  areas  already  listed  in  the  FDI  screening  Regulation  (e.g.  aerospace  and  defence 
ecosystem), the EU’s critical raw materials list (e.g. energy intensive industries ecosystems) as 
well as the critical technologies outlined in the Action Plan on synergies between civil, defence 
and space industries (e.g. digital and electronics ecosystem). Therefore, the bottom-up mapping 
of  dependencies  developed  in  chapter  2  will  focus  on  a  number  of  these  more  sensitive 
ecosystems  (see  Graph  1)  when  considering  the  question  of  identifying  possible  strategic 
dependencies.  This  also  follows  the  Council  conclusions  of  16  November  2020,  which 
specifically  highlighted  health,  defence,  space,  digital,  energy  and  critical  raw  materials  as 
examples of sensitive industrial ecosystems and areas.28 Nevertheless, this does not exclude the 

27 European Commission: Study on the EU's list of Critical Raw Materials, 2020 
28 13004/20 (paragraph 3) 

12 

 
 
                                                           
existence  of  possible  risks  or  dependencies  in  other  ecosystems  not  covered  by  the  analysis  in 
this staff working document.29  

Graph 1: More sensitive ecosystems for the purposes of this staff working document  

Source: European Commission 
Note: Circles represent a selection of more sensitive ecosystems for the purpose of this staff working document 

1.2 Approach of the staff working document 

The  staff  working  document  combines  a  number  of  elements  to  address  the  objective  of 
identifying and addressing strategic dependencies. 

Firstly,  Chapter  2  develops  a  bottom-up  (quantitative)  analysis  of  trade  dependencies  in 
goods, taking as its starting point a detailed assessment of the EU’s trade flows, following a step-
by-step approach: 

- 

- 

In  a  first  step,  the  analysis  identifies  goods  where  the  EU  is  dependent  on  a  limited 
number  of  sources,  based  on  the  concentration  of  suppliers,  the  relative  importance  of 
extra EU imports as well as their possible substitution with internal EU production; 
In  a  second  step,  the  dependencies  identified  in  step  1  are  narrowed  down  to  more 
sensitive  ecosystems  with  a  higher  risk  of  dependencies  being  of  a  possible  strategic 
nature (as outlined in chapter 1.1); 

29  For  example  in  the  agri-food  ecosystem,  the  international  dimension  is  important  in  the  common  agricultural 
policy  (CAP),  as  maintaining  a  healthy  balance  of  imports  and  exports  is  key  to  safeguarding  internal  market 
stability. There are already tools in place to monitor this ecosystem. Notably, in order to ensure the delivery of the 
CAP objectives, the Commission collects statistics and produces analyses of agricultural trade and international agri-
food  policy  developments.  The  most  up  to  date  information  is  published  monthly  in  “Monitoring  EU  agri-food 
trade”,  while  a  more  in-depth  examination  of  how  the  EU  agri-food  trade  flows  have  changed  in  the  past  year  is 
provided in the annual “Monitoring agri-trade policy” report.  

13 

 
 
 
                                                           
- 

In a third step, consisting of a qualitative assessment, specific dependencies are identified 
that might be strategic for the EU (in line with the different elements set out in chapter 
1.1  concerning  the  concept  of  “strategic”)  or  that  require  further  in-depth  analysis  to 
assess their impact and strategic nature.  

For  each  of  the  identified  product  dependencies  spotted  in  the  more  sensitive  ecosystems  the 
analysis also gives an indication of the potential to further diversify the EU’s import sources for 
these products as well as the potential for substitution with EU production (see chapter 2.4).   

This  bottom-up  analysis  faces  a  number  of  data  limitations  and  caveats  as  to  the 
conclusions that can be drawn. The first relates to the level of aggregation. While the analysis 
covers more than 5,000 traded products or product groups, in some cases the level of detail is not 
sufficient  to  capture  dependencies  on  specific  or  specialised  products  or  inputs.30  Second, 
sufficiently  detailed  trade  statistics  are  not  available  for  services  and  trade  statistics  cannot 
(clearly) identify dependencies in the area of complex technologies including those that are of a 
more emerging nature. Third, the analysis only looks at trade dependencies at one point in time 
and  cannot  capture  changing  or  emerging  trends.  In  addition,  the  assessment  whether 
dependencies are strategic (step 3) is a qualitative exercise and this staff working document can 
only provide a first indication, which needs to be complemented through further dialogue with 
industry on the exact nature and impact of identified dependencies.  

As  a  consequence,  the  bottom-up  mapping  cannot  be  considered  to  be  an  exhaustive 
screening of all possible product dependencies.  In  addition,  it needs to  be complemented by 
discussions  with  industry  and  Member  States  on  the  strategic  nature  of  the  identified 
dependencies  taking  into  account  the  specific  ecosystems  concerned.  Despite  these  limitations, 
the  analysis  offers  a  methodical  screening  giving  preliminary  insights  into  individual  products 
and inputs where the EU has a higher level of dependence on third countries including some with 
a possible strategic character. This analysis is dynamic by nature and requires regular  updating 
and refinement, given the changing nature of dependencies. Further details on the approach and 
methodology of the bottom-up mapping are set out in chapter 2.  

Secondly,  the  Industry  Strategy  of  March  2020  highlighted  the  importance  of  developing  key 
enabling technologies that are strategically important for Europe’s industrial future. In addition, 
the  recent  Communication  on  the  Digital  Decade  underlined  that  digital  technologies  are 
currently  mostly  developed  outside  of  Europe  and  highlighted  the  importance  of  reinforcing 
internal strengths and capacities for the EU to achieve digital leadership. The EU’s performance 
in comparison with its global competitors in the area of these key technologies cannot be clearly 
captured by an analysis of trade statistics as performed in chapter 2. In this context, chapter 3 
aims to complement the assessment done in chapter 2 by considering the EU’s position in 
comparison with its global competitors in the area of key technologies that will drive future 
competitiveness.  It  does  this  on  the  basis  of  a  range  of  indicators  (considering  e.g.  research, 

30 In addition, the bottom-up product mapping faces a number of specific limitations when it comes to identifying 
dependencies  within  the  defence  and  aerospace  ecosystem,  linked  to  the  sensitivity  of  data  associated  to  defence 
goods, as  well as the classification level of  most defence contracts. Further  work is needed to assess this  specific 
area in detail. 

14 

 
 
                                                           
investments, innovation and business dynamics), looking into the EU’s relative performance in 
comparison with its global competitors. These provide important indications, albeit not complete, 
as  to  possible  risks  of  potential  (future)  dependencies  in  the  area  of  such  technologies.  For 
example,  comparatively  low  levels  of  innovation  and  investments  may  result  in  Europe 
becoming more dependent on other countries for access to state-of-the-art technologies. Chapter 
3 relies on information obtained from different sources, including the Advanced Technologies for 
Industry  project  as  well  as  other  data  and  analyses  on  the  EU’s  performance  in  research  and 
innovation.  

Thirdly, chapter 4 provides indications of relevant possible measures that might be able to 
mitigate strategic dependencies and related risks. Such measures would need to build on in-
depth discussion and dialogue with and between Member States and industry. They should build 
on the opportunities of international trade to diversify and strengthen sources of supply as well 
as, where needed, the strengths of the Single Market to build up adequate EU capacity. Measures 
would  need  to  be  carefully  examined  with  a  view  to  maintain  the  competitiveness  of  the  EU, 
choosing to address dependencies and increase resilience in the most cost-efficient manner. 

Finally,  for  those  specifically  identified  dependencies  of  strategic  importance,  possible  policy 
intervention  would  need  to  build  on  a  thorough  understanding  and  detailed  analysis  of  the 
functioning  of  relevant  value  chains  as  well  as  the  underlying  drivers  of  Europe’s  current  and 
possible  future  strategic  dependencies.  Chapter  5  presents  a  selected  number  of  in-depth 
reviews  of  possible  dependencies  identified  in  chapters  2  and  3  that  can  be  considered 
strategic  across  a  number  of  key  areas  (including  health,  digital,  green).  These  reviews 
provide an overview of the origin of strategic dependencies, their impact on the EU economy as 
well  as  possible  relevant  (ongoing)  measures.  They  provide  a  first  stage  of  assessments  in 
strategic areas and should not be considered to be an exhaustive analysis of all the EU’s strategic 
dependencies.  Further  key  areas,  including  products,  services  or  technologies  key  to  the  twin 
transition such as renewables or energy storage, might be considered in the future.        

15 

 
 
 
 
2.  Mapping of EU dependencies in the most sensitive ecosystems  

The  COVID-19  crisis  showed  the  importance  of  obtaining  a  more  comprehensive 
understanding of the EU’s strategic dependencies as a first step to strengthening resilience. 
This  chapter  provides  a  bottom-up  mapping  of  the  EU’s  ecosystems  and  their  reliance  on 
international trade. It covers trade flows for some 5,000 products classifying goods as dependent 
based  on  various  meaningful  and  objective  economic  criteria.  While  this  assessment  faces  a 
number of data limitations and caveats, it provides a first indication of goods (final products and 
inputs) where the EU might have a higher level of dependence on a limited number of suppliers, 
including those with a possible strategic character in more sensitive ecosystems. 

2.1 Context 

Over  the  last  decades,  production  processes  and  supply  chains  have  become  increasingly 
interlinked across countries and continents. The drivers explaining the continuous integration 
of Global Value Chains (GVCs) include, among others, cost reduction, greater market openness 
(lower  tariff  and  non-tariff  barriers),  changes  in  the  political  environment,  as  well  as  multiple 
technological  innovations.  GVCs  enable  firms  to  improve  their  market  position  through 
delocalisation  strategies  and  generate  benefits  from  a  more  efficient  production  process 
(including  in  some  cases  lower  prices  for  final  consumers)  and  help  firms  to  reduce  risks.  In 
addition, when firms become geographically closer to their final customers, they may also gain 
from a better consumer knowledge.  

While  global  value  chains  are  highly  efficient  from  a  cost,  growth,  and  a  diversification 
perspective,31 they could also entail vulnerabilities to external demand and supply shocks. 
Reliance of EU firms  on international  trade is  a strength  for the resilience of the EU economy 
and it is fundamental to safeguard the wealth and competitiveness of the EU through efficiency 
and productivity gains, as well as to sustain demand for EU output. In that regard, private firms 
have  the  ability,  the  incentive  and  the  information  to  diversify  supply  and  demand  sources 
sufficiently to absorb normal discontinuities  in trade flows. However, not all of them might be 
able to accommodate unanticipated demand and/or supply shocks exceeding by far what normal 
business  operations  would  dictate.  In  such  instances,  the  collective  cost  of  a  potential  demand 
and  supply  shock  to  the  general  EU  public  may  exceed  the  lost  profits  to  the  market  operator 
importing  specific  goods  or  services.  Given  the  result,  akin  to  a  market  failure,  policy  action 
addressing strategic dependencies may be justified. 

While  the  majority  of  value  chains have  shown  resilience  during  the  pandemic,  the  crisis 
has  shown  that  disruptions  in  GVCs  might  affect  specific  products,  some  of  which  are 
particularly critical for society. For instance, the greatest disruptions have been felt in medical 
(e.g. personal protective equipment) and medical-pharmaceutical supplies. These products have 
been  under  severe  strain  due  to  the  enormous  surge  in  demand  compared  to  supply.32  Export 

31 OECD: Shocks, risks and global value chains: insights from the OECD METRO model, 2020 
32 See OECD: Global Value Chains: Efficiency and Risks in the Context of COVID-19, 2020; S. Evenett: Chinese 
whispers:  COVID-19,  global  supply  chains  in  essential  goods,  and  public  policy,  2020  (Journal  of  International 

16 

 
 
                                                           
 
restrictions  imposed  by  some  countries  on  these  specific  products  or  their  components  have 
worsened  the  situation.  At  the  same  time,  other  measures  adopted  by  governments  cut  import 
duties,  facilitated  customs-clearance  and  streamlined  approval  requirements  for  medical 
supplies33. 

While  observing  significant  differences  across  sectors,  overall,  the  EU  is  an  important 
supplier  and  customer  for  extra  EU  countries.  Using  GVC  data,  national  and  international 
links  between  sectors  along  value  chains  can  be  tracked,  by  looking  for  each  sector  at  both 
upstream  links  (which  shape  supply  chains)  and  downstream  links  (which  contribute  to  final 
demand).  Graph  2  shows  the  exposure  of  EU  industry  to  extra  EU  markets  both  in  terms  of 
demand and supply, which are then used in the production process of each sector. It shows that 
the sectors with the highest upstream and downstream foreign links are Computer & electronics, 
Chemicals  and  Pharmaceuticals,  Basic  Metals  and  Electrical  equipment.  Sectors  above  the  45 
degree line rely more on extra EU demand than on the supply from extra EU countries.  

With few exceptions, extra EU demand is relatively more important for the EU aggregate 
than extra EU supply. However, foreign supply from certain sectors still plays a significant role 
for  EU  production.  Graph  3  ranks  sectors  according  to  the  extent  to  which  EU  production 
depends on foreign supply. The EU relies on extra EU countries particularly in raw materials and 
electronics, but also textiles, financial activities, as well as chemicals and active pharmaceutical 
ingredients. Consequently, this highlights the need for the EU to continue being integrated in the 
global economy. 

EU  trade  diversification  is  high  and  stable  over  time.  At  a  macro  level,  extra-EU  trade  is 
diversified. Both extra-EU exports and extra-EU imports concentration have not varied much in 
the last decade (see Graph 4). Compared to other countries, while extra-EU import concentration 
has remained broadly constant over the last two decades, concentration decreased significantly in 
China  and  increased  in  the  US.  For  example,  US  imports  at  an  aggregate  level  are  currently 
around twice as concentrated as EU imports. 

Macro and sectoral trade give an overview of dependencies, but a more granular detail is 
required  to  identify  specific  products  where  the  EU  has  strong  external  dependencies.34 
Ideally, the identification of dependent  products would use product  information at  a 8-10 digit 
level on the Harmonised Standardisation (HS) system or firm level data. However, comparable 
data  sources  across  all  countries  in  the  world  are  not  available.  This  would  jeopardise  the 
calculation  of  the  dependency  indicators  proposed  in  this  chapter  and  their  comparison  across 
countries.  Thus,  a  6-digit  level  of  disaggregation  is  used,  which  already  provides  informative 
results of the level of dependency across products. 

Business  Policy);  OECD:  COVID-19  and  global  value  chains:  Policy  options  to  build  more  resilient  production 
networks, 2020  
33  In  this  respect  see,  for  example,  European  Commission  Decision  2020/491  and  European  Commission  Notice 
2020/C 96/I/01. 
34 To be noted is that trade in services is not captured in the database used for this analysis.   

17 

 
 
                                                                                                                                                                                           
The  following  section  outlines  a  methodology  to  identify  existing  dependencies  of  the  EU, 
including dependencies of a possible strategic nature in more sensitive ecosystems. This exercise 
has  certain  limits  dictated  by  the  information  sources  available  as  already  outlined  in  Chapter 
1.2.  

Graph 2: Downstream and upstream exposure to extra EU markets 

Source:  Commission  elaborations  based  on  OECD  2016-AMNE  data.  Note:  on  the  horizontal  axis,  the  indicator  measures  for 
each EU sector the share of value added that depends on intermediate inputs generated by extra EU supply chains; on the vertical 
axis the indicator measures for each EU sector the share of final demand absorbed by exports to extra EU countries. These figures 
are based on the most recent available data (2016). As the share of value added has stayed rather stable over time, more recent 
figures are not expected to substantially depart from this illustration. 

Graph 3: Foreign (extra EU) dependency for EU production 

Source: Commission elaborations based on OECD-AMNE 2016 data. This graph shows the share of value added embedded in 
the production process that comes from non-EU countries for 20 sectors in decreasing order. Note that this level of aggregation is 
not suited to identify dependencies in some sectors/ecosystems such as defence and aerospace. 

18 

 
 
 
 
 
 
Graph 4: Foreign (extra EU) trade is very diversified and has remained stable over time 

Source: Felbermayr presentation to Informal Meeting of Trade Ministers Berlin, Sept. 21, 2020 “Fostering the Resilience of EU 
Trade Links”.  
Data source: BACI (CEPII). The Herfindahl index takes a value of 100 if trade is fully concentrated on 1 foreign country, 

2.2 Methodology to identify foreign dependencies 

The  bottom-up  mapping  of  foreign  dependencies  relies  on  an  agnostic,  data-driven 
perspective  with  the  objective  of  identifying  products  with  extra  EU  dependency.  The 
bottom-up mapping follows a step-by step approach. In a first step, the analysis identifies traded 
products where the EU is more dependent on third countries based on three economic indicators. 
Then, the identified dependencies are narrowed down to the most sensitive ecosystems. On this 
basis,  a  further  qualitative  assessment  consists  in  spotting  dependencies  in  the  most  sensitive 
ecosystems,  with  a  possible  strategic  nature  (in  line  with  definition  of  “strategic”  outlined  in 
Chapter 1.1).  

Graph 5: Approach bottom-up analysis  

Source: European Commission  

2.2.1  Core Dependency Indicators 

The  bottom-up  approach  classifies  products  as  highly  foreign  dependent  if  the  levels  of 
import diversification and potential substitutability with EU supply are low. This mapping 
of dependencies builds on the approach used by Bonneau and Nakaa (2020), but it extends their 

19 

 
 
 
 
 
analysis  by  considering  potential  substitutability  with  EU  production.35  Data  covering  the 
universe of country trade in goods is used, including more than 5,000 products defined at the six-
digit  level  using  the  international  nomenclature  of  the  Harmonized  System  (HS6),36  across  all 
industrial ecosystems.37 Given that the level of dependency cannot be characterised by a single 
metric,  the  bottom-up  approach  combines  three  complementary  economic  indicators  that  are 
referred to as the core dependency indicators (CDIs) as presented in Graph 6.    

Graph 6: Core Dependency Indicators  

Source: European Commission  

1.  Concentration  of  EU  imports  from  extra  EU  sources:  The  first  indicator  aims  at 
quantifying the concentration of EU imports with respect to the rest of the world, in order 
to capture the risk of disruptions faced by the EU due to low diversification of extra EU 
sources. In particular, this indicator identifies products for which EU imports (in values) 
are  highly  concentrated  in  a  few  extra  EU  countries.  To  this  end,  the  Herfindahl-
Hirschman Index (HHI) index is used, computed as detailed below:  

𝑛

𝐶𝐷𝐼1 = ∑(𝑠𝑖

2)

𝑖=1

where 𝑠𝑖 is the market share of the extra EU supplying country i in EU’s imports, and n is 
the total number of extra EU supplying countries. 

35  See  Bonneau  and  Nakaa:  Vulnérabilité  des  approvisionnements  français  et  européens,  2020  and  other  recent 
studies that  have analysed the foreign dependencies by looking at the diversification of  EU imports from  non-EU 
sources  (e.g.  G.  Felbermayr:  Fostering  the  Resilience  of  EU  Trade  Links,  2020  and  Cernat  and  Guinea:  On  ants, 
dinosaurs, and how to survive a trade apocalypse, 2020)  
36  The  first  two  digits  (HS-2)  identify  the  chapter  the  goods  are  classified  in,  the  next  two  digits  (HS-4)  identify 
groupings  within  that  chapter.  The  next  two  digits  (HS-6)  are  even  more  specific.  Up  to  the  HS-6  digit  level,  all 
countries classify products in the same way. While HS-6 classification is already highly disaggregated and suitable 
for  analysing  dependencies  across  ecosystems,  for  some  specific  products,  an  analysis  at  a  higher  level  of 
disaggregation would be necessary to complement this assessment. 
37  The  notion  of  ecosystems  captures  the  complex  set  of  interlinkages  and  interdependencies  among  sectors  and 
firms  spreading  across  countries  in  the  Single  Market.  This  concept  takes  into  account  specificities  of  business 
models, presence of vulnerable players (SMEs and micro) and interdependencies.  

20 

 
 
 
 
 
                                                           
2.  Importance of extra EU imports in total demand: The second indicator measures the 
importance of extra EU imports in total EU imports (i.e. extra and intra EU imports), so 
as  to  identify  the  products  for  which  the  EU  mainly  relies  on  foreign  sources.  It  is 
computed as the share of extra EU imports in total EU imports (in values): 

𝐶𝐷𝐼2 =  

𝑒𝑥𝑡𝑟𝑎 𝐸𝑈 𝑖𝑚𝑝𝑜𝑟𝑡 𝑣𝑎𝑙𝑢𝑒 
𝑡𝑜𝑡𝑎𝑙 𝐸𝑈 𝑖𝑚𝑝𝑜𝑟𝑡 𝑣𝑎𝑙𝑢𝑒

3.  Substitutability of extra EU imports with EU production: The third indicator aims at 
capturing whether the EU production can cover the extra EU import needs in the event of 
trade  disruptions.  For  this  purpose,  EU  total  exports,  including  intra  and  extra  EU 
exports, are used as a proxy for the EU internal production capacity.38  For each product, 
the ratio between the extra EU import value and the total EU export value (i.e. extra and 
intra EU exports) is computed as detailed below:  

𝐶𝐷𝐼3 =

𝑒𝑥𝑡𝑟𝑎 𝐸𝑈 𝑖𝑚𝑝𝑜𝑟𝑡 𝑣𝑎𝑙𝑢𝑒𝐸𝑈
𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑜𝑟𝑡 𝑣𝑎𝑙𝑢𝑒𝐸𝑈  

2.2.2  Identifying foreign dependencies 

The narrowing down of foreign dependencies is based on the application of thresholds on 
the  three  indicators.  As  depicted  in  Graph  5,  the  whole  sample  of  around  5000  products  is 
considered,  with  the  objective  of  narrowing  the  number  of  products  down  to  most  dependent 
goods, satisfying the following thresholds for each indicator:  

i. 

𝐶𝐷𝐼1 = ∑ (𝑠𝑖

𝑛
𝑖=1

2)

> 0.4  

The indicator suggests that the higher the concentration, the lower the diversification of 
EU  imports  from  extra  EU  sources.  Consequently,  this  threshold  implies  that  the  EU 
import  value  originates  mainly  from  2.5  foreign  countries.39  It  is  important  to 
acknowledge that the diversification of imports  could  be complemented  with  additional 
information on the trading partner in question, so as to assess the overall level of risk.   

ii. 

𝐶𝐷𝐼2 =  

𝑒𝑥𝑡𝑟𝑎 𝐸𝑈 𝑖𝑚𝑝𝑜𝑟𝑡 𝑣𝑎𝑙𝑢𝑒 

𝑡𝑜𝑡𝑎𝑙 𝐸𝑈 𝑖𝑚𝑝𝑜𝑟𝑡 𝑣𝑎𝑙𝑢𝑒

> 0.5 

38  Ideally,  production  data  should  be  used  for  the  purpose  of  this  indicator  but  European  production  data  do  not 
allow to analyse dependencies at 6-digit level. Databases like PRODCOM contains many missing values at this level 
of product disaggregation.   
39 This threshold is more conservative than 0.25, which is considered by the economic literature as an indication of a 
high concentration.  

21 

 
 
 
 
 
 
                                                           
The  indicator  suggests  that  the  higher  the  share,  the  higher  the  importance  of  extra  EU 
imports  in  total  EU  imports.  Hence,  this  threshold  implies  that  the  value  of  extra  EU 
imports accounts for the majority (> 50%) of the value of total EU imports. 

iii. 

𝐶𝐷𝐼3 =

𝑒𝑥𝑡𝑟𝑎 𝐸𝑈 𝑖𝑚𝑝𝑜𝑟𝑡 𝑣𝑎𝑙𝑢𝑒𝐸𝑈

𝑡𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑜𝑟𝑡 𝑣𝑎𝑙𝑢𝑒𝐸𝑈 > 1 

The indicator suggests that the higher the ratio, the less able the EU is to substitute extra 
EU  imports  with  EU  production  in  case  of  a  trade  disruption.  Therefore,  this  threshold 
implies that the value of extra EU imports is higher than the value of total EU exports.  

A sensitivity analysis is conducted, based on the whole distribution of the three indicators. More 
precisely,  all  5000  products  are  ranked  based  on  each  indicator.  The  ranks  of  these  three 
indicators  are  combined  in  a  composite  indicator  measuring  the  overall  foreign  dependency  of 
each product. Broadly, the results of the approach based on thresholds corresponds to the most 
dependent products based on a composite indicator.  

Graph 7: Identification of dependencies on extra EU supplies 

Source: European Commission  

2.3 Results  

As highlighted in chapter 2.2, the bottom-up mapping consists in the application of three 
economic  indicators  and  their  respective  thresholds  to  the  whole  sample  of  about  5,000 
products  to  identify  foreign  dependencies  (Graph  7).  The  mapping  exercise  first  identifies 
around  390  dependent  products  across  all  ecosystems.  In  a  second  step,  the  list  of  products 
identified as dependent is narrowed down to the most sensitive ecosystems. Finally, in the third 
step, only the most dependent products in the most sensitive ecosystems are considered.  

22 

 
 
 
 
The bottom-up mapping identifies 137 products in the most sensitive ecosystems where the 
EU  can  be  considered  highly  dependent  on  imports  from  third  countries.  These  pre-
identified products represent about 6% of the EU’s total import value of goods.  

The three main foreign sources of EU import value for the 137 products identified as highly 
dependent  are  China,  Vietnam  and  Brazil  (Graph  8).  China  represents  around  52%  of  the 
total  value  of  imports  of  the  most  foreign  dependent  products  and  it  is  among  the  top  three 
suppliers  for  around  54%  of  these  goods.  In  terms  of  stages  of  processing,  around  16%  of  the 
most  foreign  dependent  products  are  raw  materials,  around  57%  are  intermediate  goods  and 
around 27% final goods. At the same time, the EU can also be a source of dependency for other 
countries  (see  Box  4  for  an  example  of  reverse  dependencies  of  the  EU  and  US  and  their 
common dependencies vis-à-vis important trading partners). 

Graph 8: Share of EU imports value of dependent products 

Source: European Commission based on BACI database 

The strategic nature of these identified dependencies needs to be assessed on a case-by-case 
basis, relying on in-depth discussions with Member States and relevant industries.  Further 
discussions with Member States and relevant industries would be needed to assess the possible 
strategic character of these dependencies, as well as their impact and the risks that they entail on 
the functioning of the more sensitive ecosystems (including e.g. taking into account risks linked 
to  the  specific  trading  partners  in  question).  In  what  follows,  a  preliminary  description  of  the 
dependencies identified in the more sensitive ecosystems as well as a number of considerations 
on the possible strategic nature of the identified dependencies is provided.  

A  large  group  of  identified  dependencies  are  raw  and  processed  materials  and  chemicals 
that can be classified in the energy intensive ecosystem but that have also wider importance 
and implications across several other ecosystems. The bottom-up mapping exercise highlights 
foreign  dependencies  for  99  products  related  to  raw/processed  materials  and  chemicals  (e.g. 
beryllium,  cobalt,  antimony,  lithium,  aluminium,  tungstates,  chromium,  nickel,  molybdenum, 

23 

 
 
 
manganese,  ferro-alloys,  steel,40  various  chemical  products).  Several  of  these  identified  raw 
materials have already been assessed as critical in the context of the EU’s regular monitoring of 
critical  raw  materials.41  The  mapping  also  highlights  dependencies  regarding  imported  energy 
products  (e.g.  petroleum  products  and  fossil  fuels),  which  are  important  to  consider  in  the 
context of the decarbonisation of EU industry. Chapter 5 of this staff working document provides 
more in-depth reviews of the EU’s dependencies and possible vulnerabilities in the areas of raw 
materials as well as hydrogen as a key contributor to the EU’s future decarbonised economy.42  

A second important group of dependencies belongs to the health ecosystem, including active 
pharmaceutical  ingredients  (APIs),  other  medicines  and  COVID-19  related  goods  in  the 
health  ecosystem.  Access  to  medical  products  and pharmaceuticals  is crucial for the health of 
Europeans  and  the  EU’s  open  strategic  autonomy,  as  evidenced  by  the  COVID-19  crisis.  The 
bottom-up  mapping  identifies  14  products  as  foreign  dependent,  some  of  which  have  been  of 
high  relevance  during  the  COVID-19  crisis  (e.g.  part  of  protective  garments).  Others  include 
chemical  substances  known  as  APIs  (i.e.  antibiotics,  vitamins,  hormones,  heterocyclic 
compounds), which are particularly important in the manufacturing of medicines. The mapping 
indicates for a range of  APIs that they are concentrated in  a few sourcing countries, with  little 
potential  for  substitution  with  domestic  production  as  the  EU  produces  different  products 
compared to the ones imported. In this regard, given that APIs are potentially essential inputs for 
producing a wide range of medicines, Chapter 5 of this staff working document provides a more 
in-depth review of the EU’s potential strategic dependencies in the area of APIs. 

An  important number  of dependent products are also  identified  in the  renewables, digital 
and  electronics  ecosystems  as  they  are  directly  related  to  the  green  and  digital  transition. 
The bottom-up analysis notably reveals that that the EU has a high level of foreign dependency 
with  respect  to  17  products  related  to  renewable  energy  production,  green  mobility  and 
digital/electronics  (e.g.  permanent  magnets,  electric  accumulators,  electric  motors,  radio 
broadcast receivers, laptops, mobile phones).  

The  production  of  many  green  and  digital  products  relies  on  various  (critical)  raw 
materials. As highlighted above, several of these raw materials are identified by the bottom-up 
mapping  as  dependent  (e.g.  lithium,  cobalt,  nickel,  copper,  chromium,  molybdenum).  For 
example,  the  production  of  permanent  magnets,  which  are  used  in  different  types  of  wind 
turbines, is reliant on various raw materials. The bottom-up mapping indicates that not only the 
relevant raw materials but also the permanent magnets themselves are foreign dependent goods. 
As for green mobility, the dependent electric accumulators might use raw materials on which the 
EU  is  foreign  dependent  as  well.  More  broadly,  in  the  renewable  ecosystem,  several 

40 Steel is a vital component in most of the EU’s industrial ecosystems. For this reason, the Staff Working Document 
“Towards competitive and clean European steel” shows different policies that the EU already has at its disposal to 
help  the  steel  industry  in  its  transformation  –  from  research  funding,  through  regulatory  measures  to  trade 
instruments. 
41 See European Commission: Critical Raw Materials for Strategic Technologies and Sectors in the EU - A Foresight 
Study, 2020 
42 This is in line with the objectives of the European energy union, which aims at creating a reliable, affordable and 
sustainable energy system. 

24 

 
 
                                                           
dependencies  may  have  an  impact  on  the  decarbonisation  and  continued  proper  functioning  of 
the  EU  electricity  system.43  For  example,  several  hydrogen  related  technologies  depend  on 
imports of raw materials for key components such as electrolysers and fuel cells. In the area of 
digital, for example, some of the identified dependent raw materials are used in the production of 
semi-conductors, the basic building blocks of all digital products and services. Chapter 5 of this 
staff  working  document  provides  more  in-depth  reviews  concerning  Li-ion  batteries  and 
hydrogen technologies. 

The bottom-up product mapping faces a number of limitations when it comes to identifying 
dependencies  within  the  defence  and  aerospace  ecosystem  and  can  only  provide  tentative 
insights.  Identifying  foreign  dependent  products  within  this  ecosystem  through  a  bottom-up 
mapping  faces  a  number  of  challenges  given  the  lack  of  complete  data  (notably  for 
confidentiality reasons) and the required level of detail. For these reasons, in this ecosystem in 
particular, the bottom-up methodology relying on trade data should be complemented with other 
more  qualitative,  ecosystem-specific  assessments  (at  a  more  granular  level).  This  specific 
assessment  will  be  tackled  through  the  EU  Observatory  on  Critical  Technologies  for  civil, 
defence and space industries.  

Box 4 – Reverse and common dependencies in products 

The  main  trading  partners  of  the  EU  (notably  the  US  and  China)  are  also  conducting 
comprehensive reviews of the resilience of their own strategic supply chains. The US issued 
an Executive Order on America’s Supply Chains44 with the goal of strengthening supply chain 
resilience and security, building capacity and diversifying sources. Concerning China, a review 
of  strategic  supply  chains  is  part  of  the  Chinese  5-year  plan  (5YP)  which,  among  other 
objectives, aims at minimising external dependencies.  

Given  the  current  global  environment,  this  box  intends  to  shed  light  on  the  foreign 
dependencies  in  goods  that  the  EU  and  the  US  have  with  each  other,  as  well  as  their 
common dependencies vis-à-vis the rest of the world and China specifically (being the main 
source  of  dependencies  for  both  the  EU  and  the  US).  As  a  starting  point,  the  analysis 
identifies the general foreign dependencies in goods of the EU and the US based on two out of 
the three the economic indicators detailed in Section 2.2.1. More precisely, in this context, a high 
level of foreign dependency is associated with a low diversification of import sources (i.e. high 
concentration) and a limited domestic capacity (i.e. low substitutability of imports with domestic 

43  A  dedicated  study  for  the  Commission  (forthcoming,  May  2021)  assesses  the  resilience  of  the  critical  supply 
chains  for  energy  security  and  clean  energy  transition  during  and  after  the  COVID-19  crisis.  It  assesses 
dependencies and criticalities related to different key areas such as the cables, conductors and equipment needed to 
transport and distribute electricity, the production of renewable energy sources (especially wind and solar energy), 
the storage of electricity and smart grid technologies required for operating the electricity system. 
44  President  Biden  signed  on  24  February  an  Executive  Order  on  America’s  Supply  Chains  launching  a 
comprehensive  review  of  US  supply  chains  for  semiconductors,  high-capacity  batteries,  pharmaceuticals  and 
medical supplies and strategic and critical minerals that will identify ways to secure supply chains against risks and 
vulnerabilities. This  review  should  be  completed  in  100  days  (i.e.  by  early  June).   There  will  also  be  an  in-depth 
one-year  review  of  six  industrial  bases  covering  defence,  public  health  and  biological  preparedness,  ICT, 
transportation, energy, and agricultural commodities and food production.  

25 

 
 
                                                           
production) as defined above.45 Then, relying on the identified general foreign dependencies, the 
analysis  identifies  those  products  where  the  US  is  highly  dependent  on  the  EU  (“reverse 
dependencies”)  and  vice-versa.  Furthermore,  “common  dependencies”  that  the  EU  and  the  US 
share vis-à-vis China and the world can also be identified. These identified reverse and common 
dependencies are then further assessed by evaluating their potential for diversification using the 
existing global trade networks as a proxy.46  

Overview of EU & US dependencies in sensitive ecosystems 

Note:  This  table  focuses  on  potentially  sensitive  ecosystems;  The  chart  shows  products  where  the  US  can  be  considered 
dependent on the EU (first row); the EU dependent on the US (second row); common dependencies for the EU and the US on 
China (third row); and common dependencies for the EU and the US on the world (fourth row) 
Source: Commission analysis based on BACI database 

The EU is less dependent on the US than vice-versa and both countries have important 
dependencies  vis-à-vis  China.  The  US  appears  more  dependent  on  imported  products  from 
the  EU  than  vice-versa.  This  is  in  line  with  the  aggregate  finding  that  the  US  has  more 
concentrated sources of imports compared to the EU (see Graph 4). In addition, the EU and the 
US  have  an  important  amount  of  common  dependencies  vis-à-vis  China.  Furthermore,  for 
many  of  these  common  EU/US  dependencies  vis-à-vis  China,  the  potential  for  trade 
diversification to other countries (beyond China) appears limited given the current structure of 
world trade where China takes up a very central position for these dependent products.  

These  common  dependencies  of  the  EU  and  the  US  on  China  include  various  goods  in 
sensitive  ecosystems.  Notable  examples  include  products  in  the  Health  ecosystem  (e.g. 
various  Covid-related  goods  and  APIs  including  vitamins,  antibiotics,  hormones)  and  goods 

45 The indicator corresponding to the importance of extra EU imports in total demand is not used in this analysis, as 
it is specific to the EU context and cannot be mirrored within the US. 
46 To measure the potential of diversification of different products, an indicator measuring the risk of centrality is 
used (IMF Working Paper No. 17/30), which identifies situations where an exporter is central to a large number of 
countries  in  a  trade  network.  The  classification  of  the  potential  for  diversification  across  four  categories  is  done 
based on the quartiles of the distribution of the indicator taking into account more than 5000 products. 

26 

 
 
 
                                                           
belonging  to  the  ecosystems  relevant  for  the  EU’s  twin  transition  (e.g.  permanent  magnets, 
electric  accumulators, cell phones, radio  broadcast  receivers). Similarly  as  for the bottom-up 
mapping  carried  out  in  chapter  2  of  this  staff  working  document,  these  analytical  findings 
would need to  be further corroborated with  qualitative  analysis and discussion with  Member 
States and industry.   

Common  and  reverse  dependencies  (EU  &  US)  in  sensitive  ecosystems:  examples  at 
product level 

Note: chart shows examples of products in sensitive ecosystems where the US can be considered dependent on the EU (first 
row); the EU dependent on the US (second row); common dependencies for the EU and the US on China (third row); and 
common dependencies for the EU and the US on the world (fourth row). These examples might not be representative of the 
overall level of dependency. 
Source: European Commission based on BACI database. 

2.4 Assessing the further vulnerability of dependent products: potential for diversification 

and substitution 

Out  of  the  137  products  identified  as  dependencies  in  the  sensitive  ecosystems,  a  lower 
number  could  be  considered  as  possibly  more  vulnerable  given  that  their  potential  for 
diversification is low. To evaluate the diversification potential, a measure for concentration of 
world exports is used.47 Thus, the HHI index computed at the world level for each product (based 
on the total export flows of each third country) captures the concentration of production in the 
world outside the EU.48 A high level of concentration of world exports of a given product could 
indicate that the EU has limited potential for further diversification of imports (e.g. in case of an 
unexpected trade disruption).  

47  Alternatively,  a  network  centrality  indicator  could  be  used  to  identify  products  where  there  are  a  few  central 
players in the world, which takes into account the whole structure of the trade network.  
48  The  indicator  used  to  measure  the  potential  for  further  diversification  is  again  the  HHI  index  considering  the 
exports of every country in the world excluding the EU countries.  

27 

 
 
 
 
 
                                                           
For about half of the identified dependent products world export values outside the EU are 
concentrated  in  2-3  countries.  To  identify  products  with  low  potential  of  diversification,  a 
threshold  of  0.4  for  the  HHI  index  is  used  (i.e.  world  export  value  outside  the  EU  being 
concentrated  in  2-3  countries).  It  is  important  to  acknowledge  that  the  diversification  capacity 
could be complemented with a risk analysis of the trading partner in question so as to assess the 
overall level of vulnerability. About 50% of the 137 products previously identified as dependent, 
have an index higher than 0.4, representing around 4.5% of total imports. These products could 
be considered possibly more vulnerable as the potential for diversification is low.  

To  evaluate  the  potential  for  substitution  of  imports  with  domestic  production  across  the 
dependent  products,  the  average  price  of  exports  is  compared  with  the  average  price  of 
imports. The underlying idea is that the higher the price differences, either positive or negative, 
the more difficult it is to substitute foreign goods with domestic goods even if internal capacity is 
available. 

Another layer of possible vulnerability is a price difference between extra-EU imports and 
total  EU  exports  of  at  least  30%.  The  distribution  of  price  differences  between  extra-EU 
imports and total EU exports shows that the median price difference is 30%. This suggests that 
for half of all identified dependent products, the goods produced within the EU are significantly 
different compared to the ones imported from third countries, representing around 1.2% of total 
import value. While the analysis cannot point to specific reasons behind these price differences 
(e.g.  quality  differentiation,  efficiency  or  other),  the  fact  that  the  goods  produced  are  different 
from  the  ones  imported  reveals  another  layer  of  possible  vulnerability  for  this  half  of  the 
identified dependent products.  

Together,  a  low  potential  of  diversification  and  high  price  differences  between  extra-EU 
imports  and  total  EU  exports  might  point  to  a  subset  of  34  particularly  vulnerable 
products.  This  subset  of  34  goods  has  an  HHI  higher  than  0.4  (i.e.  possibly  low  potential  for 
diversification)  and  a  price  difference  of  at  least  30%  (i.e.  possibly  low  potential  for 
substitution).  This  final  subset  represents  0.6%  of  total  import  value.  Among  the  34  products 
identified, 22 products are classified as raw materials and intermediates goods (e.g. some APIs 
including  alkaloids  or  heterocyclic  compounds  and  some  ferro-alloys  including  ferro-tungsten 
and  ferro-niobium)  and  12  as  final  goods  (e.g.  Turbo-propellers,  COVID-19  related  products 
such  as  part  of  protective  garments,  types  of  radio-broadcast  receivers  and  some  types  of 
medicines).   

2.5 Single Market dependencies linked to concentration of economy activity 

The Single Market per definition relies on an open exchange of goods and services between 
Member  States.  The  Single  Market  is  key  for  the  economic  resilience  of  the  EU  as  a  whole, 
since  Member  States  can  rely  on  the  capabilities  and  strengths  of  each  other.  One  of  the  main 
advantages  of  the  Single  Market  is  the  possibility  of  enabling  economies  of  scale,  through 
specialisation,  with  notable  benefits  for  the  overall  economy,  i.e.  contributing  to  the  overall 
economy growth, creating jobs and adding value to consumers.  

28 

 
 
Still,  it  is  important  to  consider  that  activity  concentration  in  firms  within  the  Single 
Market  brings  about  various  risks.  As  highlighted  in  Chapter  1.1,  risks  related  to  internal 
dependencies,  arising  from  an  important  concentration  of  activity,  are  of  a  different  nature 
compared to external dependencies. Possible internal dependencies might emerge when the EU 
relies on the provision of key products and inputs originating from a relatively limited number of 
sources within the Single Market. For instance, a natural disaster affecting activities concentrated 
in  one  or  a  few  firms  could  affect  the  well-functioning  of  EU  value  chains  within  the  Single 
Market.  Relying  on  very  few  firms  within  the  Single  Market  for  supply  of  specific  goods  can 
also lead to reduced capacity to respond to demand surges. 

Identifying risks across firms originating from production concentration within the Single 
Market requires detailed and comprehensive information. Such analysis should be based on 
data  including  the  location  of  production  facilities  at  a  very  granular  product  level.  This  data 
would  allow  to  explore  whether  there  are  important  levels  of  economic  concentration  at  a 
product  level,  which  can  create  risks  for  the  EU  as  a  whole  in  case  of  an  unexpected  shock. 
Currently,  such  granular  data  on  production  locations  at  a  very  detailed  product  level  is  not 
available across the EU. Further work would be needed (e.g. in the form of ad-hoc surveys, case 
studies, use of existing national firm level databases) to collect  information on firm production 
facilities at a product level across Member States.  

A smooth functioning of the Single Market is a key asset to ensure the resilience of the EU 
economy and mitigate risks of possible internal dependencies. The COVID-19 pandemic has 
shown that a well-functioning Single Market should be at the core of the Union’s assets to tackle 
future potential crises. Structural solutions are needed to safeguard free movement during crisis 
times. This is particularly important where concentration of activities within the Single Market 
may  exist.  Furthermore,  competition  policy  can  also  play  a  major  role  in  addressing  possible 
risks  related  to  such  internal  dependencies,  by  diversifying  sources  of  supply,  promoting 
innovation  and  fostering  an  open  competitive  industrial  fabric  that  prevents  overreliance  on  a 
few players or products, be it within or outside the Single Market.  

29 

 
 
 
 
 
 
 
3.  EU performance in key technologies and research & innovation  

Strengthening the EU’s capacity to develop and take up technologies that are important for 
the industrial future of the EU is of key importance to enhance future competitiveness and 
avoid  possible  (future)  strategic  dependencies.  The  Industry  strategy  of  March  2020 
specifically  highlighted  that  the  EU  should  support  the  development  of  key  enabling 
technologies that are strategically important for Europe’s industrial future. The Communication 
on the Digital Decade underlined the importance of reinforcing internal strengths and capacities 
in the area of digital technologies in order for the EU to be a stronger international partner. 

This chapter aims to complement the assessment done in chapter 2 by considering the EU’s 
position in comparison with its global competitors in the area of key technologies that will 
drive future competitiveness. The EU’s performance in comparison with its global competitors 
in the area of these technologies cannot be clearly captured by an analysis of trade statistics as 
performed in chapter 2. In this context, this chapter assesses the EU’s relative position in the area 
of key technologies on the basis of a range of indicators (considering e.g. research, investments, 
innovation and business  dynamics). These provide important indications (or early warnings) as 
to  possible  risks  of  (future)  dependencies  in  the  area  of  such  technologies.  For  example, 
comparatively low levels of research, innovation, investments and entrepreneurial activities are 
key  drivers  of  Europe  becoming  potentially  more  dependent  on  other  countries  for  access  to 
state-of-the-art technologies.  

The  analytical  basis  for  this  chapter  consists  of  a  number  of  different  quantitative  and 
qualitative sources. It first considers the EU’s position in the development and uptake of certain 
key  technologies,  based  on  information  developed  through  the  Advanced  Technologies  for 
Industry  project49.  This  provides  an  indicative  overview  of  the  EU’s  performance  in  key 
technologies  compared  to  its  global  competitors,  using  indicators  and  proxies  of  technology 
generation,  entrepreneurial  activities,  investments  and  available  skills.  In  addition,  as  regards 
green technologies, information is used from the Commission report on progress of clean energy 
competitiveness.  Secondly,  the  EU’s  performance  in  research  and  innovation  (R&I)  is  a  key 
driver  of  technological  performance.  For  this,  the  analysis  mainly  relies  on  available  Eurostat 
statistics on R&I and the 2020 EU Industrial R&D Investment Scoreboard50.   

3.1 Key technologies for (future) competitiveness 

Technologies that will drive the EU’s future competitiveness include both those that are already 
at a more mature stage of development as well as emerging and breakthrough technologies that 
will gain importance in a more long-term perspective.  

49 https://ati.ec.europa.eu/  
50  European  Commission  (JRC/DG  R&I):  2020  EU  Industrial  R&D  Investment  Scoreboard.  The  Scoreboard  is 
based on companies’ published annual reports and accounts. 

30 

 
 
 
 
                                                           
Key technologies (based on Advanced Technologies for Industry project) 

In the context of extensive monitoring of technological  trends in the area of key enabling 
technologies  for  industry,  a  number  of  technologies  have  been  identified  as  being  of 
strategic importance for the EU’s industrial future.51 These key technologies are expected to 
substantially  alter  the  business  and  social  environment.  The  focus  of  this  section  will  be  on 
technologies  that  are  part  of  the  Advanced  Technologies  for  Industry  project,  including 
Advanced materials, Advanced manufacturing, Artificial Intelligence, Big data, Cloud, Industrial 
biotechnology,  the  Internet  of  Things,  Micro-and  nanoelectronics  (including  semi-conductors), 
IT for Mobility, Nanotechnology, Photonics,  Robotics and Cybersecurity.52 These technologies 
are  also  part  of  the  list  of  critical  technologies  highlighted  in  the  Action  plan  on  synergies 
between  civil,  defence  and  space  industries.  Several  are  also  closely  linked  to  the  six  key 
strategic  value  chains  identified  in  the  Strategic  Forum  on  Important  Projects  of  Common 
European Interest.53   

Graph 9: Indicator of overall EU performance in key technologies 

Source: Advanced Technologies for Industry project 
Note: The graphs provides a ranking of performance in key technologies in terms of technology generation, start-up creation 
and skills comparing EU with US, China and Japan54 

The  EU  has  both  strengths  and  possible  weaknesses  across  these  technologies.  An  overall 
assessment  –  based  on  a  number  of  elements  including  technological  generation  and  uptake, 

51 Notably in the context of the Key Enabling Technologies Observatory and the Digital Transformation Monitor  – 
now  centralised  in  the  ongoing  Advanced  Technologies  for  Industry  (ATI)  project.  The  list  of  identified 
technologies also takes into account the findings of the high-level strategy group on industrial technologies. 
52 Definitions for these technologies are available at https://ati.ec.europa.eu/reports/eu-reports/technology-definitions  
53 The Strategic Forum on Important Projects of Common European Interest identified six key strategic value chains 
in Europe  where further joint and coordinated efforts are  needed. These six identified value chains are  connected, 
clean  and  autonomous  vehicles;  smart  health;  low-CO2  emission  industry;  hydrogen  technologies  and  systems; 
industrial internet of things; and cybersecurity. 
54  Detailed  methodology  available  at  https://ati.ec.europa.eu/reports/eu-reports/advanced-technologies-industry-
methodological-report  

31 

 
 
 
                                                           
entrepreneurial activities and available skills – shows that the EU has a relatively strong position 
for some technologies (Graph 9). For example, the EU currently maintains sound technological 
leadership in Advanced Manufacturing, with European firms delivering a wide range of advance 
manufacturing equipment that are key enablers to production lines across the world. The EU also 
shows some strengths for related technologies such as in the area of Advanced materials. At the 
same time, some indicators appear to suggest that the EU faces certain challenges in comparison 
with  its  global  competitors  for  several  other  technologies  including  AI,  Big  Data,  cloud, 
cybersecurity, industrial biotech, robotics and micro-electronics (including semi-conductors).55  

Looking  in  more  detail  at  technology  generation  confirms  important  differences  in 
performance across technologies. In some areas, the EU holds the highest share of worldwide 
patent applications (e.g. advanced manufacturing technologies, Internet of Things and in the area 
of  IT  for  mobility56)  showing  strengths  in  technology  generation  (Graph  10).  Such  strong 
performance  in  technology  generation  has  a  positive  impact  on  business  performance.  In  fact, 
European firms that own intellectual property rights (IPRs) have on average 20% higher revenue 
per  employee than firms that do not.57 The impact is  even higher for SMEs, among which the 
revenue per employee is 68% higher for SMEs that own IPRs. 

Graph 10: Share in world transnational advanced technology patent applications 

Source: Advanced Technologies for Industry project 
Note: Based on EPO Worldwide Patent Statistical Database (PATSTAT, 2017) 

At  the  other  side  of  the  spectrum,  the  EU  has  been  gradually  losing  leadership  in  many 
technologies in terms of its share in worldwide patent applications. This is largely due to the 
rise in Chinese patents but also patent activity in Taiwan and South Korea. Currently, the EU is 
lagging behind both China and the US in a number of the areas. This is the case for AI and Big 
Data,  although  the  EU  is  showing  some  increasing  dynamics  in  AI-related  patenting.  The  EU 

55  IDC,  Technopolis  Group,  Capgemini,  Fraunhofer,  IDEA  Consult  and  NESTA:  Advanced  Technologies  for 
Industry – General Findings, 2020 
56  IT  for  mobility  covers  e.g.  satellite  navigation  and  radiolocation,  which  are  core  technologies  in  the  area  of 
autonomous driving  
57  EUIPO,  EPO:  Intellectual  property  rights  and  firm  performance  in  the  European  Union  (firm-level  analysis 
report), 2021 

32 

 
 
 
                                                           
share  in  worldwide  patenting  has  significantly  dropped  in  Robotics,  now  showing  a  large  gap 
compared  to  China.  When  it  comes  to  semi-conductors,  the  EU’s  technology  generation 
approximated by the number of patent applications is significantly below Japan and also lower 
than China and the US. Overall, this indicates that while the EU is positioning itself well when it 
comes to the ‘factory of the future’, it might be falling behind its main competitors in terms of 
scientific leadership and technology generation in other key areas that have important spill-over 
effects to many other ecosystems.  

The  growth  of  venture  capital  backed  start-ups  and  scale-ups  provides  for  another 
indication  of  the  EU’s  comparative  position  across  key  technologies.  It  equally  shows  a 
divergent picture on performance across technologies (Graph 11). For example, in fields such as 
Internet  of  Things,  Nanotechnology  and  Industrial  biotechnology  the  EU  appears  to  have  a 
relative advantage compared to the US. At the same  time,  in  other  areas  including  AI,  cloud, 
cybersecurity and micro-electronics the number of EU venture capital backed start-ups and scale-
ups  is  lagging  behind  the  levels  seen  in  the  US.  Even  larger  differences  are  seen  when 
considering total capital investments, with important gaps in investments compared to the US.58  

Graph 11: Number of active venture capital backed start-ups and scale-ups established 
since 2009 (left); total capital investments in advanced technologies (right, 2010-2019)  

Source: Advanced Technologies for Industry project 
Note: Based on Crunchbase and Dealroom 

An analysis of the uptake of key technologies by EU businesses shows that while some are 
becoming more established, others are still only relevant in very specific sectors. Relatively 
more  established 
technologies  such  as  cloud  computing,  cybersecurity  and  advanced 
manufacturing appear to play an important role supporting the EU’s digital transformation. Other 
technologies are showing lower but still promising adoption levels. This is the case, for example, 
for technologies such as AI or Internet of Things. A relatively high share of companies appear 
willing  to  invest  in  such  technologies  in  the  near  future,  although  the  COVID-19  crisis  might 
have  a  negative  impact  on  these  expectations.  Technologies  such  as  Industrial  biotechnology 
show low adoption levels, as there are largely still used only by EU businesses in very specific 
sectors.  

58 Which on the one  hand is due to the  prevalence of the  much  stronger venture capital  market in  the  US,  on  the 
other  hand,  the  comparison  of  total  investment  figures  has  to  be  interpreted  with  caution  given  the  somewhat 
different coverage of data  

33 

 
 
 
  
  
                                                           
Graph 12: Advanced Technologies current uptake in the EU (2019) 

Source: Advanced Technologies for Industry project 

In addition to technology generation, entrepreneurial activity and uptake of technologies, it 
is also important to consider whether EU industry has access to the relevant technical and 
digital skills to fully capture the potential of technological advances. An approximation59 of 
available skills in the EU across different fields of technologies provides for a rough indication 
of this. Compared to the US,  the EU has  a higher relative share of professionals  with  skills  in 
advanced  manufacturing  technologies,  advanced  materials,  industrial  biotechnology  and 
nanotechnology. Nevertheless, the EU appears to lag behind the US when it comes to available 
skills in areas such as cloud technologies, big data, AI, cybersecurity and micro-electronics.  

Graph 13: Weighted share of professionals with advanced technology skills (proxy) 

Source: Advanced Technologies for Industry project. Note: Analysis relying on (online) self-reported skills by professionals 

59  For  more  details  on  methodology:  https://ati.ec.europa.eu/reports/eu-reports/advanced-technologies-industry-
methodological-report 

34 

 
 
   
 
   
 
                                                           
The EU’s performance in green technologies 

This Commission’s annual progress report on clean energy competitiveness60 has assessed 
the state and competitiveness of the EU as regards clean energy technologies.  It includes a 
focus on six key technologies that are expected to play an increasing role in the EU’s 2030 and 
2050  energy  mix:  offshore  renewables  (wind  and  ocean),  solar  photovoltaics  (PV),  renewable 
hydrogen, batteries and grid technologies. 

On the one hand, the report highlights the importance of regaining and strengthening EU’s 
competitive  edge  in  the  solar  photovoltaic  industry  and  the  battery  sector.  In  the  solar 
photovoltaic industry,  the EU has lost market share in some of the upstream parts of the value 
chain (such as solar PV cell and module manufacturing). Considerable market opportunities exist 
in the segments of the value chain where specialisation or high value products are key. Building 
a sizeable EU PV manufacturing industry would also reduce the risk of supply disruptions and 
quality risks. Regarding batteries, there is an ongoing competitive recovery by the EU, which is 
further assessed in chapter 5 of this staff working document. 

The EU holds a first mover advantage in the wind, renewable hydrogen and ocean energy 
industries. At the same time, large increases in the capacity size of these markets are expected. 
This will require scaling up and realising economies of scale. The EU offshore wind industry has 
strong innovative capacity, while needing the perspective of a growing home market as well as 
sustained R&I  funding to benefit from  growth in global markets.  Also in renewable hydrogen, 
European  companies  are  well-placed  to  benefit  from  market  growth  (including  thanks  to  their 
leading position on the electrolysers market). Still, large efforts to scale up are needed to achieve 
a  significant  renewable  hydrogen  production  capacity  by  2030.  Renewable  hydrogen  is  further 
assessed in chapter 5. As regards ocean energy, technologies have yet to become commercially 
viable and further efforts are needed to maintain and expand the EU’s current leading position. 
Finally, the EU smart grid industry is relatively small but also competitive. Given its regulated 
nature, governments and regulators in the EU play a key role in developing the benefits of this 
industry. 

Emerging break-through technologies 

A horizon scanning of potentially important, disruptive innovations over the coming 15 to 
20 years reveals the expectation of high diffusion potential mainly in digital but also green 
innovation, making disruptive innovation key for the twin transition.61 The main expectation 
is  that  digital  technologies,  which  have  gained  importance  in  the  COVID-19  crisis,  have  the 
highest  diffusion  potential  in  the  2038  horizon  by  increasing  efficiency,  effectiveness  and 
convenience everywhere.62 With a somewhat less ubiquitous role, innovations in biology, energy 

60 COM(2020) 953 
61 In 2018, a horizon scanning exercise identified 100 important radical innovation breakthroughs by 2038 regarding 
their potential techno-economic and social impacts (European Commission, 100 Radical Innovation Breakthroughs 
for the future, 2019) 
62 Varnai et al: The scientific, technological and socio-economic conditions of exit from the COVID 19 crisis (report 
to the EC), forthcoming  

35 

 
 
                                                           
and materials are expected to diffuse into highly digitised and automated industrial ecosystems 
and to bring massive improvements in (competitive) sustainability.63 

Emerging  break-through  technologies  with  a  high  likelihood  of  maturity  by  2038  exist 
across  different  ecosystems.  In  the  digital  ecosystem,  for  example,  important  emerging 
technologies  include  areas  such  as  speech  recognition  and  computational  creativity.  In  the 
electronics  ecosystem,  examples  of  technologies  with  important  potential  include  nano-leds, 
flexible  electronics,  2D  material  based  technologies64  and  bio-degradable  sensors.  Also  in 
ecosystems such as health (e.g. gene editing and therapy) and renewables (e.g. bioplastics), there 
are  several  important  break-through  technologies  with  a  high  likelihood  of  maturity  by  2038. 
While  limited  data  is  available  to  assess  the  EU’s  performance  in  many  of  such  emerging 
technologies, it is clear that they deserve attention from industry and policymakers.  

3.2 Europe’s research and innovation performance 

The EU’s  performance in R&I gives insights in possible future developments of the EU’s 
competitive  position  in  key  technologies.  R&I  is  a  key  driver  that  will  define  Europe’s 
performance  when  it  comes  to  key  technologies  to  support  competitiveness,  match  the  EU’s 
green and digital ambitions and safeguard the security and health of Europeans.  The EU’s R&I 
performance compared to its global competitors is creating concerns over (future) technological 
dependencies. While the EU is a global R&D powerhouse, accounting for almost 20 % of R&D 
worldwide65, it is threatened by global competitors in a number of innovation key indicators.  

Graph 14: BERD in EU and its main global competitors in bln EUR (left axis) and BERD 
intensity (%, right axis) 

Source: JRC elaboration based on Eurostat data 

Business expenditure on R&D is far below the US and has been caught up by China as well 
(Graph 14). EU business expenditure on R&D (BERD) was around 200 billion EUR in 2019, 
accounting for about 1.5% of GDP. Despite its 50% growth over the last decade EU BERD 

63  See  Sachs,  J.D,  Schmidt-Traub,  G.,  Mazzucato,  M.,  Messner,  D,  Nakicenovic,  and  N.,  Rockström,  J.:  Six 
Transformations  to  Achieve  the  Sustainable  Development  Goals,  2019  (Nature  Sustainability);  and  M.  Porter: 
Developing  the  EU’s  ‘competitive  sustainability’  for  a  resilient  recovery  and  dynamic  growth,  2018  (Cambridge 
Institute for Sustainability Leadership)  
64 https://graphene-flagship.eu/  
65 European Commission: Science, Research and Innovation Performance of the EU 2020, 2020 

36 

 
 
 
                                                           
has been caught up by Chinese BERD also in monetary terms and it is significantly lower (by 
45%) than the amounts that US businesses spend on R&D.  

Manufacturing BERD in the EU is performed mostly in the high tech (HT) and medium 
high tech (MHT) sectors. In 2018, these sectors accounted for more than half of total BERD 
(56%)  and  for  83%  of  total  manufacturing  BERD.  The  main  industrial  sectors  for  BERD 
include the automotive industry, computer & electronic & optical and pharmaceuticals. The 
decade long changes in these shares have been minor. 

Graph  15:  Medium  high  tech  and  high  tech  manufacturing  BERD  as  a  share  of  total 
manufacturing BERD in EU 

Source: JRC elaboration based on Eurostat data 

Still,  the  share  of  EU  high  tech  BERD  is  only  less  than  half  of  that  of  the  US.  The  US 
invests  significantly  more  in  HT  compared  to  the  EU  (57%  vs  27%)  and  less  in  the 
automotive  and  other  MHT  manufacturing.  China’s  HT  BERD  has  only  a  slight ly  lower 
share (24%) than that of the EU. The EU’s scaling-up performance also lags behind the US and 
China: for each EU private unicorn in 2018 there were eight in the US and four in China.66  

Graph 16: Medium high tech (MHT) and high tech (HT) manufacturing BERD as a share 
of total manufacturing BERD in the US (left) and China (right) 

Source: JRC elaboration based on Eurostat data 

The EU (as well as the US) is also losing ground in favour of China with respect to scientific 
excellence  and  patenting.  Regarding  scientific  output  measured  by  the  top  1%  highly  cited 

66 European Commission: Science, Research and Innovation Performance of the EU 2020, 2020 

37 

 
 
 
 
                                                           
publications, the EU is behind the US and also overtaken by China in 2015.67 Regarding world 
shares in transnational patent filings, the EU remains world leader, but the gaps between the EU, 
US, Japan and China are narrowing.68  

Technological specialisation has deepened given similar R&D trends observed for over 10 
years,  shaping  specialisation  patterns  and 
increasing  differences  across  regions, 
particularly between the EU and the US. Companies’ R&D investments in the EU and the US 
have increased significantly over the past ten  years in the top four R&D investing sectors.69 In 
2010,  EU  companies  in  the  automotive  industry  were  investing  more  in  R&D  than  their  US 
counterparts,  whereas  US  companies  in  the  health  and  the  ICT  industries  (both  services  and 
producers)  invested  the  most  in  R&D.  These  differences  have  increased  further  in  2019, 
particularly  in  both  ICT  sectors.  The  ratio  of  R&D  investment  between  the  EU  and  the  US 
remained  constant  in  the  health  sector,  increased  significantly  in  the  automotive  sector  and 
substantially decreased in both ICT sectors.  

Graph  17:  R&D  investment  in  2010-2019,  comparison  of  selected  sectors  in  the  EU  and 
US70 

Source: The 2020 EU Industrial R&D Investment Scoreboard, European Commission 

A closer look to the EU and US data at the sub-sector level shows even more striking differences 
in R&D investment, for example in biotechnology and software & internet. In 2019, the US had 
many more companies in both sub-sectors (8.6 times more in biotechnology and 8.8 times more 
in  software  &  internet)  as  well  as  significantly  higher  R&D  investments  (EUR  34.3  billion  vs 
EUR  2.6  billion  in  biotechnology  and  EUR  92.7  billion  vs  EUR  7.5  billion  in  software  & 
internet). 

67 Commission elaboration based on INCITES (Web of Science) data 
68 Commission elaboration PATSTAT 
69  Source:  European  Commission  (JRC/DG  R&I):  2020  EU  Industrial  R&D  Investment  Scoreboard.  R&D  in  the 
Scoreboard is extremely concentrated, with the top four sectors contributing 77% of the total R&D: ICT producers 
(23.0%), health industries (20.5%), ICT services (16.9%), and the automotive industry (16.3%). 
70 Note: data refers to 514 (EU:164, US:350) of the 805 companies (EU:204, US:601) in the four sector groups in 
the two regions considered for which R&D data are available for the all period 2010-2019, accounting for 90.2% of 
the R&D in 2019.  

38 

 
 
 
 
                                                           
Graph  18:  R&D  investment  in  2010-2019,  comparison  of  selected  sectors  in  the  EU  and 
China71 

Source: The 2020 EU Industrial R&D Investment Scoreboard, European Commission 

In  the  past  10  years,  the  R&D  investment  of  Chinese  companies  operating  in  the  ICT 
sectors has overtaken that of EU companies. By contrast, the EU retained its lead in the health 
and automotive sectors.  The average R&D investment  per company in  the EU  Industrial  R&D 
Investment  Scoreboard  has  grown  significantly  in  China  in  2019.72  However,  it  has  still 
remained  little  more  than  half  of  the  average  EU  company  (EUR  509.6  million).  Thus,  while 
overall  EU  firms’  R&D  investments  remain  well  ahead  of  that  of  Chinese  firms,  the  gap  is 
continuously decreasing. 

Finally, when it comes to green technologies, it is crucial that the EU maintains its strong 
position. R&I as well as the development and uptake of eco-innovations will be key to achieving 
the  climate  goals.  Existing  technology  will  not  be  able  to  deliver  the  full  emissions  reduction 
required  to  achieve  EU  climate  objectives  and  new  technologies  should  ideally  become 
commercialised by 2030, to allow for timely scaling and deployment across the EU by 2050.73 
At the same time, in the case of more mature techniques, necessary investment into large-scale 
demonstration and deployment will require increased pooling of resources.  

The EU makes too little use of its world-leading R&D in industry and must ensure a better 
transfer  of  that  R&D  into  the  economy,74  especially  when  it  comes  to  green  innovations. 
The  EU  currently  has  a  higher  share  in  clean  energy  technologies  in  overall  patenting  activity 
than most other major economies.75 The EU is also the global leader on high-value green patents 
(protected  in  at  least  two  patent  authorities),  with  Japan  and  the  US  following  closely. 

71 Note: Data refers to 347 (EU:164, CN:183) of the 497 companies (EU:204, CN:293) in the four sector groups in 
the two regions considered for which R&D data is available for the entire period, accounting for 91.1% of R&D in 
2019. 
72 From €47.2million in 2010 to €274.4 million in 2019 
73 In-depth analysis in support of COM(2018)773: A Clean Planet for all - A European strategic long-term vision for 
a  prosperous,  modern,  competitive  and  climate  neutral  economy;  European  Commission:  Science,  Research  and 
Innovation Performance of the EU 2020, 2020 
74 New ERA, COM(2020)628, chapter 2.3. 
75 Over the period 2010-2016, the EU was second among major economies in terms of patenting activity in green 
technologies as a share of all inventions (at 9.5%), following South Korea at 10.3%, well above the global share of 
7% (European Commission: 2020 EU Industrial R&D Investment Scoreboard) 

39 

 
 
 
                                                           
Nevertheless,  the  green  transition  will  depend  on  the  degree  to  which  the  corresponding  green 
innovations are created and deployed.  

In addition, there is an overall decrease in national budgets devoted to R&I in clean energy 
technologies  and  a  lack  of  national  objectives  and  funding  targets  that  show  concrete 
pathways to 2030 and 2050.76 Even though some Member States have been increasing efforts, 
overall, national budgets for clean energy research have been in slight decline in recent years77. 
The  R&I  budget  allocated  to  energy  in  the  EU  represents  4.7%  of  total  spending  on  R&I.  In 
2018, the EU public R&I investment  in  clean energy technologies as  a share of  GDP was less 
than 0.03%, against around 0.05% in Japan or China. Estimates of private investment in the same 
areas  have  also  been  decreasing  in  recent  years  and  amount  to  around  10%  of  the  companies’ 
total expenditure in R&I.78 This is higher than the US, but lower than China.  

Graph  19:  Estimated  public79  and  private80  R&I  financing  in  the  Energy  Union  R&I 
priorities 

Source: JRC81 based on IEA, Mission Innovation, Eurostat/OECD 

3.3 Conclusions  

This snapshot assessment of the EU’s performance in key technologies and R&I shows that 
the  EU  has  certain  strengths  but  is  also  at  risk  of  falling  behind  in  other  areas  that  will 
drive  future  competitiveness.  While  the  EU  still  has  a  sufficient  technological  base,  it  is 
exposed  to  strong  global  competition.  In  some  areas  such  as  advanced  manufacturing  the  EU 
seems to be performing well. Also in the area of certain green technologies (such as hydrogen, 
see  chapter  5.4)  the  EU  is  highly  competitive,  while  overall  efforts  are  needed  for  the  EU  to 
maintain  and  further  build  its  strong  position.  At  the  same  time,  the  increased  technological 
capacities of the EU’s competitors highlight the risk of the EU not being able to create and grow 

76 COM(2020)564  
77 COM(2020)950; COM(2020)953 
78 Contrasted  with BERD statistics:  Eurostat/OECD Business expenditure on  R&D by NACE Rev. 2 activity and 
source of funds  
79 This excludes EU funds (2018 value; for EU27 partly estimated) 
80  Private  R&I  estimates  for  China  are  challenging  and  uncertain,  given  the  differences  in  Intellectual  Property 
protection and the difficulty in mapping the company structure (e.g. state backed companies) and financial reporting 
81https://setis.ec.europa.eu/publications/setis-research-innovation-data;  Pasimeni,  F.;  Fiorini,  A.;  Georgakaki,  A.; 
Marmier, A.; Jimenez Navarro, J. P.; Asensio Bermejo, J. M.: SETIS R&I country dashboards, 2018 

40 

 
 
 
                                                           
a  sufficient  number  of  firms  in  certain  key  technology  sectors.82  Furthermore,  the  EU’s  R&D 
efforts in the digital ecosystem fall significantly behind those of the US and have been overtaken 
by  China  as  well.  Such  lagging  performance  provides  at  least  indications  as  regards  possible 
(future)  dependencies  with  regard  to  these  technologies.  If  left  unaddressed,  strategic 
dependencies in the area of these technologies could further materialise and possibly new ones 
might emerge. 

Particular  technologies  where  the  EU’s  competitive  position  appears  to  be  weaker 
compared to its global commercial competitors include AI, High Performance Computing, 
Big  Data,  cloud,  industrial  biotech  and  micro-electronics  (including  semi-conductors). 
These key technologies in the digital ecosystem deserve particular attention, as key enablers and 
sources  of  transformation  for  many  other  ecosystems  (such  as  the  defence  and  aerospace, 
automotive, agri-food and health ecosystems). Chapter 5 of this staff working document provides 
in-depth reviews of the EU’s position and potential strategic dependencies in the areas of semi-
conductors and cloud technologies.  

82  Moncada-Paternò-Castello  P.  and  H.  Hernandez  (JRC  Policy  Insights,  European  Commission):  Ten-year 
evolution of EU industrial R&D in the global context, 2018  

41 

 
 
 
 
 
 
 
                                                           
4  Policy measures with a potential to address strategic dependencies 

Any measures addressing strategic dependencies would need to be designed and applied on 
a case-by-case basis, taking into account the specific nature of the dependency, the global 
situation  and  the  policy  objectives  pursued  within  the  ecosystem  concerned.  They  would 
need  to  build  on  in-depth  discussion  and  dialogue  with  Member  States  and  industry.  Dialogue 
with industry (e.g. in the context of the Industrial Forum) is particularly important when it comes 
to  better  understanding  the  impact  of  certain  dependencies  and  the  drivers  of  current  supply 
patterns. 

A detailed understanding of the functioning of relevant value chains as well as the potential 
risks  that  specific  strategic  dependencies  entail  to  the  EU’s  core  interests  allows  building 
policy measures that would aim at address dependencies in a targeted manner.83 This would 
allow  taking  proportionate  measures,  without  compromising  the  open  and  trade-based  EU 
economy and ensuring competition is not distorted. Addressing strategic dependencies requires 
targeted  measures  depending  on  the  dependency  concerned  and  its  potential  risks.  Different 
alternatives should be carefully examined with a view to maintaining the competitiveness of the 
EU and choosing to address dependencies in the most cost-efficient manner. 

4.1  Relevant measures to address external and internal strategic trade dependencies 

There  are  differences  between  external  and  internal  (concentration  of  activity  at  a  firm 
level  within  the  Single  Market)  dependencies  also  when  it  comes  to  identifying  relevant 
types  of  policy  measures.  Different  types  of  measures  may  play  a  role  when  it  comes  to 
considering how to mitigate risks of external and internal dependencies.   

Measures to address external trade dependencies considered strategic 

Policy measures to address external strategic dependencies can be diverse.  On the one hand, 
they should ensure that the EU reinforces its position in global value chains by strengthening and 
diversifying  external  trade.  On  the  other  hand,  the  EU  should  strengthen  its  own  capacity  in 
strategic areas  where necessary, building on the  strengths  of a fully functioning Single Market 
with open and competitive markets.   

On the external side, the diversification of import sources is a key element when it comes to 
increasing the EU’s resilience in a context of global uncertainty and growing international 
tensions. A strong EU engagement in multilateral cooperation and coordination mechanisms is 
important  for  this,  including  when  it  comes  to  preparing  for  a  future  crisis.  At  the  same  time, 
companies themselves play the key role in  this  regard as they are able to assess risks and take 
action so that they are able to tap into a sufficiently diversified and environmentally sustainable 
set of suppliers.  

83 For example, in the area of raw materials in addition to a regular review of the EU’s critical raw materials list, the 
Commission has recently also carried out specific foresight work to obtain a better understanding of the EU’s future 
raw material needs in particular in light of the green and digital transitions (see European Commission: Critical Raw 
Materials for Strategic Technologies and Sectors in the EU - A Foresight Study, 2020) 

42 

 
 
                                                           
Public  policy  can  facilitate  the  process  of  diversification  to  alternative  sources  of  supply 
and  strengthening  of  existing  supply  chains.  The  recent  Trade  Policy  Review  provides  the 
basis  and  direction  for  this.  A  reinforced  use  of  the  EU’s  trade  policy  tools  can  contribute  to 
obtaining  access  to  new  and  improve  access  to  existing  global  markets  as  well  as  ensuring  an 
undistorted  functioning  of  existing  supply  chains,  based  on  a  stable,  rules-based  trading 
framework. This  requires building partnerships  with  like-minded partners and further  engaging 
with a range of markets and countries around the world. In addition, trade policy also plays an 
important  role  in  allowing  EU  businesses  to  compete  on  an  equal  footing  with  third  country 
businesses.  Better  enforcing  existing  trade  agreements  and  ensuring  effective  defence  against 
unfair  trade  practices  are  key  in  this  regard,  including  in  those  areas  where  the  EU  currently 
faces possible strategic dependencies. Likewise, the Commission plans to adopt as a follow-up to 
the  White  Paper  on  foreign  subsidies84  a  proposal  for  a  new  instrument  to  address  possible 
distortive  effects  of  foreign  subsidies  in  the  Single  Market  particularly  in  relation  to 
concentrations and public procurement. 

On  the  internal  side,  the  EU  can  address  strategic  dependencies  by  increasing  or 
diversifying domestic production and where necessary and possible also consider strategic 
stockpiling.  In  addition  to  diversifying  sources  of  imports  (or  where  the  potential  of  such 
diversification  is  limited),  the  EU  can  also  develop  or  improve  its  own  capacity  in  strategic 
areas.85  In  addition,  a  crisis  preparedness  strategy  (including  e.g.  the  building  of  stocks  or  the 
development  of  alternatives,  possibly  together  with  international  partners)  can  also  be  of 
relevance  for  certain  strategic  areas,  including  when  it  is  not  fully  possible  or  efficient  to 
substitute foreign goods with domestic production. 

Achieving increased EU capacity in areas considered strategic requires a fully functioning 
and competitive Single Market. Actions taken to facilitate a better functioning Single Market 
are key when it comes to ensuring increased strategic capacity in specific areas.   Fostering the 
growth  of  firms  and  increasing  industrial  dynamics  both  via  the  ecosystems  and  the  Single 
Market  is  key  to  achieving  the  twin  transition.86  The  EU  would  need  to  ensure  that  regulatory 
frameworks are fit  for purpose and provide legal certainty to  facilitate large-scale investments. 
Unnecessary or disproportionate barriers to the Single Market that hinder innovative businesses 
from  exploiting  opportunities  of  scale  should  be  removed,  particularly  for  areas  of  strategic 
importance.87 The Single Market Programme can be a key facilitator in this regard. Furthermore, 
open  and  competitive  markets  support  resilience.  Competition  policy  is  key  in  this  regard  as  a 
tool  to  promote  innovation  and  foster  a  competitive  industrial  fabric,  including  in  areas  of 
strategic importance. The use of existing tools such as Important Projects of Common European 
Interest  have  already  shown  to  offer  important  potential  benefits  in  specific  areas  where  the 

84 See COM (2020)253 on levelling the playing field as regards foreign subsidies 
85 Demand-side substitution policies may also be relevant, diversifying or changing demand for specific products  
86 JRC policy brief: EU corporate R&D intensity gap: structural features call for a better understanding of industrial 
dynamics, 2016. 
https://iri.jrc.ec.europa.eu/sites/default/files/contentype//publication//policybriefs//1568801201//EU%20corporate%
20R%26D%20intensity%20gap%20_PolicyBrief.pdf  
87  See  also  COM(2020)93  on  identifying  and  addressing  barriers  to  the  Single  Market  and  COM(2020)94  on  the 
Long term action plan for better implementation and enforcement of single market rules 

43 

 
 
                                                           
market alone cannot deliver breakthrough innovation, while ensuring that the benefits are shared 
across the EU economy. Industrial alliances can also serve as a platform to convene and rally a 
wide range of stakeholders in  a given area to  uncover opportunities and address  bottlenecks in 
achieving  the  EU  policy  objectives.  Finally,  the  COVID-19  crisis  has  also  indicated  that  in 
exceptional cases, specific solutions (such as advance purchase agreements) allow investments to 
be made in a context of high cost and high failure rates.  

Modern,  well-managed  and  efficient  procurement  by  public  authorities  can  also  play  an 
important  role  in  increasing  resilience.  Smart  procurement  already  today  takes  up  a  central 
part in enabling the achievement of key priorities (e.g. related to the green transition, innovation 
and  social  objectives)  across  many  ecosystems.  The  role  of  public  procurement  and  specific 
criteria  in  reducing  dependencies  and  thus  strengthening  the  resilience  of  different  ecosystems 
can be further explored and developed.  

Targeted funding geared towards strategic priorities and investments in research can also 
provide a key contribution to building capacity and increasing resilience. The Recovery and 
Resilience  Facility  provides  a  major  boost  in  this  regard.  In  addition,  support  for  research  and 
innovation  can  help  to  extend  the  EU’s  strategic  industrial  capabilities  including  in  new  and 
emerging  areas.  For  example,  Horizon  Europe  is  already  providing  support  to  research  and 
innovation  in  different  areas  of  strategic  importance  (e.g.  raw  materials,  batteries,  quantum 
technologies).88  

SMEs may require specific support to diversify supply chains and increase their resilience. 
Strategic dependencies have a particular impact on SMEs, as they are more vulnerable to lock-in 
effects  and  high  switching  costs.  A  recent  SME  survey89  highlights  that  the  COVID-19  crisis 
strongly  or  moderately  affected  seventy-two  percent  of  respondents  because  of  supply  chain 
disruptions,  employee  absences  and  temporary  shutdowns.  In  addition,  SMEs  were  not  well 
prepared:  almost  two  thirds  of  respondents  had  no  plan  in  place  to  handle  supply  chain 
disruptions. One third created such a plan during the pandemic.  

Developing  the  skills  of  the  EU  workforce  in  identified  areas  of  strategic  importance  can 
help  the  EU  build  capacity.  This  requires  mapping-out  the  skills  needed  and  supporting 
workers in acquiring them. Such efforts would help regain skills that might have been transferred 
to parts of the value chain located outside the EU, or learn new ones that emerge as the economy 
transforms. Developing skills can increase EU workers’ productivity, ensuring that an increased 
EU production in certain areas is at the same time also economically efficient.  

For  several  of  the  possible  external  strategic  dependencies  highlighted  in  chapter  2.3, 
actions have been initiated or further developed since the March 2020 Industry Strategy. 

88  It  should  also  be  noted  that  for  actions  related  to  Union  strategic  assets,  interests,  autonomy  or  security,  the 
Horizon Europe work programme may provide that the participation can be limited to legal entities established only 
in  Member  States,  or  to  legal  entities  established  in  specified  associated  or  other  third  countries  in  addition  to 
Member  States.  In  addition,  exceptionally  and  for  duly  justified  reasons,  entities  established  in  the  Union  or  in 
Associated Countries directly or indirectly controlled by non-associated third countries or by legal entities of non-
associated third countries may also be excluded from individual calls for proposals. 
89 EU Survey carried out by European Commission July-December 2020 

44 

 
 
                                                           
Chapter 2.3 identified possible strategic dependencies for a number of products,  notably in  the 
energy  intensive  industries  ecosystem  (including  raw/processed  materials  and  chemicals),  the 
health ecosystem (including active pharmaceutical ingredients and other health related products) 
as  well  as  other  inputs  and  products  that  are  relevant  to  support  the  green  and  digital 
transformation.  Several  recent  initiatives  aim  to  address  these  dependencies  or  assess  them  in 
more detail. 

Firstly, in the area of raw materials, the action plan on critical raw materials90 (September 
2020) presents the challenges for a secure and sustainable supply of critical raw materials 
and  actions  to  increase  EU  resilience  and  open  strategic  autonomy.  In  the  context  of  this 
action plan, actions taken to address strategic dependencies consist of both internal EU capacity 
building as well as strengthening and diversifying external sources. Actions taken to build up EU 
production capacities include identifying and developing viable industrial projects on critical raw 
materials  exploration,  extraction,  processing  and  refining;  launching  research  and  innovation; 
developing  relevant  expertise  and  skills;  and  deploying  Earth-observation  programmes  and 
remote sensing. The  action plan also  aims to  make better use of the potential  of recycling and 
secondary critical raw materials. On the external side, the strategy sets out that EU will continue 
to diversify supply from third countries and strengthen rules-based open trade in  raw materials 
and remove distortions to international trade. The EU will also engage in strategic partnerships 
with  resource-rich third countries  to  secure a diversified, sustainable and responsible supply of 
critical raw materials. The Commission will implement parts of the critical raw materials action 
plan  together  with  the  European  Raw  Materials  Alliance.  The  alliance  will  identify  barriers, 
opportunities  and  investment  cases  to  build  capacity  at  all  stages  of  the  raw  materials  value 
chain,  from  mining  to  waste  recovery.  Chapter  5  will  provide  a  more  detailed  analysis  on  the 
nature  and  impact  of  strategic  dependencies  as  well  as  relevant  measures  in  the  area  of  raw 
materials. 

Furthermore, the chemicals strategy for sustainability was adopted in October 2020.91 One 
of the key actions of the strategy is to promote the EU’s resilience of supply and sustainability of 
critical chemicals. In this context, the Commission is stepping up strategic foresight in the field 
of chemicals together with relevant stakeholders including by gathering more in-depth evidence 
on chemicals that are critical for the Europe’s societal and economic resilience and the green and 
digital transition of industrial ecosystems. 

Secondly,  in  the  area  of  health,  the  Commission  Communication  on building  a  European 
Health Union (November 2020)92 proposes actions to reinforce the EU’s resilience for cross-
border health threats. The COVID-19 crisis showed that the EU lacked effective mechanisms 
and  structures  to  monitor  demand  and  supply  of  critical  medical  countermeasures  and  support 
Member  States  in  addressing  shortages.  Different  measures  were  taken  during  the  crisis  to 

90 COM(2020)474 
91 COM(2020)667 
92 COM(2020)724 

45 

 
 
                                                           
address  these  shortcomings  (e.g.  stockpiling  of  emergency  medical  equipment93  and  offering 
regulatory flexibility while maintaining safety standards). In addition, the Communication on a 
European Health Union proposes further actions aimed at increasing resilience to all cross-border 
health threats  and providing European citizens with  a high level  of public health.  It focuses on 
crisis preparedness and response measures such as strengthening coordination at EU-level when 
facing  cross-border  health  threats;  revising  the  mandates  of  the  European  Centre  for  Disease 
Prevention and Control and of the European Medicines Agency to provide stronger surveillance, 
scientific analysis and guidance before and during a crisis; and setting up a new EU agency for 
biomedical preparedness. 

In addition, the Pharmaceuticals Strategy for Europe (November 2020) presents actions to 
ensure  accessibility,  availability  and  affordability  of  medicines,  including  through 
diversified and secure supply chains. Specifically on the issue of supply security of medicines, 
the  Commission  is  steering  a  structured  dialogue  with  relevant  actors  in  the  pharmaceuticals 
value  chain,  public  authorities  and  other  stakeholders.  In  a  first  phase,  the  structured  dialogue 
aims  at  obtaining  a  more  detailed  understanding  of  the  functioning  of  global  pharmaceutical 
supply chains and identifying the precise causes and drivers of different potential vulnerabilities. 
In a second phase, the structured dialogue will allow putting forward a set of possible measures 
and  policy  options.  These  will  aim  to  address  possible  vulnerabilities,  including  potential 
dependencies, and ensure the security of supply and the availability of critical medicines, active 
pharmaceutical ingredients and raw materials. Chapter 5 will provide a more detailed analysis on 
the nature and impact of strategic dependencies as well as relevant possible measures in the area 
active pharmaceutical ingredients. 

Thirdly,  a  number  of  recent  and  forthcoming  initiatives  aim  to  address  strategic 
dependencies in the area of green and digital. For example, the Commission’s proposal for a 
new  regulatory  framework  on  batteries94  aims  to  ensure  that  there  are  robust  sustainability, 
safety  and  performance  requirements  for  all  batteries  placed  on  the  EU  market.  In  addition,  a 
second Important Project of European Interest in the area of batteries was authorised in January 
2021. Similarly, the recent Digital Services Act and Digital Markets Act package95 opens up new 
opportunities  for  businesses  that  depend  on  gatekeeper  platforms  to  offer  their  services  in  the 
Single  Market,  as  they  will  be  able  to  innovate and  compete  in  a  fair  and  balanced  market.  In 
addition, the Commission will soon propose a Data Act96 to provide the best conditions for the 
access  to  and  control  over  data  in  B2B  and  B2G  situations.  Also,  the  proposed  regulatory 
framework on Artificial Intelligence has the twin objective of creating ecosystems of excellence 
and trust to promote the development and uptake of AI while addressing the risks associated with 
certain uses of this technology. Such regulatory initiatives would allow providing legal certainty 

93  In  the  context  of  the  COVID-19  crisis  the  Commission  has  set  up  a  strategic  rescEU  stockpile  of  medical 
equipment.  This  common  European  stock  of  medical  equipment  is  hosted  by  nine  Member  States  (as  of  January 
2021) and includes products such as medical masks, gloves, gowns and ventilators. It has already delivered essential 
medical supplies to a number of countries participating in the EU Civil Protection Mechanism that have requested 
assistance via that mechanism. 
94 COM(2020)798 
95 https://ec.europa.eu/digital-single-market/en/digital-services-act-package  
96 See COM(2020) 66, ‘A European strategy for data’ 

46 

 
 
                                                           
for investments and place European players at the forefront of these technological developments. 
Chapter  5  will  provide  a  more  detailed  analysis  on  the  nature  and  impact  of  strategic 
dependencies  as  well  as  relevant  possible  measures  in  the  areas  of  lithium-ion  batteries,  cloud 
and edge computing, and semi-conductors. 

Policy measures in the context of internal Single Market dependencies linked to concentration of 
activities 

In  view  of  possible  internal  dependencies  on  a  limited  number  of  sources  within  the  EU 
(notably linked to possible concentration of activities at a firm level), it is of key importance 
to safeguard a free flow of goods and services across the Single Market. The internal Single 
Market  disruptions  experienced  particularly  during  the  first  wave  of  the  pandemic  have 
highlighted the importance of a functioning Single Market where all Europeans can rely fully on 
the capacities held by individual Member States. For example, national bans or other restrictions 
on intra-EU exports undermined the principle of European solidarity and created a domino effect 
across  the  Single  Market.  In  addition,  they  were  subject  to  frequent  adjustments  exacerbating 
legal  uncertainty  and  triggered  uncoordinated  stockpiling  responses.  Businesses  repeatedly 
underlined  the  negative  impact  on  their  supply  chains  of  export  restrictions  within  the  Single 
Market  established  in  the  context  of COVID-19.  The  Commission  worked  to  lift  around  30  of 
such  restrictions  during  the  first  wave  of  the  pandemic.  This  shows  the  need  for  structural 
solutions  to  safeguard  and  strengthen  the  functioning  of  the  Single  Market  during  times  of 
emergency.  

In  addition,  competition  policy  plays  a  key  role  by  enabling  lively  entrepreneurial 
ecosystems  in  Europe.  A  well-functioning  Single  Market  with  strong  business  dynamics  and 
competition is also key when it comes to mitigating the possible risks of internal dependencies 
linked to  a potential  concentration of critical  supplies at  firm  level.  Generally, market  entry  of 
new firms in a given sector has positive effects on competition, allocative efficiency and overall 
competitiveness of the sector. In sectors of strategic importance, a higher level of diversification 
(and lower concentration) of individual sources within the Single Market also increases the EU’s 
resilience  to  unexpected  shocks  (e.g.  natural  disasters).  This  is  important,  for  example,  in 
situations where a very limited number of EU production facilities is producing certain critical 
products.  Competition  policy  plays  an  essential  role  in  this  regard  by  ensuring  access  to 
diversified sources of supply within the EU and preventing too strong reliance on a few players 
or products.  

Finally,  the  EU’s  integration  into  global  value  chains  can  also  play  an  important  role  in 
mitigating possible risks related to internal dependencies. Together with a functioning Single 
Market,  potential  risks  related  to  internal  dependencies  are  further  reduced  by  the  EU’s  open 
economy being integrated in an effective and fair global trading system. Global trade can notably 
help to diversify supply sources and sustain demand for our industrial output. International trade 
helps not only to cushion possible shocks and disruptions having an impact on internal EU value 
chains, but also to ensure that the EU can meet its internal demand in case of rapidly increasing 
demand of certain goods.   

47 

 
 
4.2 Relevant measures in the area of key technologies 

Chapter  3  highlighted  a  number  of  challenges  the  EU  faces  in  comparison  with  other 
economies in the areas of key technologies. While the EU has certain strengths (e.g. in the area 
of advanced manufacturing), it is also at risk of falling behind in certain other areas (e.g. cloud) 
that  will  drive  future  competitiveness.  Furthermore,  the  EU’s  efforts  in  research  and 
development  show  important  gaps  in  comparison  with  international  competitors  notably  in  the 
digital ecosystem, highlighting concerns over technological dependencies increasing or possible 
new ones emerging. 

It is paramount to step up cooperation with industry on research and innovation providing 
increased  certainty  for  private  engagement  based  on  a  common  agenda  for  technological 
development. The pandemic is leading to shrinking turnover and profits, often leaving even less 
room  for  company  investment.  There  is  a  need  for  more  favourable  conditions  supporting  the 
emergence and growth of companies and investments in strategic and R&D intensive sectors of 
economic and social interest. In addition, the capacity of traditional (and mature) medium- and 
low-technology  sectors  –  where  Europe  is  comparatively  strong  –  to  absorb  new  technologies 
should be strengthened. It is essential to crowd in private investment to this end and to provide 
directionality  and  ambition  to  public  support.  The  Commission  will  develop  industrial 
technology  roadmaps97  for  a  number  of  priority  ecosystems  offering  a  common  vision  for 
technological  development  with  industry  and  Member  States.  They  will  make  concrete 
recommendations  to  speed  up  the  transfer  of  research  results  into  the  real  economy,  linking 
relevant partnerships under Horizon Europe with industrial ecosystems.  

The  Recovery  and  Resilience  Facility  and  the  Digital  Europe  programme  provide  major 
opportunities  to  step  up  investments  in  advanced  digital  technologies  and  turn  the 
immediate challenges presented by the COVID-19 into a long-term opportunity. On top of 
existing funding programmes, 20% of the Recovery and Resilience Facility has been reserved for 
digital investments and reforms. Several of the flagship initiatives identified by the Commission 
are  targeted  towards  a  stronger  generation  and  uptake  of  digital  technologies  (including 
“connect”, “modernise”, “scale-up” and “reskill and upskill”).98  In addition, the Digital Europe 
programme  aims  to  build  the  strategic  digital  capacities  of  the  EU  and  to  facilitate  the  wide 
deployment of digital technologies in the EU.99  

Investment  in  Multi-Country  Projects  can  target  strategic  dependencies  in  the  area  of 
technologies more effectively. The Digital Decade communication proposes investments in a set 
of  multi-country  projects  around  4  pillars:  digital  infrastructure,  digital  skills  and  education, 
digitalisation of businesses and digital government. Such projects include deploying a common 
and multi-purpose pan-European interconnected data processing infrastructure; endowing the EU 
with  capabilities  in  electronics  design  and  deployment  of  the  next  generation  of  low  power 

97 As announced in the European Research Area Communication (new ERA)   
98 SWD(2021)12 
99  For  duly  justified  security  reasons,  participation  of  EU-based  entities  controlled  from  third  countries  may  be 
excluded from specific actions under the programme (Article 12 (5) and (6) of the Digital Europe Regulation) 

48 

 
 
                                                           
trusted  processors;  deploying  5G  corridors  along  major  pathways;  connecting  public 
administrations with interoperable services; supporting the digitisation of industry via European 
Digital  Innovation  Hubs;  and  developing  specialised  ICT  education  and  training.  The  Digital 
Policy Programme foreseen under the Digital Decade Communication will set up a mechanism 
to  enable  the  Commission  to  engage  with  Member  States  with  the  objective  of  taking  joint 
commitments as well as possible measures at EU and national level. The variety of mechanisms 
that  has  been  used  for  different  projects  and  investments  until  now  has  revealed  a  gap  in  the 
Commission’s  toolbox  to  combine  funding  from  Member  States,  the  EU  budget  and  private 
investment for the purposes of deploying and operating infrastructures and services of common 
interest, outside the research area.  In this regard, the Council conclusions of 25 March 2021100 
also highlight the need for appropriate vehicles to support multi-country projects. 

Cohesion  policy  co-funds  research  and  innovation  actions  in  areas  where  regions  have 
particular  strengths,  while  supporting  the  reinforcement  of  EU  value  chains  in  key 
technologies.  The  new  Interregional  Innovation  Investment  instrument  (I3)  will  bring  together 
partners  from  different  Member  States  and  regions  to  develop  joint  investment  to  accompany 
Europe and its regions in their efforts to strengthen the EU on the global stage and facilitate the 
recovery. 

Skills are crucial to the development and uptake of new technologies, to address existing or 
potential future strategic dependencies in key technologies.  Important  ongoing initiatives in 
this  regard  include  the  European  Skills  Agenda  as  well  as  the  Pact  for  Skills.  In  addition, 
pursuing  gender  equality  could  be  crucial  as  closing  the  gender  gap  in  science,  technology, 
engineering and mathematics (STEM) careers would be key for the EU to meet its needs in terms 
of ICT professionals in years to come. 

Important  Projects  of  Common  European  Interest  (IPCEIs)  provide  a  State  aid 
compatibility  basis  under  Art.  107(3)(b)  TFEU  under  which  Member  States  can  jointly 
design large cross-border projects to achieve EU strategic goals in areas where the market 
alone  cannot  deliver  breakthrough  innovations.  Furthermore  and  as  also  announced  in  the 
Industry Strategy of March 2020, the Commission will revise in a targeted manner the applicable 
State  aid  rules  in  2021  to  facilitate  further  SMEs’  participation  in  future  IPCEIs  and  clarify 
further  the  applicable  state  aid  criteria,  while  at  the  same  time  continue  to  respect  the  EU’s 
international obligations.101  

Industrial  alliances  can  play  a  key  role  in  building  up  EU  capacity  in  specific  strategic 
areas through joint action by all the interested partners. Industrial alliances are already used 

100 SN 18/21, para 4: ‘We stress the need to strengthen the competitiveness and resilience of the European Union’s 
industry,  including SMEs, to  accelerate  its green and digital transitions, including  through appropriate vehicles  to 
support multi-country projects […]’ 
101 The ongoing adaptation of relevant horizontal State aid Guidelines, including the Communication on Important 
projects of common European interest, the Regional aid Guidelines, the Framework on Research, Development and 
innovation,  the  Risk  Finance  Guidelines  as  well  as  the  Environmental  and  Energy  Guidelines,  together  with  the 
review of the transport specific aviation and railway state aid guidelines, will ensure that they are fit for purpose for 
an economy that is changing fast, increasingly digital and must become greener and more circular. The adaptation 
process follows the Better Regulation principles (including public consultations of industry and Member States).   

49 

 
 
                                                           
as one of the delivery vehicles for existing EU strategies including in the fields of hydrogen, raw 
materials  and  plastics.  Possible  new  alliances  can  be  considered  including  in  the  area  of 
advanced technologies, where proved a well-targeted and efficient tool.  

The  EU  Space  Programmes  are  effectively  strategic  capacities,  built  up  by  sustained 
investment  over  decades  by  Member  States  and  the  EU  in  strategic  infrastructure  and 
technologies.  Both  Copernicus  and  Galileo  contribute  strongly  to  the  EU’s  open  strategic 
autonomy  by  providing  global  Earth  Observation  data  and  satellite  navigation  services,  which 
are used in a wide range of applications, including critical security applications and monitoring 
of greenhouse gasses, crucial for the green deal. Simultaneously, those EU space capabilities act 
as  a  positive  lever  for  multilateral  cooperation,  for  example  in  climate  action  with  Copernicus 
data,  in  satellite  navigation  for  security  applications  with  the  US,  and  providing  satellite 
navigation services in Africa. Thereby, those EU flagships represent open strategic autonomy in 
action. 

Finally,  the  Commission’s  Action  plan  on  synergies  between  civil,  defence  and  space 
industries  identifies  a  (non-exhaustive)  number  of  critical  technologies  that  are  relevant 
across the civil (with a focus on security), defence and space industry domains.  Several of 
these identified critical technologies include technologies highlighted in Chapter 3 for which the 
EU  appears  to  be  facing  challenges  compared  to  its  global  competitors  (e.g.  cloud,  semi-
conductors). In the context of this Action plan, the Commission will set up an EU Observatory of 
Critical  Technologies  that  can  provide  a  regular  monitoring  and  analysis  of  these  critical 
technologies, their potential applications, the value chains, the desired EU control over them and 
the  existing  gaps  and  dependencies.  Every  second  year,  this  Observatory,  in  consultation  with 
key stakeholders, will produce a classified report. On the basis of these reports, the Commission 
will  develop  technology  roadmaps  to  stimulate  cross-fertilisation  between  civil,  defence  and 
space industries for critical technologies. 

50 

 
 
 
 
5  Reviews of a selected number of strategic areas 

This  chapter  provides  more  in-depth  reviews  for  a  number  of  strategic  areas.  As  for  any 
area  of  strategic  importance,  policy  intervention  would  need  to  build  on  a  thorough 
understanding  and  detailed  analysis  of  the  functioning  of  relevant  value  chains  as  well  as  the 
underlying drivers of Europe’s current  and possible future strategic dependencies and the risks 
they  entail.  This  chapter  provides  in-depth  reviews  of  a  number  areas  that  can  be  considered 
strategic  for  Europe’s  interests.  They  look  into  the  nature  of  possible  strategic  dependencies, 
their impact as well as relevant (ongoing) policy responses.  

These  assessments  should  not  be  considered  as  an  exhaustive  analysis  of  all  the  EU’s 
possible  strategic  dependencies,  but  rather  as  a  first  stage  of  assessments  concerning  a 
number of important areas. Further key areas, including products, services or technologies key 
to  the twin  transition such as renewables or energy storage, can be considered and analysed in 
more detail in the future.        

The  chapter  develops  reviews  of  six  specific  areas.  Four  reviews  (hydrogen,  raw  materials, 
batteries and active pharmaceutical ingredients) look further into possible strategic dependencies 
that  were  identified  through  the  bottom-up  mapping  of  dependencies  developed  in  chapter  2. 
Another  two  reviews  (semi-conductors  and  cloud  and  edge  computing)  look  into  examples  of 
technological  areas  where  the  EU  appears  to  be  falling  behind  in  relation  to  its  global 
competitors  as highlighted in  chapter 3, creating concerns over possible technological  strategic 
dependencies in the digital ecosystem.  

51 

 
 
 
 
5.1 Raw materials  

Access  to  resources  is  fundamental  for  the  entire  EU  industry  and  central  to  Europe’s 
ambition  to  deliver  the  Green  Deal  and  ensure  the  digital  transformation  of  the  EU 
economy. These  ambitions will need to  continue to  be  anchored in  diversified and undistorted 
access to global markets for raw materials. 

a)  Context and possible weaknesses in the EU  

As the EU does not produce raw materials that can meet our demand, EU industry faces 
global competition in access to raw materials. The OECD102 estimates that material extraction 
doubled since 1990 and that global consumption of resources will  grow up to 40% by 2040 and 
close  to  90%  by  2060  (both  values  as  compared  to  2017).  This  puts  high  pressure  on  the 
resilience of raw materials supply chains globally. 

Graph 20: Global material use by resource type: a) historical data (world, 1990 - 2017) and 
b) projection (world, 2018 - 2060) 

Source:  European  Commission,  Raw  materials  Scoreboard  in  preparation.  Adapted  from  OECD  (2019),  ´Global  Material 
Resources Outlook to 2060´.   

Metals  and  minerals  are  part  of  our  daily  lives.  With  the  transition  of  Europe’s  industry  to 
climate-neutrality,  the  reliance  on  available  fossil  fuels  will  progressively  be  replaced  with 
reliance  on  non-energy  raw  materials.  For  many  of  them,  the  EU  sources  from  abroad  and 
global competition is fierce. Those raw materials that are very important economically and 
have a high supply risk are called critical raw materials. Critical raw materials are essential 
to  the  functioning  and  integrity  of  a  wide  range  of  industrial  ecosystems.  Rare  earths  based 
magnets move electric cars and make wind turbines work. Gallium and indium are part of light-
emitting  diode  (LED)  technology  in  lamps.  Semiconductors  need  silicon  metal.  Hydrogen  fuel 
cells and electrolysers need platinum group metals.  

102  OECD,  Global  Material  Resources  Outlook  to  2060:  Economic  Drivers  and  Environmental  Consequences 
(OECD Publishing, Paris), 2019. https://doi.org/10.1787/9789264307452-en  

52 

 
 
 
                                                           
Dependence  on  critical  raw  materials  of  nine  strategic  technologies  and  three  sectors  has 
been analysed103 as a part of the EU raw materials criticality assessment in 2020. Graph 21 
shows competition of technologies and sectors for the same materials. For example, wind energy 
and  traction  motors  compete  both  for  various  rare  earths,  as  well  as  for  borates;  robotics  and 
drones  also  use  motors;  fuel  cells  and  digital  technologies  require  a  large  amount  of  platinum 
group metals (PGMs). 

Graph  21:  Flows  of  raw  materials  and  their  current  supply  risks  to  the  selected 
technologies and sectors 

Source: European Commission, Critical materials for strategic technologies and sectors in the EU - a foresight study, 2020 

b)  Origin of vulnerabilities 

The EU identified 30 critical raw materials in 2020. Their supply is highly concentrated. For 
example,  in  the  period  of  2012-2016,  China  provided  98 %  of  the  EU’s  supply  of  rare  earth 
elements (REE), Turkey provided 98% of the EU’s supply of borate, and South Africa provided 
71%  of  the  EU’s  needs  for  platinum  and  an  even  higher  share  of  the  platinum  group  metals 
iridium,  rhodium,  and  ruthenium.  The  EU  relies  on  single  EU  companies  for  its  supply  of 
hafnium and strontium. 

103 https://ec.europa.eu/docsroom/documents/42881   

53 

 
 
 
 
 
                                                           
Graph 22: Biggest supplier countries of critical raw materials to the EU  

Source: European Commission, Study on the EU’s list of Critical Raw Materials (2020) 

Many  supplier  countries  of  raw  materials  increasingly  impose  restrictions  on  exports  of 
minerals and metals. The continuing growth of the global demand of metals and non-metallic 
minerals could lead to more restrictions to secure local supply or foster the domestic downstream 
industry.  The  share  of  global  production  of  cobalt,  rare  earths  and  tungsten  affected  by  export 
restrictions was higher than 70% (as of 2018, see Graph 23).  

Graph  23:  Share  of  global  primary  production  of  five  selected  raw  materials  subject  to 
export restrictions (world, 2014, 2017 and 2018) 

Source: European Commission, Raw materials Scoreboard in preparation. JRC, based on data on export restrictions provided by 
OECD,  ‘Inventory  on  Restrictions  on  Exports  of  Raw  Materials’  and  data  on  global  production  data  from  C.  Reichl  and  M. 
Schatz (2019). 

The  EU  is  very  dependent  on  imports  of  the  raw  materials  needed  for  key  products  and 
technologies.  Graph  24  shows  current  supply  risks  across  a  number  of  key  products  and 
technologies  in  the  subsequent  stages  of  processed  materials,  components  and  assemblies.  For 

54 

 
 
 
 
example,  the  EU  only  provides  1%  or  less  of  some  specific  raw  materials  for  Li-on  batteries, 
wind turbines and electric traction motors.  

Graph 24: Identified supply risks for the EU and EU shares of production 

Source: European Commission, Critical materials for strategic technologies and sectors in the EU - a foresight study, 2020 
Note: Percentage  means proportion of EU on the  global production. Products and technologies highlighted above (from top to 
bottom) are: Li-on batteries, fuel cells, wind energy, electric traction motors, photovoltaic technology, robotics, drones and 3D 
printing. Supply risks are highlighted from red (very high) to green (low). 

In  addition  to  current  supply  risks,  demand  for  multiple  raw  materials  is  expected  to 
strongly  increase  across  different  sectors  and  technologies.  Graph  25  shows  the  expected 
increases  in  the  use  of  a  number  of  critical  raw  materials  for  the  renewables  and  e-mobility 
sectors by 2030 and 2050 (according to low, medium and high demand scenarios). Furthermore, 
additional increases in use can be expected from other sectors, including defence and aerospace 
as well as digitalisation (e.g. handheld devices use batteries, sensors and motors; data is stored on 
drives containing permanent magnets; etc.). 

55 

 
 
 
 
 
 
 
Graph 25: Critical raw materials use in different technologies in the EU in 2030 and 2050 

Source: European Commission, Critical materials for strategic technologies and sectors in the EU - a foresight study, 2020 

The EU is well-endowed with aggregates and industrial minerals, as well as certain base metals 
such  as  copper  and  zinc.  It  is  less  successful  in developing  projects  to  produce  critical  raw 
materials, even though there is significant potential for some of these. As the timeframes for 
starting  extractive  operations  are  quite  long,  these  tend  to  lag  behind  price  peaks.  Price  drops 
during the start-up time can therefore reduce economic viability and result in freezing the activity 
before it has started.  

The  early  phase  from  inception  to  permitting  constitutes  a  high-risk  phase  of  project 
development and is particularly vulnerable. This is partly due to the inherent risk and cost of 
new  projects,  lack  of  incentives  and  financing,  the  diversity  and  length  of  national  permitting 
procedures, and the lack of public acceptance for mining in Europe. 

Access  to  resources  and  sustainability  is  key  for  the  resilience  of  the  EU  raw  materials 
supply  chains.  Achieving  resource  security  requires  diversified  supply  from  both  primary  and 

56 

 
 
 
secondary  sources,  reduced  dependencies  and  improved  resource  efficiency  and  circularity, 
including  sustainable  product  design.  This  is  true  for  all  raw  materials,  including  base  metals, 
industrial minerals, aggregates and biotic materials, but is even more necessary when it concerns 
those raw materials that are critical for the EU. 

c)  Way forward and relevant (ongoing) measures 

In the fall of 2020, the Commission adopted the Critical Raw Materials action plan that outlines 
a set of concrete actions to tackle vulnerabilities in the raw materials supply chains.  

Building resilient value chains in the EU  

The first action under the action plan was the launch of the European Raw Materials Alliance 
(ERMA)  in  September  2020.  ERMA  has  started  its  work  towards  developing  a  resilient 
European  value  chain  for  the  rare  earths  and  permanent  magnets  in  eMotors  (see  also  chapter 
5.3).  Its  role  is  to  facilitate  investment  in  the  raw  materials  value  chain.  Downstream 
manufacturers  such  as  automotive  OEMs,  wind  turbine  manufacturers  and  the  defence  and 
aerospace  industries  need  to  provide  strong  support  to  developing  a  resilient  European  supply 
chain  for eMotors.  Member States and industry can assess the situation and decide on the 
investments  needed  for  the  production  of  rare  earths  and  their  refining,  magnetic  alloys, 
magnets and their recycling, building on the investment pipeline prepared by ERMA.  

The pipeline as it currently stands would contribute to addressing important raw material 
dependencies. The EU currently imports all permanent magnets for wind turbines, mostly from 
China. Offshore wind turbines contain on average 600 kg of permanent magnets per MW, while 
onshore  wind  turbines  contain  80-160  kg/MW,  such  that  an  average  wind  turbine  in  Europe 
contains  230kg/MW.  Installed  EU  wind  energy  capacity  today  is  220  GW.  According  to 
estimates by WindEurope104, 397 GW of wind energy capacity would be installed in the EU by 
2030 in a High Scenario. On average, this implies an annual wind capacity addition of 18 GW, 
which would increase to around 25 GW when taking into account replacements of old turbines. 
ERMA identified investment projects with a potential to increase rare earths magnets production 
capacity. If these projects were fully implemented this would be sufficient to cover around 60% 
of  the  EU  annually  installed  wind  energy  capacity  by  rare  earths  magnets  made  in  the  EU105. 
Regarding battery raw materials, the EU foresight study on Critical Raw Materials estimates, for 
a high-demand scenario, an annual  EU demand of 500,000 tonnes of nickel  for e-mobility  and 
renewable energy by 2030. ERMA has identified investment projects with a potential to increase 
production from 10,000 tonnes to 100,000 tonnes nickel capacity per year, representing 20% of 
projected EU annual demand in 2030. 

Investments  

Under  Action  5  of  the  action  plan,  together  with  Member  States  and  ERMA,  the  Commission 
identifies mining and processing investment projects, as well as investment needs and related 
financing  opportunities  for  critical  raw  materials  in  the  EU  that  can  be  operational  by  2025, 

104 https://windeurope.org/about-wind/reports/wind-energy-in-europe-scenarios-for-2030/  
105 Source: ERMA estimates 

57 

 
 
                                                           
prioritizing  coal-mining  regions.  ERMA  will  also  support  the  development  of  projects  and 
facilitate contact with investors. Significant investments would be needed in order for Europe to 
compete  with  the  current  global  raw  materials  market  leaders.  The  two  IPCEIs  on  the  battery 
value  chain  already  include  raw  material  projects  (R&I  and  First  Industrial  Deployment)  on 
sustainable mining, refining and recycling. Such concerted action could also be of relevance in 
the area of eMotors, including electricity generators. 

Recovery funds. The EU raw materials sector has been left in a vulnerable position due to lack 
of  investment.  The  Recovery  and  Resilience  Facility  provides  an  opportunity  for  Europe  to 
reverse certain trends and create new competences and markets. Given the fast-moving nature of 
today’s economy, adopting a proactive stance with regard to this issue will prove indispensable. 
Under  the  Recovery  and  Resilience  Facility  EUR  672.5  billion  in  loans  and  grants  will  be 
available  to  support  post  COVID-19  recovery  projects.  These  will  have  to  be  committed  by 
2023 and implemented by 2026. Member States are encouraged to identify possibilities to 
allocate funding and develop recovery projects in the raw materials value chains, especially 
for critical raw materials and base metals. 

R&D  investment.  Under  Action  3  of  the  action  plan,  research  and  innovation  on  waste 
processing,  advanced  materials  and  substitution  will  be  undertaken  using  Horizon  Europe,  the 
European  Regional  Development  Fund  and  national  R&I  programmes.  Under  the  first  Work 
Programme  of  Horizon  Europe  2021-2022,  a  set  of  raw  materials-related  research  and 
innovation actions will be funded with a budget of almost 300 million EUR. They will focus 
on  exploration,  mining,  processing,  refining,  recycling  and  substitution,  as  well  as  developing 
skills, promoting responsible mining practices, fostering international cooperation with resource 
rich countries, mapping secondary sources in the EU and identifying investment needs. 

International cooperation  

Under  Action  9  of  the  action  plan,  the  Commission  will  develop  strategic  international 
partnerships  to secure a diversified and sustainable supply of critical  raw materials,  including 
through  undistorted  trade  and  investment  conditions,  starting  with  pilot  partnerships  with 
Canada,  interested  countries  in  Africa  and  the  EU’s  neighbourhood  in  2021.  Under  the  EU-
Ukraine  High  Level  Industrial  Dialogue,  the  Commission  is  progressing  with  the  strategic 
partnership on raw materials with Ukraine. The Commission also held an initial scoping meeting 
with Serbia. 

From  commodity  to  service.  Many  raw  materials  could  be  recycled  and  brought  back  into 
service. To better link the raw materials with products and customers, there is an opportunity to 
move away from the commodity model to a "Resource as a Service" model.  This model could 
link investors, companies, suppliers and end-users. For example, instead of providing lithium as 
a  commodity  to  battery  manufactures,  a  service  can  guarantee  a  minimum  level  of 
electrochemical  potential  high  energy-density  rechargeable  batteries.  The  raw  materials  will 
remain in the company's custody. They could be recovered after the end of the life of the battery 
for appropriate recycling.  

58 

 
 
Transparency  and  data.  To  achieve  a  more  resilient  economy,  there  is  a  need  for  efficient 
tracking  of  raw  materials  through  technology,  harmonised  data  requirements,  and  policy  and 
regulation  that carefully  incentivise data collection and sharing worldwide. There is  a range of 
technologies  such  as  distributed  ledgers  and  satellites  that  can  help  to  improve  traceability, 
transparency, and sustainability of the supply chains. Improved understanding of material flows, 
and  data  transparency  will  provide  significant  benefits,  including  increased  recycling,  reduced 
global supply chain vulnerability and reduced price volatility. 

Raw materials from Europe  

Public  awareness,  acceptance  and  trust.  Sourcing  from  the  EU  (actions  5  to  8  of  the  action 
plan) needs to be accompanied by increased public awareness, acceptance and trust. Concerns of 
local  communities  about  the  degradation  of  the  environment  linked  to  extraction  and  refining 
projects would need to be addressed. Efforts would need to be undertaken at national, regional 
and local level, and by holding an open and transparent dialogue with local communities about 
the  importance  and  benefits  of  raw  materials  activities  for  mitigating  climate  change  and 
preserving biodiversity. In this context, the Commission is launching in 2021 a “Roundtable on 
Environmentally and Socially Sustainable Raw Materials Mining”, gathering together the 
Commission, public authorities, industry, NGOs and other social partners.  

Under action 10 of the action plan, the EU promotes responsible mining practices for critical 
raw materials through the EU regulatory framework and relevant international cooperation. The 
Commission  is  developing  a  set  of  social,  environmental  and  economic  principles  for 
sustainable raw materials in the EU. The principles should enable to better communicate with 
the public on the conditions at which sustainable raw materials extraction and processing takes 
place in Europe and increase public acceptance for this activity.    

Permitting – a competence of Member States or their regions. While maintaining the highest 
environmental and social standards, there is a need to further streamline, accelerate and improve 
predictability  of  the  diverse  and  lengthy  planning  and  permitting  procedures,  in  close 
cooperation with industry and social partners. This should apply in the first place to (critical) raw 
materials  projects  of  strategic  importance  (e.g.  for  achieving  climate  neutrality  and  the  digital 
agenda).  

59 

 
 
 
 
5.2 Active pharmaceutical ingredients  

Medicinal  products  are  critical  for  society.  They  offer  therapeutic  options  for  diagnosis, 
treatment  and  prevention  of  diseases  and  are  important  to  address  threats  to  public  health, 
including  the  COVID-19  and  any  future  pandemic.  The  New  Industrial  Strategy  for  Europe 
(March  2020)  stresses  that  “access  to  medical  products  and  pharmaceuticals  is  crucial  to 
Europe’s security and autonomy in today’s world”. The bottom-up analysis developed in chapter 
2 of this staff working document highlighted that the EU appears to be foreign dependent on a 
number of inputs and products in the health ecosystem.  

This chapter provides first insights into the EU’s possible dependencies and vulnerabilities 
in  the  area  of  active  pharmaceutical  ingredients.  It  should  be  considered  together  with  the 
analysis  and  actions  in  the  Pharmaceutical  Strategy  for  Europe  (November,  2020),106  which 
underlined the importance of access to safe, effective and high-quality medicines at an affordable 
price.  The  evidence  presented  in  this  chapter  can  notably  provide  information  to  the  ongoing 
Structured  Dialogue  on  the  security  of  medicines  supply  launched  under  the  Pharmaceutical 
Strategy,  which  specifically  aims  at  developing  further  understanding  of  causes  and  drivers  of 
potential  vulnerabilities  and  dependencies  in  the  pharmaceutical  supply  chain,  together  with  a 
range of relevant actors.107  

a)  Context  

The pharmaceutical supply chain has a very complex structure (Graph 26). Pharmaceuticals 
are  composed  of  active  pharmaceutical  ingredients  (APIs)108  and  excipients109.  APIs  are 
formulated  via  chemical  synthesis,  derived  from  starting  animal  sources,  extracted  from  plants 
and  herbs  or  via  formation  processes  or  cell  culture,  fermentation,  extraction  or  isolation.  In 
addition to those starting materials110, raw materials111 and intermediates112 are also needed in the 
production  process  of  APIs.  This  production  process  is  potentially  polluting  and  very  energy 
intensive if not properly managed. After an API is produced, it is then formulated into the final 
medicinal  product.  In  many  cases,  the  production  process  may  also  include  drug  delivery 
technologies  (e.g.  inhalators,  injection  pens).  Once  manufactured  and  formulated,  medicinal 

106 COM(2020)761 final. 
107  For  more  details  on  the  Structured  Dialogue  on  the  security  of  medicines:  https://ec.europa.eu/health/human-
use/strategy/dialogue_medicines-supply_en  
108 Active pharmaceutical ingredient is a substance or mixture of substances intended to be used in the manufacture 
of a drug (medical product) and intended to exert a pharmacological, immunological or metabolic action with a view 
of restoring, correcting or modifying physiological functions or to make a medical diagnosis  
109  Excipients  are  diverse  materials  from  many  origins  (animal,  vegetable  or  mineral)  and  are  not  exclusive  to 
medicines (can be for example also used in food and cosmetics). Excipients can act as fillers or control the pace of 
the release. They are manufactured using traditional chemical or biosynthetic processes. 
110 Any substance from which an active substance is manufactured or extracted. 
111 Any substance, reagent or solvent intended for use in the production of an active substance and from which the 
active substance is not directly manufactured or extracted. 
112  Substances  intended  for  further  processing  (one  or  several  times).  Further  processing  can  be  further  molecular 
changes and /or purification and isolation processes until the active substance is of sufficient quality to be used in 
the production of a medicinal product. 

60 

 
 
                                                           
products  are  packaged  and  transferred  to  wholesale  distributors  and  then  further  distributed  to 
hospital pharmacies and other authorised or entitled medicines retailers. 

The  pharmaceutical  supply  chain  has  in  general  lower  risk  exposure  than  other  supply 
chains but remains susceptible to possible disruptions.113 Given the high trade intensity of the 
pharmaceutical  supply  chain,  this  sector  is  particularly  sensitive  to  trade  disputes  as  well  as 
cyberattacks given the high level of digitisation, R&D, capital intensity and exposure to digital 
data flows.114 The COVID-19 outbreak has shown that an increased demand for medicines used 
to  treat  patients  as  well  as  uncoordinated  stockpiling,  together  with  difficulties  in  the  supply 
chains within and outside of the EU (e.g. closing of sites, export restrictions  and disruptions in 
logistics)  can  result  into  important  disruptions  in  pharmaceutical  supply  chains  with  possible 
risks  of  medicine  shortages  in  the  EU.  Furthermore,  on-site  accidents115,  non-compliance  with 
Good Manufacturing Practices (GMP) as well as transport issues are other factors threatening the 
supply and leading to possible important drug shortages.  

Graph 26: Pharmaceutical supply chain  

Source: https://www.ey.com/en_us/strategy-transactions/covid-19-risks-and-resiliency-in-the-drug-supply-chain   

Biological medicines are taking up an increasing share in total drug expenditure. In the past 
decade,  the  focus  of  pharmaceutical  research  has  moved  from  small  molecules  designed  to 
control diseases to biologics.116 In 2018, in Europe over 30% of all healthcare spending was on 

113  It  is  has  less  exposure  to  climate-related  events  (e.g.  heat  stress  and  flooding)  or  to  a  pandemic  due  to  its 
relatively high capital intensity 
114  McKinsey  Global  Institute,  Risk  resilience  and  rebalancing  in  global  value  chains,  2020.  Retrieved  from 
https://www.mckinsey.com/business-functions/operations/our-insights/risk-resilience-and-rebalancing-in-global-
value-chains  
115 Explosion in Tianjin (China) in 2015 damaged storehouses and production lines of medicines. This accident led 
to shortages of supplies in the EU. 
116 Biological medicines are derived or manufactured from a living source and work by targeting specific chemicals 
or cells involved in the body’s immune system response. 

61 

 
 
 
                                                           
biological  medicines of  which 1.5% are biosimilars  (i.e. biological  medicines highly similar to 
the  already  approved  ones).117  The  latter  is  expected  to  increase  in  the  next  five  years  as  a 
number of biologics will fall off patent. 

This  review  focuses  on  possible  vulnerabilities  and  dependencies  that  manifest  upstream, 
during the manufacturing process. There are also a number of other challenges, notably in the 
procurement and distribution of medicines that have manifested during the COVID-19 outbreak. 
In  this  context,  the  Health  Union  Package  proposed  by  the  Commission  in  November  2020 
strengthens  the role of the European Medicines  Agency (EMA) in  the monitoring of shortages 
and provides for a cooperation framework to confront crisis situations. 

b)  Origin of possible vulnerabilities 

The pharmaceutical supply chain has become one of the most integrated supply chains in 
the world. Different stages of manufacturing towards a finished dosage form may take place in 
many different countries before the final product reaches the European patient. The supply chain 
of biological medicines is shorter than that of medicines produced in chemical synthesis, as such 
biological  medicines  are  produced  in  final  dosage  forms  (i.e.  API  production  and  formulation 
take place in a single location). 

Global production of APIs  

There  is  regional  concentration  in  generic  API  production.  According  to  a  Chemical 
Pharmaceutical  Generic  Association  Report  (2015),  the  EU  accounts  for  24%  of  the  world’s 
value  of  API  production.  66%  are  produced  in  Asia  Pacific  (India  and  China),  3%  in  North 
America and 7% in the rest of the world. APIs for biological products are not included in these 
statistics. 

China and India are the world’s key producers  of generic APIs.  Until mid-2010, India has 
been  the  world’s  top  supplier  of  both  APIs  and  intermediates.  It  remained  self-dependent  on 
those  materials  for  both  domestic  consumption  and  export.118  In  recent  years,  China  has 
leveraged  on  its  inherent  cost  advantage,  leading  to  the  displacement  of  part  of  the 
manufacturing capacity for certain APIs and their advanced intermediates from  India to China. 
Today, India fulfils 20% of global demand for generic medicines in terms of volume, but it relies 
on  Chinese  imports  for  their  70%  of  APIs  by  volume.  Europe  imports  15.4%  of  Chinese  and 
16.4% of Indian API production.119 

In  addition,  there  seems  to  be  a  further  increasing  trend  in  the  concentration  of  generic 
APIs  being  produced  in  India  and  China.120  Looking  at  new  approvals  of  Certification  of 

117 IQVIA: The impact of biosimilar competition in Europe, 2019  
118 KPGM: Indian bulk drugs industry – Regaining the lost glory, 2017. Retrieved from http://ciipharma.in/pdf/API-
Report-2017.pdf  
119 Chemical Pharmaceutical Generic Association (CPA) Report: Competition in the World API markets, 2015 
120 MundiCare (2020) for Progenerica 

62 

 
 
                                                           
suitability of European Pharmacopoeia monographs (CEPs, i.e. API quality certificates121) used 
for medicine approvals between 2000 and 2020, Asia significantly outperformed Europe. Asian 
manufacturers  increased  the  number  of  their  CEPs  from  183  to  2,369,  while  European 
manufacturers only grew from 348 to 1,260 CEPs. 

Data also indicates that there are specialisation patterns whereby certain medicines may no 
longer be produced in  the EU due to cost pressures. A MundiCare Report122 finds that two 
thirds of the currently valid CEPs are held by Asian manufacturers. For 93 out of the 554 APIs 
with valid CEPs considered in the analysis, there is no European production at all. Furthermore, 
for more than half of the APIs that are placed in the EU market, there are only between 1 and 5 
manufacturers being CEP holders.  

Still,  European  manufacturers  maintain  their  key  position  as  regards  specific  (high-end) 
APIs  with  low  production  volumes  and  complex  production  processes.  According  to 
EudraGMDP, Member States with the highest number of registered manufacturing sites are Italy 
(185),  France  (149),  Germany  (92),  Spain  (87)  and  Poland  (84).  European  APIs  producers  are 
reputed  for  the  highest  quality  and  maintain  an  important  share  in  the  global  market.123  Italy 
followed by Spain are the largest producers of generic APIs in Europe. They both export more 
than  95%  of  their  production.124  Production  of  APIs  in  Europe  is  subject  to  the  most  stringent 
environmental  regulations  and  is  well  known  for  its  high  quality.125  These  together  with 
relatively high energy prices increase the cost of APIs production in Europe.  

On a global scale, China holds a strong APIs position in antibiotics, antiviral, anti-bacterial 
and anti-inflammatory (pain-relief segment). India leads in the central nervous system (CNS) 
and  respiratory  segments.  China  and  India  both  have  strong  competitive  positions  in 
cardiovascular  and  oncology  segments.  However,  when  it  comes  to  serving  highly  regulated 
markets,  Italian  companies  keep  a  strong  competitive  position  in  all  therapeutic  segments  with 
the exception of antibiotics and the anti-infective sector. 

Trade data analysis  

An analysis of the EU’s API import volumes using the dependency indicators developed in 
chapter 2.2 points to an important level of concentration of extra-EU imports coming from 
a limited number of third countries. Applying the indicators developed in chapter 2.2.1 to the 

121 Proof of the quality of active pharmaceutical ingredients, used for drug approvals. It should be noted that CEPs 
are not mandatory and there are API manufacturers that do not have a CEP but are still authorized and selling their 
APIs. 
122 MundiCare (2020) for Progenerica  
123  One  third  of  US  finished  dosage  forms  of  APIs  comes  from  Europe  according  to  the  2019  FDA  Shortages 
Report, retrieved from www.fda.gov/drugs/drug-shortages/report-drug-shortages-root-causes-and-potential-solutions  
124  Italy  exports  almost  all  of  its  production  to  the  most  regulated  markets:  25.5%  to  Europe,  49.7%  to  North 
America and 15.3% to Japan 
125 Good manufacturing practice (GMP) describes the minimum standard that a medicines manufacturer must meet 
in  their  production  processes  to  assure  consistent  quality  for  the  final  product.  Independently  of  the  GMP 
requirements, the environmental legislation applies to the API manufacturing plants. 

63 

 
 
                                                           
extra-EU import volumes126 of APIs127 provides insights into the EU’s possible dependencies in 
the  area  of  APIs.  The  results  show  an  average  concentration  of  the  EU’s  import  volumes  of 
around 0.4, indicating that most imports come from only a few sources. In fact, around 80% of 
the EU’s total extra-EU import volume in APIs originates in five countries – China, US, United 
Kingdom,  Indonesia,  India  –  with  China  providing  around  45%  of  the  total  extra-EU  volume. 
Total extra-EU import volumes account for 53% of the EU’s total import value of APIs, while a 
large part of the EU’s total import volume of API originates in the EU (47%).  

In  addition,  while  data  shows  that  the  EU  has  capacity  to  produce  APIs,  there  are 
important  price  differences  between  imports  and  exports.  The  indicator  (also  developed  in 
chapter 2.2.1) on the substitutability of the extra-EU import volume of APIs with EU production 
(proxied by the total export volume of APIs), is characterised by an average of 1. This suggests 
that the volume of extra EU imports is equal to the volume of total EU exports of APIs. At the 
same  time,  in  order  to  understand  whether  the  EU  produces  the  same  types  of  products  as  the 
ones  imported,  the  price  differences  between  the  imports  and  exports  of  APIs  can  provide  an 
indication  (see  chapter  2.4).  These  show  important  differences  in  the  average  price  between 
imports  and  exports.128  Thus,  in  the  event  of  a  trade  disruption,  while  the  EU  might  have 
capacity to produce some APIs, the fact that it produces at a different price should be taken into 
account.  

Looking  at  the  extra-EU  APIs  imports  in  values  provides  complementary  information  to 
analyse  foreign  dependencies  and  shows  that  the  EU  is  dependent  on  different  third 
countries. The analysis of extra-EU import values of APIs allows to consider trade in high value 
and innovative products. Applying the dependency indicators to the EU’s import values of APIs 
shows an average concentration of around 0.5, suggesting that most APIs import values originate 
in a few sources. However, these main sources of imports are different with around 80% of the 
total  extra-EU import value of APIs coming from  four countries  – Switzerland, US,  Singapore 
and China – with Switzerland and the US at the top, each of them supplying the EU with around 
30% of the total  import  value. Moreover,  extra-EU import values  account  for less than half of 
total EU import value of APIs.  

Firm level data 

Examining  linkages  between  firms  along  the  supply  chain  can  shed  further  light  on 
potential  dependencies.  Pharmaceutical  companies  can  produce  APIs  themselves  or  they  can 
enter  into  business  relationships  with  Contract  Manufacturing  Organizations  (CMOs).  CMO 

126  Pharmaceuticals  can  be  divided  into  two  distinct  groups:  high  value  innovative/branded  medicines  (patent 
protected) and generic medicines. Generic medicines are traded at a significantly lower price than innovative ones. 
Analysing  trade  flows  in  values  gives  a  greater  weight  to  trade  in  innovative  medicines,  creating  a  bias  towards 
them. For this reason, analysing trade volumes provides a clearer illustration. At the same time, looking at trade in 
volumes gives a higher weight to blockbuster drugs that are traded in high volumes. 
127 For the purpose of this analysis, API products are identified following the methodology put forward in CEIPE 
(2020)  Key  Trade  Data  Points 
from 
https://www.efpia.eu/media/554792/key-trade-data-points-on-the-eu27-pharmaceutical-supply-chain.pdf  
128 The average price difference for APIs is 1, suggesting that on average the price of extra-EU imports for APIs is 
100% more different compared to the price of total exports (i.e. intra- and extra-EU exports). 

the  EU  Pharmaceutical  Supply  Chain 

retrieved 

on 

64 

 
 
                                                           
activities  cover  both  APIs  used  for  production  of  small  molecules  and  biological  medicines. 
Sourcing  from  CMOs  allows  optimising  resource  utilisation  and  managing  costs,  as  well  as 
ensuring supply continuity in case of disturbances in in-house production. CMOs can also take 
responsibility for the whole production process up to formulation. For these reasons, they have 
become an indispensable part in  the production of vaccines as many  developers (including big 
pharma  companies)  while  being  able  to  establish  in-house  manufacturing  for  products  in  an 
investigational phase, do not have sufficient capacities to deploy large scale production.129 

Table 1: Number of CMOs, by geographical location of headquarters (2019) 

Country ISO 

CN 

IN 

KR 

EU 

US 

TW 

JP 

CH 

GB 

Other 

Total 

All 
CMO 

102 (23) 

90 (56) 

40 (12) 

32 (3) 

31 (9) 

28 (14) 

19 (3) 

7 (5) 

6 (1) 

23 (11) 

Biologics 
CMO 

CMO supplying EU 
companies 

CMO with 
EU GMP (*) 

4 (0) 

1 (0) 

13 (3) 

8 (1) 

9 (4) 

3 (2) 

2 (1) 

0 

1 (0) 

1 (1) 

12 

14 

5 

22 

17 

5 

4 

5 

4 

5 

36 

43 

10 

2* 

5 

2 

7 

5 

1 

5 

378 (137) 

43 (14) 

93 

116 

Source: Based on FactSet and EudraGMP database 
Notes: (*) Only sites located in third countries are considered. 
There are 378 firms  that can be classified  as CMOs  in the firm-level database  FactSet130, 
the majority of which are located in China or India. This sample includes biopharmaceutical 
conglomerates  such  as  Pfizer  or  Merck,  as  well  as  specialized  companies  such  as  Zhejiang 
Huahai  Pharmaceutical  or  Samsung  BioLogics.  Table  1  provides  an  overview  of  the 
geographical locations of the headquarters of these companies. Half of them are based in China 
and India, with China ranking first. However, when specialised firms are considered131, India is 
in  the  lead  with  56.  Only  three  EU  based  firms  specialise  in  Contract  Manufacturing  services. 
This confirms the leading role of China and India in the production of APIs.132  

129 Roots analysis (2019) Vaccine Contract Manufacturing Market (2nd Edition), 2019-2030  
130  See  Box  in  the  Annex  for  details  on  this  data  source.  The  data  relies  on  FactSet’s  Revere  Business  Industry 
Classification  System  (RBICS)  classification  and  includes  companies  that  produce  intermediate  and  active 
ingredient  including  large  molecules  of  small  compounds  including  biological  products  (antibodies,  proteins  or 
generic material) used in the production of biological medicines. 
131 A firm is considered specialized, if it derives more than two thirds of its revenues from Contract Manufacturing 
services. 
132 The main limitation of FactSet data is that it covers mostly listed and larger companies. As a result, the coverage 
of SMEs is  not thorough enough to ensure that  the  scale of production in the EU is appropriately reflected, since 

65 

 
 
                                                           
 
When it comes to biological products, other countries appear to play an important role. The 
second  column  in  Table  1  shows  the  number  of  CMOs  supplying  biological  products.  The 
number of companies is smaller as this part of industry is still relatively young. Here developed 
countries are taking the lead, including South Korea, EU Member States and the US.  

Looking specifically at CMOs with a European GMP certificate again appears to confirm 
the important role of China and India as suppliers to Europe. The third column shows the 
number of CMOs that supply to EU based pharmaceutical companies. It is important to note, that 
while only a few companies located in China and India are supplying EU-based pharmaceutical 
companies  it  could  be  that  the  FactSet  data  does  not  capture  all  links  between  companies.  For 
this  reason,  the  last  column  checks  how  many  of  FactSet  CMOs  have  a  European  GMP 
certificate  confirming  that  these  are  smaller  than  the  actual  number  of  CMOs  and  highlighting 
again the important role of China and India. 

Graph 27: Supplying structure of major EU-based CMOs (2019) 

Source: Based on FactSet database. 
Note: Blue and red circles denote, respectively, EU- and non EU-based companies. Customers are  identified by 
their  name  in  large  blue  case,  while  suppliers  are  identified  by  their  name  in  small  dark  case.  The  size  of  the 
circles  is  proportional  to  the  company’s  supplier  outdegree  (i.e.,  the  number  of  different  companies  that  it 
supplies). Darker connecting arrows denote a stronger relation between the two companies concerned (measured 
as the total number of links between them). 

many API producers in Europe tend to be SMEs. Still, the data indicates that CMOs in China and India have large 
scale production when compared to European counterparts. 

66 

 
 
 
                                                                                                                                                                                           
It appears that EU companies rely on both EU and extra EU based suppliers (Graph 27). 
EU customers have bilaterally specific suppliers that are not connected to one another. However, 
EU companies have some suppliers in common that also tend to be supplier with high outdegree 
(i.e., relevant for the industry globally and not just at the EU level). At the same time, it is not 
fully clear based on the available data sources to what extent the EU relies on critical capacities 
in extra-EU countries and firms in the different steps in the manufacturing process of APIs.  

c)  Way forward and relevant (ongoing) measures 

The  elements  of  information  presented  in  this  review  are  a  starting  point  for  a  broader 
assessment of the EU’s potential vulnerabilities and dependencies in pharmaceutical supply 
chains. The EU has a strong production capacity and it is not sufficiently clear to what extent the 
EU relies on capacities in extra EU countries across the different steps and inputs required for the 
manufacturing  of  APIs.  These  steps  are  not  sufficiently  identifiable  in  available  data  sources. 
Furthermore,  there  is  no  pre-established  list  in  the  EU  of  essential  APIs  that  would  allow  to 
narrow the assessment to a specific set of critical medicines.133 It is essential to determine critical 
products,  relevant  from  the  point  of  view  of  public  health,  for  which  the  EU  does  not  have 
sufficient  capacity  to  produce.  In  this  respect,  further  analysis  would  be  needed  to  provide 
evidence on: 

  Which specific APIs, other key ingredients or technologies are critical?  
  What  is  the  share  of  medicinal  products  placed  on  the  EU  market  relying  on  key 

ingredients imported from a limited number of extra EU countries?  

  How many companies (in the EU and globally) rely on the same sources of supply? How 

does this affect resilience (at company, EU and global level)?  

  Which specific APIs, other key ingredients or technologies are of concern?  

Having a better understanding of vulnerabilities and potential dependencies in a first phase 
will  serve to put forward, in a second phase,  a set of possible  measures to strengthen the 
resilience of pharmaceutical supply chains and ensure the security of supply of medicines 
to patients in Europe. As announced in the Pharmaceutical Strategy for Europe, the European 
Commission  has  initiated  and  will  steer  a  structured  dialogue  initiative  with  and  between 
relevant  public  and  private  actors  of  the  pharmaceutical  supply  chain.  The  structured  dialogue 
will  first  focus  on  identifying  the  causes  and  drivers  of  potential  vulnerabilities,  including 
dependencies  in  the  often  global  and  complex  supply  chains  of  critical  medicines,  their  raw 
materials, APIs and intermediates. In the second phase, after closing knowledge gaps and gaining 
a better understanding of the current situation, the Commission will consider possible solutions 
to address issues identified. 

133 The WHO publishes a list of Essential Medicines containing the medications considered to be most effective and 
safe to meet the most important needs in a health system: https://list.essentialmeds.org/  

67 

 
 
 
 
                                                           
5.3 Li-ion batteries  

Technologies and products related to batteries are key to enable the EU’s green and digital 
transformation,  notably  also  in  the  area  of  mobility.  They  are  at  the  heart  of  the  European 
Green  Deal  that  sets  the  ambition  for  the  EU  to  ‘become  climate  neutral  by  2050’  and  ‘help 
companies become world leaders in clean products and technologies’. 

This  review  looks  more  in  detail  at  the  EU’s  dependencies  and  possible  vulnerabilities  in 
the strategic area of batteries as well as relevant ongoing actions to address them. Industrial 
Alliances, where proved well targeted, justified and efficient, emerged as an important tool that 
can be used in some specific sectors following the experience of the European Battery Alliance 
launched in 2017 to help address the lack of battery manufacturing capacity in the EU. 

a)  Context and possible weaknesses in the EU  

In 2018, the EU only had about 3% of the global production capacity of Lithium-ion (Li-
ion) battery cells, while China had about 66% and South Korea together with Japan and 
other Asian countries about 20%.134,135 While EU demand was  also  limited, in  the short and 
mid-term  reliance  on  imported  cells  or  batteries  could  have  made  it  more  difficult  for  EU 
industry (including automotive original equipment manufacturers) to obtain tailor-made cells and 
ensure security of supply. Other risks that were raised include increased costs of transportation, 
loss of part of the value, time delays, relinquished control on quality and limitations on design 
options.136 The supply of some relevant raw and processed materials were also identified as high 
risk, while a medium  level  of risk was  anticipated for the supply of some components. Due to 
some  of  these  considerations,  the  development  of  a  European  value  chain  for  Li-ion  cells  was 
identified as priority through the Commission’s Strategic Action Plan for Batteries.137 

While  there  are  different  battery  technologies,  Li-ion  is  a  key  component  in  a  range  of 
chemistries  largely  due  to  its  superior  performance  (e.g.  as  regards  energy  and  power 
densities)  compared  to  various  well-established  and  mature  battery  technologies.  The 
energy density of Li-ion batteries has increased significantly in recent years (by more than 300% 
since their commercialisation in 1991138). In addition, there is further potential for optimisation 
with  the  new  generation  of  Li-ion  batteries.139  An  additional  important  enabler  of  the  Li-ion 
battery technology’s significant market share growth is the rapid decrease of their cost in recent 
years  from  over  USD  1100/kWh  (Kilowatt  Hour)  in  2010  to  USD  156/kWh  in  2019.134,138  By 

action  n°7,  Declaration  of 

134 Tsiropoulos I., Tarvydas D., Lebedeva N. (JRC Science for Policy report and references therein): Li-ion batteries 
for mobility and stationary storage applications. Scenarios for costs and market growth, 2018 
135 Report on progress of clean energy competitiveness, COM(2020)953 
136  SET‐ Plan  key 
available 
and 
https://setis.ec.europa.eu/implementing-integrated-set-plan/batteries-e-mobility-and-stationary-storage-ongoing-
work 
137 https://eur-lex.europa.eu/resource.html?uri=cellar:0e8b694e-59b5-11e8-ab41-
01aa75ed71a1.0003.02/DOC_3&format=PDF  
138  L.  Trahey,  et  al:  Energy  storage  emerging:  A  perspective  from  the  Joint  Center  for  Energy  Storage  Research, 
2020 
139  Lebedeva,  N.,  Ruiz  Ruiz,  V.,  Bielewski,  M.,  Blagoeva,  D.,  Pilenga,  A.  (European  Commission):  Selected 
Advanced Lithium-ion, Post Lithium-ion and Non-Lithium-Ion Batteries Technology Development Report, 2020  

Implementation  Plan, 

Intent 

at: 

68 

 
 
                                                           
2023,  some  forecasts  suggest  that  average  prices  will  be  close  to  USD  100/kWh.140  The  USD 
100/kWh  point  has  traditionally  been  seen  as  the  point  at  which,  for  mobility,  electric  cars 
become competitive with their internal combustion engine equivalent. 

Access  to  relevant  raw  materials  is  a  key  element  when  considering  dependencies  and 
possible vulnerabilities in the Li-ion battery supply chain. Among the raw materials used in 
battery  manufacturing,  cobalt,  natural  graphite,  lithium,  fluorspar  and  phosphorous  are  in  the 
2020 list of critical raw materials. There is also research looking at silicon metal, titanium and 
niobium  (also  critical  raw materials) to  improve energy  density, durability  and safety in  future 
Li-ion battery types. OEMs, cell manufacturers and suppliers will likely compete globally with 
each  other  to  secure  their  battery  supply  chains  and  access  to  the  five  essential  battery  raw 
materials (lithium, cobalt, nickel, graphite and manganese). 

In  addition,  value  chains  of  other  materials  (in  particular  rare  earths  for  high-energy 
density permanent  magnets) are key to producing electric  motors with  the highest power 
densities.  In  some  cases,  access  to  these  raw  materials  may  be  at  risk  (for  example  due  to 
political  instability  or  export  restrictions),  or  challenged  by  the  prevalent  use  of  unethical  and 
unsustainable mining practices. For these reasons, access to raw materials was identified as one 
of  the  six  priority  areas  in  the  Strategic  Action  Plan  for  Batteries141  and  subsequently  in  2020 
when the European Raw Materials Alliance was launched. 

b)  Origin of vulnerabilities and recent progress made 

The EU is a major world market for electrical vehicles and consequently also for batteries. 
The  battery  represents  a  significant  share  of  the  total  cost  of  an  electric  vehicle.  Furthermore, 
batteries  are  also  increasingly  used  for  energy  storage  and  in  other  industrial  applications 
(machinery, power tools, forklifts, etc.).  

Graph 28: The worldwide battery market 

Source:  Reproduced  with  permission  from  Pillot  C.,  “The  rechargeable  battery  market  and  main  trends  2018-
2030”, Avicenne Energy, presentation at AABC Europe 2020, 13-16 January 2020, Wiesbaden, Germany.   

140 Source: Bloomberg 
141 COM(2018)293 

69 

 
 
 
                                                           
At  present  the  Li-ion  battery  technology  dominates  the  rechargeable  battery  market  in  value 
(Graph 28). With a compound annual growth rate over 15%, it is expected to break-even, also in 
volume,  with  well-established  and  mature  battery  technologies  (such  as  lead-acid)  in  the  near 
future.142 Driven by a rapidly growing demand in batteries for electric vehicles, Li-ion batteries’ 
global demand is projected to increase from about 90 Gigawatt hours (GWh) in 2016 to up to ca. 
800 GWh by 2025, exceed 2 000 GWh by 2030, and possibly reach up to 4 000 GWh by 2040 
under the most optimistic scenario.134,135 In Europe, demand is expected to be around 400 GWh 
by 2028.143 

As a result, future needs for raw materials are very significant, while the EU holds only a 
very limited level of production. Graph 29 shows the key players in the Li-ion cell supply chain 
in relation to global production. For batteries used in mobility and energy storage alone, the EU 
will need, compared to  the current  supply to  the  whole EU economy, 7-18 times more lithium 
and 2-5 times more cobalt in 2030, and almost 16-57 times more lithium and 3-15 times more 
cobalt  in  2050.145,144  At  the  same  time,  the  EU  produces  just  1%  of  all  battery  raw  materials. 
These volumes cannot satisfy now the European demand for Li-ion batteries. 

Graph  29:  Li-ion  batteries  –  an  overview  of  supply  risks,  bottlenecks  and  key  players 
along the supply chain 

Source: European Commission, JRC145  

Also  when  it  comes  to  processed  materials  and  components,  Asia  delivers  84%  while  the 
EU  again  has  only  a  relatively  small  share  (around  8-9%).  Furthermore,  the  low  level  of 
processed  materials  and  components  delivered  by  other  countries  (beyond  China  and  Japan) 

142 Pillot C.: The rechargeable battery market and main trends 2018-2030 (Avicenne Energy, presentation at AABC 

Europe 2020, 13-16 January 2020, Wiesbaden, Germany) 

143 COM(2019)176  
144 Cobalt: demand-supply balances in the transition to electric mobility 
(https://publications.jrc.ec.europa.eu/repository/bitstream/JRC112285/jrc112285_cobalt.pdf)   
145  European  Commission:  Critical  materials  for  strategic  technologies  and  sectors  in  the  EU  -  a  foresight  study, 
2020. Figures refer to the range between the low and the high demand scenario.  

70 

 
 
 
 
                                                           
provides very little margin for supply diversification. Finally, regarding battery cells themselves 
a similar high level of dependence on foreign imports (notably from China) was also identified. 

Recent investments in the EU 

As a response to these identified vulnerabilities, public and private investments have been 
mobilised at scale over recent years, in particular through the European Battery Alliance. 
These are expected to lead to a significant increase of Europe’s lithium  demand being supplied 
from  European  Union  sources  by  2025.  The  ambition  of  the  European  Commission  and  the 
European Battery Alliance is to have 15 gigafactories in Europe offering enough battery cells by 
2025  to  power  six  million  electric  cars  (around  360  GWh).146  Based  on  the  Transport  & 
Environment (T&E) monitoring of current battery production intentions, the EU could be around 
100 GWh above this target if the planned gigafactories come on schedule.   

Developers of next generation Li-ion battery technologies play a major role in generating 
new  investments  in  the  EU.  These  innovators  have  managed  to  attract  considerable  levels  of 
early and late stage venture capital (VC) investments as new technology developments emerged. 
About half of these are raised by US based companies, with the EU attracting around 40%. EU 
investments are mostly in Northvolt. While the majority of investors in EU projects are from the 
within  the  EU,  they  also  include  actors  from  the  US,  China,  South  Korea,  the  UK  and 
Switzerland147,148. The size of VC investments in Northvolt over the past 3 years is comparable 
to the investments in US start-ups of comparable scope since 2013.  

Firm level data analysis 

Looking at the currently established battery manufacturing companies in the EU, the pre-
eminence of Asian-based companies is quite important. Graph 30 shows the supply structure 
of the major manufacturers in the EU of heavy-duty and high-end batteries. Most manufacturers 
display  specific  links  with  suppliers,  with  a  limited  number  of  suppliers  simultaneously 
supplying  several  battery  producers.  Among  those,  there  are  Japanese  and  Korean  firms, 
although  the  vast  majority  are  Chinese  companies  (as  highlighted  in  the  circled  areas  of  the 
figure) which, considered collectively, seem to play a central  role in the supplying structure of 
the industry. 

146 See https://ec.europa.eu/commission/presscorner/api/files/document/print/en/speech_20_2202/SPEECH_20_2202_EN.pdf; 
https://www.transportenvironment.org/sites/te/files/publications/2021_02_Battery_raw_materials_report_final.pdf 
147  ICF  (commissioned  by  European  Commission):  Climate  neutral  market  opportunities  and  EU  competitiveness 
study, Draft  
148 Commission elaboration of Pitchbook data 

71 

 
 
 
 
 
 
 
                                                           
Graph  30:  Supplying  structure  of  major  manufacturers  of  high-end  and  heavy-duty 
batteries 

Source: Commission analysis based on FactSet supply chain data 
Notes:  Each  circle  represents  an  individual  company.  Circles  are  coloured  according  to  the  country  of  the  firm’s  headquarters:  EU  (blue), 
China (red), US (yellow), Japan and Korea (green), Taiwan (pink), rest of the world (grey). For easier readability, the names of the suppliers 
are  omitted,  only  the  customers  are named  in the  colour  of  their  country  of  origin.  The  size  of  the  circles  is proportional  to the company’s 
supplier outdegree (i.e., the number of different companies that it supplies). Darker connecting arrows denote a stronger relation between the 
two companies concerned (measured as the total number of links between them). 

Role of Research and Innovation 

Maintaining  the  leading  edge  in  the  quickly  growing  and  competitive  sector  of  batteries 
requires constant technological improvements and, hence, significant R&I effort. Research 
and innovation plays a key role in the area of batteries, with large ongoing efforts worldwide. A 
broad  range  of  applications  requires  a  variety  of  fit-for-purpose  batteries,  stimulating 
development  of  new  types  of  batteries.138,149  A  large  effort  worldwide  is  directed  towards 
research and development for various advanced Li-ion as well as post-Li and non-Li-ion battery 

149 Y.E. Durmus, et al: Side by Side Battery Technologies with Lithium‐ Ion Based Batteries, 2020 

72 

 
 
 
                                                           
technologies.138,139,150 For example, the evolution of peer reviewed scientific publications in the 
area  of  transport  electrification  in  recent  years  shows  an  increase  on  ‘battery  capacity’.  China 
and the  US  are leading  the research on this field with  Germany in  third  place  and  France also 
making the top 10 from the EU (Graph 31). 

Graph 31: Number of documents on battery capacity in the period 2010-2019 (left) and 
country of origin (right) 

Source: European Commission, JRC based on Scopus151 

Generally, Asian regions lead in battery research and innovation. This is the case concerning 
both  contemporary  Li-ion  as  well  as  advanced  Li-ion  such  as  ASSB,  post-Li-ion  such  as  Li-S 
and non-Li-ion (i.e. Na-ion and RedOx flow batteries139). 

At  the  same  time,  there  is  a  considerable  effort  in  R&I  by  EU  industry.  Batteries  and  e-
mobility receive the highest share (over a fifth) of private R&I investments in the Energy Union 
R&I priorities. Even though the EU ranks third in high-value patents among major economies, 
quite a way behind Japan and Korea, it does display specialisation in this topic – meaning that it 
has a larger share of patents in this field than the world average152 and thus an increased focus of 
efforts.  European  research helped  gaining a deep insight  into fundamental  aspects  of  advanced 
battery  technologies  (e.g.  underlying  reaction  mechanisms,  materials  properties,  interfacial 
processes, battery components safety, etc. as well as associated limitations).  

Batteries for electric vehicles is a research area currently attracting a number of projects 
with  significant  EU  funding.  Improving  the  driving  range  of  electric  vehicles  (EV)  is  a  key 
research  theme.  The  combination  of  the  Horizon2020  programme  and  the  preceding  Seventh 
Framework  Programme  (FP7)  contributed  over  EUR  310  million  with  support  to  research  and 
innovation  activities.  Actions  under  road  transport  electrification  include  support  for  local 
production of batteries and components as well as the development of electro-chemical systems 
for future high energy density electric batteries.  

Despite this progress in EU R&I efforts, it is key to ensure a systematic implementation of 
their  results.  Evidence  shows  that  R&I  results  may  not  have  been  fully  and  systematically 

150 ICF (commissioned by EC): Climate neutral market opportunities and EU competitiveness study, Draft  
151 www.scopus.com  
152 JRC SETIS research and innovation data https://setis.ec.europa.eu/publications/setis-research-innovation-data  

73 

0500100015002000FranceAustraliaIndiaCanadaUnited KingdomJapanSouth KoreaGermanyUnited StatesChinaNumber of documentsCountry or territory 
 
 
                                                           
implemented by the European battery sector, which raises concerns related to the potential loss 
of  Europe's  knowledge  base.136,139  For  example,  analysis153  of  EC-funded  projects  (FP7, 
Horizon2020) on developments and future needs within the scope of the Transport electrification 
STRIA  roadmap154  including  batteries  and  energy  management  systems,  shows  lithium-ion 
batteries with novel anode/cathode materials to have an overall low level of maturity. 

c)  Way forward and relevant (ongoing) measures 

Recognising  the  need  and  urgency  for  the  EU  to  develop  a  battery  value  chain,  the 
Commission  launched  the  European  Battery  Alliance  (EBA)  in  2017155  and  adopted  the 
Strategic Action Plan on Batteries (2018). Both have acted as a catalyst for major investments 
all along the battery value chain and already delivered some significant  results. The amount of 
investment across the electro-mobility value chain in Europe, in 2019 alone, reached €60 billion, 
which was 3.5 times that of China156. The vast majority of this is private investments, including 
investments from third country companies.  This has been invested into many projects across the 
value  chain  including  15  new  battery  cell  plants  being  built  across  Europe.  These  plants  will 
provide by 2025 enough cells to power at least 6 million electric vehicles. 

As  a  result,  while  production  of  batteries  for  electrification  in  transport  has  so  far  been 
dominated by companies in East Asia, notably Chinese companies, Europe may become the 
second (after China) manufacturer of the lithium-ion cells (batteries) by 2024. Compared to 
5.9% in  2019, Europe’s  share in the  global  Li-ion battery production  capacity  may increase to 
14.7% by 2024 and to 16.6% by 2029. 

Actions have also been put in place to strengthen R&I efforts. The technology and innovation 
platform of EBA – Batteries Europe157 – drives  the implementation of battery-related research 
and  innovation  actions  of  the  Strategic  Energy  Technology  (SET)  Plan136  and  the  Strategic 
Transport Research and Innovation Agenda158 and is tasked with coordination of R&I efforts at 
regional, national  and European levels.  A  range  of measures have been  put  in  place, including 
strengthening Horizon 2020 with additional funding for battery research; and preparing specific 
instruments for Horizon Europe, such as for example the European Partnership for an Industrial 
Battery  Value  Chain159  with  a  proposed  budget  of  EUR  925M,  including  a  long  term  research 

153  Tsakalidis,  A.,  van  Balen,  M.,  Gkoumas,  K.,  Marques  dos  Santos,  F.,  Grosso,  M.,  Ortega  Hortelano,  A.,  and 
Pekár,  F.:  Research  and  innovation  in  transport  electrification  in  Europe:  An  assessment  based  on  the  Transport 
Research and Innovation Monitoring and Information System (TRIMIS), 2020  
154  Strategic  Transport  Research  and  Innovation  Agenda  https://trimis.ec.europa.eu/stria-roadmaps/transport-
electrification  
155 https://ec.europa.eu/growth/industry/policy/european-battery-alliance_en Following discussions with Member 

States and industry, a report on the implementation of the EBA was adopted by the Commission in 2019 
(https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2019:176:FIN) 

156 InnoEnergy 
157 https://ec.europa.eu/energy/topics/technology-and-innovation/batteries-europe/about-platform_en#governance 
158 https://ec.europa.eu/info/research-and-innovation/research-area/transport/stria_en; 

https://ec.europa.eu/transport/sites/transport/files/swd20170223-
transportresearchandinnovationtomobilitypackage.pdf 

159 https://ec.europa.eu/info/horizon-europe-next-research-and-innovation-framework-programme/european-

partnerships-horizon-europe/candidates-climate-energy-and-mobility_en 

74 

 
 
                                                           
initiative  on  future  battery  technologies,160  and  continuing  support  to  projects  through  EIT 
InnoEnergy161. 

There are 5 main ongoing measures that will be a high priority in the short-term to secure 
the remaining objectives of the Battery Alliance.  

-  New legislative framework for batteries. On 10 December 2020 the Commission adopted its 
proposal  to  ensure  that  there  are  robust  sustainability,  safety  and  performance  requirements 
for all batteries placed on the EU market. This proposal is being discussed with the European 
Parliament and Council with the aim of it coming into force in 2022. This also provides legal 
and regulatory certainty for investments; 

-  Important  Project  of  Common  European  Interest  (IPCEI).  This  State  aid  instrument  has 
proved  to  be  a  key  tool  to  unlock  substantial  private  sector  investment  in  the  battery  value 
chain  that  would  not  have  happened  without  the  approved  Member  State  support.  In 
December  2019,  the  Commission  authorised  State  aid  for  the  first  battery  IPCEI  which 
involves  17  companies  spread  over  7  Member  States  and  a  range  of  innovative  projects  all 
along the value chain. The IPCEI decision authorised the granting of up to EUR 3.2 billion in 
state  aid  and  this  is  expected  to  leverage  a  further  EUR  5  billion  in  private  sector 
investments162. State aid for a second IPCEI has just been approved by the Commission. This 
IPCEI  involves  42  direct  participants  with  activities  in  12  Member  States163.  The 
Commission’s decision authorised the  granting  of up to  EUR 2.9 billion in  State aid  with  a 
further  EUR  9  billion  expected  in  private  sector  investments.  Both  will  be  critical  in 
delivering  beyond  state-of-the-art  innovation  across  the  batteries  value  chain  in  the  EU  and 
the Commission will be involved in the governance of both IPCEIs to monitor progress and 
ensure the original objectives are delivered; 

-  Strengthening  the  resilience  of  the  EU  critical  raw  materials  value  chains.  In  September 
2020,  the  Commission  launched  the  Action  Plan  on  Critical  Raw  Materials  to  secure  the 
European  Union's  sustainable  supply  of  critical  raw  materials  as  well  as  the  European  Raw 
Materials Alliance. Both initiatives will be high priorities in the coming years, with significant 
importance for the EU battery sector; 

-  Ensuring effective implementation of Horizon Europe funding of battery research;  Under 
Horizon  Europe,  all  battery-related  research  activities  will  be  implemented  through  a  co-
programmed partnership set up between the Commission and an association bringing together 
industrial and research stakeholders from across Europe. This partnership (labelled Batt4Eu) 
will receive up to €925M of EU funding, to be implemented through annual calls and with the 
aim  of  addressing  the  research  and  innovation  goals  set  out  in  a  Strategic  Research  and 
Innovation  Agenda  (SRIA)  jointly  drafted  and  agreed  between  all  partners.  The  ring-fenced 
budget and SRIA create stability and predictability for the sector, thus de-risking speculative 
research  activities  and  creating  a  pathway  towards  bringing  innovations  to  the  market.  The 

160 https://battery2030.eu/ 
161 https://investmentround.innoenergy.com/ 
162 Press release IP/19/6705, “State aid: Commission approves €3.2 billion public support by seven Member States 
for a pan-European research and innovation project in all segments of the battery value chain”, December 9, 2019.  

163 https://ec.europa.eu/commission/presscorner/detail/en/ip_21_226  

75 

 
 
                                                           
progress  and effectiveness  of Batt4EU will  be centrally  monitored through  annual  reporting 
on  mutually  agreed  KPI’s,  and  its  partnership  board  (composed  of  Association  and  EU 
delegates) is in charge of strategic orientation and technical coordination; and 

-  Developing a European skilled battery workforce164. In order to ensure that the battery sector 
has  access  to  an  appropriately  skilled  workforce  to  support  its  growth,  the  Commission  has 
funded  a  4  year  Erasmus  +  project  (ALBATTS)  to  develop  a  strategy  to  identify  the  skills 
needed  for  the  sector  and  to  develop  training  courses  and  related  initiatives  to  meet  the 
challenge. This compliments the Erasmus+ project DRIVES looking at the skill needs for the 
automotive  sector  as  a  whole  (due  to  be  completed  by  the  end  of  2021)  and  the  recently 
launched industry-led Automotive Skills Alliance165 supported under the Commission’s Pact 
for  Skills  initiative  (expected  to  be  operational  by  the  end  of  2021  on  the  back  of  pilot 
regional skill programmes planned for 2021).  

The  Commission  will  continue  to  pursue  the  implementation  of  the  Strategic  Action  Plan  on 
Batteries, especially in the areas mentioned above and to further promote additional investments 
in  the full value chain. The Action Plan is  also complementary to  other policies to  support the 
Green Deal ambitions of the Commission including the ongoing review of the CO2 standards for 
vehicles (cars/vans/trucks) that will impact directly on the demand for batteries. 

164 In the labour market, although some traditional jobs will be lost, the development of the battery production could 
create  a  positive  effect.  The  Impact  Assessment  for  the  battery  legislation  estimated  that  1  GWh  creates  between 
100-150 direct jobs and 100 - 500 indirect jobs. This would translate to 60,000  – 90,000 direct jobs and 60,000 – 
300,000 indirect ones. 
165 https://automotive-skills-alliance.eu/  

76 

 
 
 
 
                                                           
5.4 Hydrogen  

a)  Context and possible weaknesses in the EU   

The importance of hydrogen builds on its attributes and it has a wide range of applications 
across  ecosystems.  Hydrogen  is  the  most  abundant  and  lightest  of  the  elements,  having  at  the 
same  time  odourless  and  nontoxic  characteristics.  In  addition,  it  has  a  high  energy  content  per 
unit  mass  and  it  can  be  readily  produced  at  an  industrial  scale.  Hydrogen  is  not  found  free  in 
nature  and  must  be  “extracted”  from  diverse  sources  such  as  fossil  energy,  renewable  energy, 
nuclear energy and the electrolysis of water. Consequently, a separate energy source (electricity, 
heat or light) is required to “produce” (extract or reform) the hydrogen. It can be transported as a 
gas by pipelines or in liquid form by ships, similar to liquefied natural gas (LNG). Hydrogen use 
today  is  dominated  by  the  chemical  and  refining  industries  but  it  has  applications  in  various 
ecosystems  of  the  economy  including  mobility,  renewables,  electronics,  construction,  energy 
intensive industries, defence or agrifood.  It is  used in  applications in  the metal  production and 
fabrication, methanol production, food processing and electronics sectors.  

Renewable  or  low-carbon  hydrogen166  can  be  used  much  more  widely  than  its  current 
applications and it can help to tackle critical challenges related to the decarbonisation and 
competitiveness  of the industry.  Renewable and low-carbon hydrogen production and related 
technologies and goods such as ammonia offer ways to decarbonise a range of sectors, including 
long-haul transport, chemicals and iron and steel, where it has been challenging to meaningfully 
reduce  emissions.  In  this  regard,  renewable  and  low-carbon  hydrogen  production  and  related 
technologies  are key enablers for the decarbonisation of EU energy, industries and mobility  as 
they  can  replace  or  decarbonise  fossil  fuels.  Hydrogen  is  also  an  option  for  storing  renewable 
energy  for  long  periods  and  in  large  quantities,  and  it  is  relatively  inexpensive  to  deliver  by 
pipelines, making it an enabler for significant expansion of the renewables capacities in the EU. 
The importance of hydrogen is therefore twofold as it fosters the decarbonisation of the economy 
but  also  the  competitiveness  of  manufacturing  industries,  provided  that  renewable  and  low-
carbon  hydrogen  can  be  sustainably  offered  at  competitive  prices.  The  EU’s  consumption  of 
hydrogen  today  is  around  10  Mt,  and  it  is  primarily  produced  on  the  basis  of  natural  gas. 
Virtually all of the EU’s hydrogen consumption is currently produced within the EU. 

While  current  production  of  hydrogen  mainly  relies  on  the  use  of  fossil  fuels,  there  is  a 
need  to  move  to  renewable  and  low-carbon  hydrogen.  Around  70  Mt  of  hydrogen  are 
currently  being  produced  globally.  More  than  70%  of  the  hydrogen  produced  worldwide  is 
produced  by  the  steam  reforming  of  methane  or  natural  gas,  which  is  currently  the  cheapest 
source.  The  remaining  hydrogen  is  generated  by  gasification  of  coal,  oil  reforming  or 
electrolysis.  While  electrolysis  currently  accounts  for  only  0.1%  of  global  hydrogen 
production,167 there is significant scope for this technology to provide more renewable hydrogen. 

166  Renewable  hydrogen  refers  to  hydrogen  produced  by  electrolysis  based  on  renewable  power;  low-carbon 
hydrogen encompasses fossil-based hydrogen with carbon capture and electricity-based hydrogen, with significantly 
reduced full life-cycle greenhouse gas emissions compared to existing hydrogen production. 
167 IEA: The Future of Hydrogen, 2019 https://www.iea.org/reports/the-future-of-hydrogen  

77 

 
 
                                                           
The  EU  is  a  technology  leader  in  several  clean  hydrogen  technologies,  but  it  depends  on 
imports of raw materials for key components (such as electrolysers and fuel cells) as well as 
the supply of renewable energy. Critical raw materials, especially platinum group metals  and 
liquid electrolytes, are used for their catalysts. Therefore, general risks associated with the supply 
of raw materials (see chapter 5.1) also apply to the supply chain of hydrogen. In addition, given 
that renewable energy is the source for renewable hydrogen production, the supply of abundant 
and  affordable  renewable  energy  is  a  constraint  for  the  development  of  clean  hydrogen 
applications.  The  Hydrogen  strategy  for  a  climate-neutral  Europe  estimates  that  it  will  be 
necessary  to  connect  80-120  GW  of  solar  and  wind  energy  production  capacity  to  the 
electrolysers  to  provide  the  necessary  electricity.  Furthermore,  risks  associated  with  raw 
materials used in other renewable technologies could also have an impact on the deployment of 
these hydrogen technologies.  

Systemic risks arise from the need of some sectors (e.g. industrial hydrogen users and the 
mobility  sector)  to  have  large  and  reliable  supply  available.  Given  these  needs,  lack  of 
renewable  and  low-carbon  hydrogen  supply  in  the  short  term  and  lack  of  infrastructure  are 
considered as important risks that delay investment decisions.  

b)  Origin of vulnerabilities  

As of today, Europe is a global leader of electrolysis technologies, from components supply to 
final integration capabilities. Roughly half of electrolyser manufacturers are in Europe, including 
most  of  the  larger  ones.168  Europe  has  particular  strengths  in  key  components  of  fuel  cells  for 
transport applications,  such as catalysts, membrane electrode assemblies  (MEA), bipolar plates 
and gas diffusion layers. Many companies also offer hydrogen handling solutions and hydrogen 
refuelling stations.169 

Nevertheless,  there  are  some  technology  and  regulatory  gaps  linked  to  green  hydrogen 
production. For example, vulnerabilities in electrolysers mostly relate to manufacturing scale-up 
and  supply  chain  optimisation;  large-scale  manufacturing  capacity  is  not  yet  built  for  most 
producers.  The  high-pressure  hydrogen  storage  is  one  of  the  existing  solutions  for  on-board 
transport  applications.  However,  Europe  lacks  in  production  of  high-quality  carbon  fibre,  an 
important  material  used  in  the  manufacture  of  compressed  hydrogen  tanks,  which  is  mainly 
imported from Asia. 

The Commission has established targets for 6 GW renewable electrolyser capacity by 2024 
and 40 GW renewable electrolyser capacity by 2030, compared to less than 1 GW in 2020. 
This massive scale up of renewable hydrogen production will require the access to abundant and 
affordable  renewable  electricity,  large-scale  manufacturing  of  electrolysers  and  relevant 
components and materials.  

168 E4tech (UK) Ltd for FCH 2 JU in partnership with Ecorys and Strategic Analysis Inc.: Study on value chain and 
manufacturing  competitiveness  analysis  for  hydrogen  and  fuel  cells  technologies  (FCH  contract  192,  Evidence 
report), 2019 – SWOT analysis, p. 114 
169  E4tech:  Study  on  value  chain  and  manufacturing  competitiveness  analysis  for  hydrogen  and  fuel  cells 
technologies (Summary report), 2019 

78 

 
 
                                                           
Graph 32: Relevant raw materials used in fuel cells 

Source: European Commission, Critical materials for strategic technologies and  sectors in the EU  - a foresight 
study, 2020 

Around 30 raw  materials  are needed for producing fuel cells, electrolysers and hydrogen 
storage technologies. Of these materials, 13 materials are deemed critical for the EU economy 
according  to  the  2020  CRM  list.  Most  of  the  critical  raw  materials  are  in  the  catalysts,  with 
platinum  representing  around  half  of  the  cost  of  a  fuel  cell  stack.  South  Africa  is  the  main 
producer of platinum in the world, followed by Russia and Zimbabwe. While currently the EU 
still has a relatively small production of fuel cells and electrolysers, risks related to the specific 
raw materials will become more apparent if large-scale manufacturing is to be developed in the 
EU.  

Graph 33: Fuel cells and Hydrogen technologies: an overview of supply risks, bottlenecks 
and key players along the supply chain 

Source: European Commission, Critical materials for strategic technologies and sectors in the EU - a foresight study, 
2020 

79 

 
 
 
 
Europe  is  a  major  supplier  of  processed  materials  for  fuel  cells  (40%),  followed  by  the 
United  States  (28%),  China  (10%)  and  Japan  (7%).  At  the  same  time,  for  four  particular 
materials 
(PFSA,  perfluorosulfonic  acid),  carbon  cloth/paper;  and 
nanomaterials  and  carbon  nanotubes)  Europe  produces  between  15%  and  20%  of  the  global 
supply, which could be expected to be insufficient to satisfy European demand.170 

(CFCs,  polymers 

c)  Way forward and relevant (ongoing) measures 

A combination of measures are ongoing in the area of clean hydrogen. These measures aim 
to secure access to abundant decarbonised electricity and to the right quantity and quality of raw 
materials, as well as to build industrial capacities along the full hydrogen value chain, including 
components,  assemblies  and  applications  in  downstream  sectors.  Several  EU  funding 
programmes contribute to the development of the hydrogen value chain, such as the future Clean 
Hydrogen  partnership  under  Horizon  Europe  (building  on  the  work  of  the  Fuel  Cell  and 
Hydrogen  Joint  Undertaking),  the  Innovation  Fund,  the  Connecting  Europe  Facility,  the 
European Regional Development Fund and the Just Transition Fund. 

The  Commission  has  set  up  the  European  Clean  Hydrogen  Alliance  announced  in  the 
March  2020  Industry  Strategy.  It  will  deliver  an  investment  and  project  pipeline  that 
implements  the  EU  Hydrogen  Strategy.171  The  Alliance  will  propose  concrete  projects  that 
deliver  a  robust  foundation  for  the  hydrogen  value  chain,  starting  from  investments  in 
renewables and hydrogen infrastructure and covering several hydrogen use sectors (i.e. industrial 
use, buildings, mobility and energy). The Alliance is also looking at bottlenecks and framework 
conditions to contribute to a favourable investment climate that supports EU policies.  

In  this  context,  there  are  ongoing  discussions  involving  several  Member  States  on  the 
design of one or more potential IPCEIs. It should be noted that, beyond IPCEI, other State aid 
rules  may  be  applicable  to  projects  in  the  hydrogen  value  chain,  notably  the  Environmental 
protection and Energy Aid Guidelines, which are currently being reviewed. The combination of 
these  actions  will  contribute  to  launch  simultaneously  the  complete  value  chain,  bringing  in 
stakeholders that alone could not implement projects due to the integrated nature of the hydrogen 
value chain.  

In  addition,  the  Commission  is  promoting  cooperation  with  neighbouring  countries  to  increase 
supply  of  renewable  hydrogen  and  derivatives.  Global  cooperation  on  research  and 
development,  standards  and  definitions  of  clean  hydrogen  will  be  essential  for  the 
emergence of a global, rules-based market for hydrogen that contributes to a secure, sustainable 
and competitive hydrogen supply for the EU market.  

As  regards  possible  dependencies  with  a  potential  impact  on  relevant  clean  hydrogen 
technologies  such  as  fuel  cells  and  electrolysers,  ongoing  actions  in  the  area  of  raw 
materials  are  of  key  importance.  The  actions  under  the  Raw  Materials  action  plan  and  the 

170  European  Commission:  Materials  dependencies  for  dual-use  technologies  relevant  to  Europe's  defence  sector, 
2019 
171 COM(2020)301 

80 

 
 
                                                           
European  Raw  Materials  Alliance  (see  chapter  5.1)  are  of  key  importance  to  mitigate  risks  of 
access  to  raw  materials  relevant  for  these  technologies.  They  include  increased  recycling, 
stronger  intra-EU  supply  capacities  and  diversification  of  foreign  supply.  Furthermore,  some 
additional technology specific options are relevant for these hydrogen technologies.   

There is an ongoing effort to reduce the quantity of raw materials with supply risk needed 
for the production of fuel cells and electrolysers. Due to the high cost of platinum, the industry 
has already successfully reduced the quantity of platinum needed in some applications. Further 
efforts  are  needed  to  minimise  or  completely  eliminate  the  need  for  various  critical  raw 
materials. In addition, dependencies on supply of specific raw materials are effectively reduced 
by substituting them with raw materials with lower risks of permanent or temporary disruptions 
in  supply.  For  example,  platinum  could  at  least  partially  be  replaced  by  palladium  and  other 
materials in fuel cells. Finally, to mitigate short- to medium-term supply disruptions in the event 
of a crisis, stockpiling options could also be examined at EU or Member State level, supporting 
corporate strategies to mitigate risks. 

In  addition,  reduced  needs  for  critical  raw  materials  can  also  be  achieved  by  in  parallel 
developing  alternative  technologies.  Different  technologies  could  be  applied  based  on  best 
technical  suitability,  raw  material  supply  and  cost.  While  flexibility  is  limited  in  some 
applications (like in on-board mobile solutions), other sectors could utilise a wider selection of 
technologies that rely on a different combination of raw materials. 

81 

 
 
 
 
5.5 Semiconductors 

Semiconductor  chips  are  the  basic  building  blocks  of  all  digital  products  and  services. 
Semiconductor components, among them processors, are today embedded in almost everything, 
from  cars,  aircraft  and  medical  equipment  to  cell  phones,  networks  and  supercomputers.  They 
determine the characteristics of the products into which they are embedded – including security, 
privacy, energy performance and safety – shaping how Europe’s green and digital transition will 
unfold.  In  essence,  they  underpin  the  digital  value  chain.  This  review  looks  in  more  detail  at 
possible dependencies and vulnerabilities that the EU faces in the area of semiconductors as well 
as relevant possible (ongoing) measures.  

a)  Context and possible weaknesses in the EU   

For  decades  the  semiconductors  industry  has  been  driven  forward  by  the  capability  to 
squeeze  an  ever-increasing  number  of  transistors  into  a  given  area  of  semiconductor 
material.172 Miniaturisation of feature sizes is at the core of both faster and more power-efficient 
microprocessors  used  in  communications,  consumer  electronics  and  computing,  including 
supercomputing.  The  most  advanced  chips  in  production  in  2020  are  at  5nm.  PCs  and  cell 
phones, which account for the highest market volume across the whole electronics sector, are the 
main  drivers  of  miniaturisation.  High  production  volumes  in  these  market  segments  help  to 
sustain the high cost of technology development. 

Over  time,  leading-edge  chips  have  become  more  difficult  and  more  costly  to  produce. 
Designing and developing the most technologically advanced chips today can cost up to 1 billion 
EUR, while a leading-edge fabrication plant (“Fab”) requires investments up to 20 billion EUR. 
This has led to a consolidation in the number of leading-edge chip manufacturers. In 2020, 
only  2  companies,  TSMC  (Taiwan)  and  Samsung  (S.  Korea)  manufacture  chips  at  5nm.  Intel 
(US)  announced  that  its  7nm  technology  has  been  delayed  until  2022,  illustrating  the 
technological  complexity  of  chip  fabrication  at  such  dimensions.  Europe  has  no  foundries  that 
offer manufacturing of components with feature sizes below 22nm. 

Energy  performance  of  a  system  is  highly  dependent  on  the  energy  efficiency  of  the 
semiconductor chip(s) inside. The emergence of AI edge processing  and applications such as 
highly automated driving combined with car electrification will generate huge amounts of data. 
Processing such data at the speed needed to capture widely its benefits will require an important 
shift  in  the  way  we  conceive  and  produce  electronic  components  and  systems.  Scaling  up 
computing performance with today’s component technologies will however make computing one 
of  the  biggest  energy-consuming  activities.  In  fact,  all  these  upcoming  and  future  applications 
will require highly performant processor chips that exhibit radically lower energy consumption.  

172 This progressive miniaturisation of feature sizes has come with a corresponding increase in performance, most 
notably a doubling of computing speed every two years (Moore’s Law).  Today’s most advanced microprocessor 
chips  contain  some  10s  of  billions  of  transistors  and  can  process  10s  of  trillions  of  operations  per  second.  The 
generations  of  technologies  are  defined  by  the  critical  dimension  of  the  transistors,  which  thanks  to  advanced 
photolithographic techniques, are on the order of some few nanometres (nm). 

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Bringing AI to the device: the US industry has set its sights on the burgeoning edge-AI market 
as  illustrated  with  recent  mergers.173  Notable  among  emerging  trends  in  AI  based  on  different 
technologies are neuromorphic and quantum computing.  

The  biggest  demand  for  semiconductors  comes  from  outside  the  EU.  In  particular  China 
represents  more  than  50%  of  today’s  semiconductor  market  and  as  such,  Chinese  demand 
significantly  supports  and  drives  the  growth  of  the  semiconductor  industry  worldwide.  The 
Covid-19  outbreak  has  sped  up  the  digital  transformation  and  led  to  short-term  shifts  in 
the  demand  across  sectors.  On  the  one  hand,  the  demand  for  cloud/data  centre  services, 
“working from home products” and medical devices has increased, on the other, lock-downs and 
loss of income reduced the demand for cars, mobile phones and consumer electronics.174  

The  development  and  fabrication  of  chips  has  been  increasingly  subject  to  massive 
subsidies. In order to reduce its dependence on imports, notably from chips made in Taiwan, and 
more  generally  from  US-developed  technology  which  can  be  subject  to  unilateral  US  export 
control restrictions, China has set itself the ambition of reaching 70% autonomy in chip-making 
by 2025 with the revenues of its home-grown chip industry growing to USD 305 billion by 2030. 
To this end it has allocated USD 150 billion over 10 years under the “Made in China 2025” plan 
to  build  up  research  excellence  and  manufacturing  capacity.  Such  measures  have  served  to 
support local industrial ecosystems. In the wake of the COVID-19 crisis, the US has responded 
to China’s bid for independence with a USD 25 billion plan over 5 years to support investments 
in  R&D  and  manufacturing,  to  reduce  its  dependencies  on  other  parts  of  the  globe,  notably 
Taiwan.175 Meanwhile, the South Korean government announced a plan to spend KRW 1 trillion 
(USD 869 million) to develop AI chips through 2029.176 The ICT ministry plans to put the next-
generation  chip  on  the  Korean  New  Deal  project  list  for  KRW  20  trillion  (USD  17,38  billion) 

173 Intel, leader in CPUs, acquired Altera (USD 17B) for their FPGAs and are now introducing their discrete GPUs, 

such as Xe, also for AI in data centres.  
Nvidia,  leading  in  programmable  GPUs  and  AI,  is  planning  to  acquire  ARM  (USD  40B).  GPUs,  initially 
conceived to process images, are now being widely used for AI acceleration to speed up processes such as neural 
network and machine learning tasks. ARM has the IP needed to excel in CPUs (and low-power AI at the edge).  
AMD, the challenger in both CPUs and GPUs, has acquired Xilinx (EUR 35B). The acquisition will reinforce its 
position  as  a  credible  alternative  for  the  datacentre/AI  market.  Xilinx  also  offers  SmartNIC  for  network 
acceleration, which for AMD can be another asset for data centres in view of Intel’s acquisition of Infiniband and 
Nvidia’s acquisition of Mellanox. Intel acquired Altera end of 2015; the announcements by Nvidia and by AMD 
were in 2020. 
Worth  noting  is  the  fundamental  difference  between  ARM  and  Intel  (i.e.  X86)  approaches  to  CPUs/processing 
units and hence their different application markets. The former focuses on low-power consumption and the latter 
on advanced performance, which in turns leads to more power consumption and higher use of silicon space. The 
low-power approach of ARM has allowed ARM to offer the best balance of performance and energy efficiency for 
mobile devices including chips for cell phones and laptops.  

impacts  &  practical  actions 

174  Accenture  (2020)  Semiconductor  Companies:  Business  Resilience  in  the  Wake  of  COVID-19  A  guide  to  the 
disruptive 
from 
https://www.accenture.com/_acnmedia/PDF-126/Accenture-High-Tech-Covid-19-SEMICONDUCTOR-Final.pdf  
175 In fact the plan earmarks 12 B$ to attract TSMC to build a 5nm fabrication facility in Arizona with construction 
planned for 2021 and production for 2024. At the invitation of Japanese government TSMC is planning to set up a 
joint advanced packaging and testing plant in Japan. https://focustaiwan.tw/business/202101050014  

semiconductor  companies 

retrieved 

take, 

for 

to 

176 https://techcrunch.com/2020/10/13/south-korea-pushes-for-ai-semiconductors-as-global-demand-grows/ 
https://en.yna.co.kr/view/AEN20201012007500320  

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state aid to help attract more financial support, on top of KRW 70 billion from another fund tied 
to  the  semiconductor  industry.  The  Japanese  Ministry  of  Economy,  Trade  and  Industry  has 
invited Taiwan Semiconductor Manufacturing Co. (TSMC) to set up a joint advanced integrated 
circuit  packaging  and  testing  plant  in  Japan  to  address  Japanese  customers  in  power  solutions, 
automotive, wind energy and industrial machinery.177 Geopolitical  tensions and the lack of a 
level playing field harm the competition in this area. 

Europe’s semiconductor footprint is  small compared to other regions in particular in the 
digital sector. Compared to its economic weight (close to 23 % of world GDP), the EU shares of 
global  revenues  for  semiconductor  chips  is  ~10%  overall  and  ~6%  for  the  computing  and 
communication  segments.  Limited  existing  production  capacity  to  serve  future  demand,  high 
entry  costs  and  lack  of  a  level  playing  field  (including  inadequate  access  to  financing)  and 
different regulations in extra EU regions are threatening the EU firms’capacity to fully seize the 
opportunity  to  capitalise  on  the  digital  transformation.  Therefore,  the  digital  sector  will  be  an 
important area for Europe to focus on in order to reduce dependencies in the future and to fully 
seize the opportunity of the digital transformation.  

b)  Origin of vulnerabilities 

The  semiconductor  industry  is  a  global  industry  based  on  ever  shorter  cycles  of  very 
advanced technologies at all phases of the value chain with long learning cycles. The supply 
chain stretches from chip design, semiconductor manufacturing to test, assembly and packaging 
(also referred to as back-end processes), before reaching end-user companies, which integrate the 
chips  into  their  products.  Materials,  equipment  and  related  services  and  tools,  including 
electronic  design  automation  tools  and  functional  blocks  or  IP  blocks,  enable  design  and 
manufacturing.  The  semiconductor  supply  chain  is  well-integrated,  with  no  single  country  or 
company dominating all the different stages of the value chain (Graph 35). 

Graph 34: The semiconductor value chain 

177 https://focustaiwan.tw/business/202101050014  

84 

 
 
 
 
                                                           
R&D  is  an  integral  part  of  the  design,  testing  and  deployment  of  new  chip  technologies 
including  developing  advanced  production  processes.  Chipmakers  typically  invest  about  a 
third of their revenues in R&D and equipment. Because it is so capital intensive, aspects such as 
access  to  funding  and  market  capacity  (considering  actual  and  future  demand  for  goods  & 
services) are vital to sustain technology development. 

Graph 35: No single country or company dominates all of the stages of the value chain 

Source: IDC Manufacturing Insights 

Development  and  production  of  semiconductor  components  in  Europe  is  concentrated 
mainly  in  Germany,  France,  Italy,  the  Netherlands,  Austria,  Belgium  and  Ireland.  An 
extensive ecosystem of companies distributed across Europe supplies materials, equipment and 
related  services  for  semiconductor  manufacturing.  The  major  EU  headquartered  suppliers 
Infineon  (DE),  NXP  (NL),  ST  Microelectronics  (FR/IT)  and  Bosch  Semiconductors  (DE) 
operate  globally,  serving  OEMs  in  automotive,  industrial  automation,  security  and  healthcare 
(where  they  are  global  market  leaders)  as  well  as  aeronautics,  energy  production  and 
telecommunications. 

The different shares in revenues across the semiconductor value chain shed more light on 
where strengths and weaknesses in the EU semiconductor value chain lie (Graph 36). Europe 
has notable weaknesses in design and design automation tools178 as reflected in the small share 
of  EU-based  companies  in  “IP  /  electronic  design  automation”  and  “fabless”  chip  companies. 
These parts of the supply  chain  are mainly under US  proprietary control. Packaging, assembly 
and  testing,  and  chip  fabrication  are  located  mostly  in  Asia  (see  “semiconductor  assembly, 
testing  services”  and  “pure-play  foundry”).  Advanced  packaging  technologies  –  enabling 
integration of different functional components in single ‘chiplets’ – are increasingly important to 
address increasing power and energy efficiency needs that come with electrical vehicles on the 
one hand and the plethora of edge-computing applications driven by AI on the other. Europe is 

178 Chip design and electronic design automation environments enable the design of electronic devices and digital 
components. 

85 

 
 
 
                                                           
thus strongly dependent on the US for general design tools and on Asia for advanced chip 
fabrication. 

 Graph 36: Share of revenues per region across the semiconductor value chain 

Source: Gartner; IHS; Strategy Analytics; McKinsey 
Note: Chips design and electronic design automation tools are protected with intellectual property rights and often 
referred to as intellectual property (IP). 

The European electronic industry enjoys global leadership in innovation positions in power 
electronics,  sensors  and  advanced  chip-making  equipment.  The  ongoing  projects  under  the 
IPCEI  on  Microelectronics,  approved  in  December  2018,  have  played  an  important  role  in 
stimulating additional private investments in innovation and eventually also in manufacturing in 
the EU179, in particular for Automotive and IoT markets. Manufacturers of chips at leading-edge 
nodes  (TSMC,  Samsung,  Intel)  rely  for  their  technology  development  on  specific  EUV 
photolithography  machines  produced  by  a  unique  global  supplier,  notably  ASML  (NL),  which 
belongs to the European electronic ecosystem. ECSEL Joint Undertaking set up in 2014, which 
supported  close  to  80  research  projects,  was  instrumental  to  advance  equipment  technology 
integration  of  3nm  semiconductor 
development 
technology.180 

in  miniaturization 

the  pilot 

through 

As  set  out  above,  Europe  has  no  foundries  that  offer  advanced  manufacturing  of 
components  with  feature  sizes  below  22  nm  (necessary  for  memory  and  processor  chips) 
and therefore has to  rely on Samsung or TSMC  to  that end. Processors  are critical  enablers of 
growing importance in  data processing for communication, edge-AI components,  and high-end 
and general purpose computing. 

EU suppliers are strong in dedicated processors (micro-controllers) for embedded systems 
applications  in  automotive  (37%  global  market  share)  and  industrial  uses  including 
machinery (17% global market share). These markets are expected to grow significantly in the 
coming  years.  European  companies  are  strong  in  power  management  and  energy-efficient 

179  The technologies at focus in the approved IPCEI on Microelectronics are divided in 5 technology fields along 
the  microelectronics  value  chain,  namely  energy  efficient  chips,  power  semiconductors,  sensors,  advanced  optical 
equipment and compound materials. Automotive and IoT are the two main target markets.   
180 https://www.ecsel.eu/projects/pin3s   

86 

 
 
 
                                                           
semiconductor  technology  solutions  in  these  sectors.  The  EU  suppliers  have  currently  very 
limited  market  presence  in  generic  processor  design  and  process  technology  design  and 
manufacturing. This is reflected in modest global market share in communication (e.g. mobile 
phones) and data processing (e.g. personal computers) amounting to 5% and 3% respectively. In 
the  design  of  general-purpose  processors,  Europe  relies  almost  entirely  on  design  tools  and 
design IP developed by US companies. 

Graph 37: Global and EU market share in sales by application sector (2019) 

Source: SIA and EU Study, respectively. 

c)  Way forward and relevant (ongoing) measures 

With high entry cost, escalating trade tensions and subsidies at global level, dependence on Asia 
for advanced chip  fabrication and on the  US  for  chip  design tools, the EU supply  chain  is  left 
increasingly vulnerable. Europe needs to strengthen its own industrial position to minimise risks 
from trade disruptions and boost innovation and competitiveness in the application sectors. 

Reinforce processors and semiconductor technology for data processing, communication and 
related data infrastructure, and new applications of AI 

Joint  European  actions  and  initiatives  will  need  to  strongly  focus  on  rebuilding  capabilities  in 
processors and semiconductor technologies critical to enable powerful and energy-efficient data 
processing, communication, infrastructure and the many applications of AI. In this respect, it will 
be fundamental to reduce critical dependencies in advanced technologies and process technology 
manufacturing at leading edge nodes, advanced packaging, and in critical IP design blocks and 
platforms for digital components.  Indeed, in terms of manufacturing, high-end microprocessors 
such  as  CPUs  and  GPUs  require  leading-edge  fabrication  facilities.  A  new  fab  with  the  latest 
technology  (2nm  in  2025/6)  is  challenging  both  technologically  and  economically  (EUR  20 
billion upfront and EUR 5 billion p.a. to operate) and is not in the reach of any individual EU 
supplier today.  

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A joint European effort181 and an investment plan aiming at positioning Europe in emerging 
critical technologies and at consolidating areas of proven expertise 
In a joint declaration ‘A European Initiative on Processors and Semiconductor Technologies’182 
presented at the EU Competitiveness Council of 7 December 2020, a large number of Member 
States  have  agreed  to  work  together  in  order  to  bolster  Europe’s  electronics  and  embedded 
systems  value  chain.  This  will  include  a  particular  effort  to  reinforce  the  processor  and 
semiconductor ecosystem and to expand industrial presence across the supply chain, in order to 
address key technological, security and societal challenges. Member States agreed to consolidate 
and  build  on  Europe’s  position  in  areas  of  proven  expertise,  and  aim  to  establish  advanced 
European  chip  design  capabilities  and  production  facilities  progressing  towards  leading-edge 
nodes for data processing and connectivity. In the joint declaration, the signatory Member States 
discuss a possible industrial  alliance on microelectronics and processors, which could  mobilise 
industrial partners, as well as possibly designing a proposal for an IPCEI.  

Concretely, when it comes to cooperating and engaging in efforts to co-invest in next generation 
semiconductor technologies across the full value chain, the declaration highlights: 

 

the  mobilisation  of  industrial  stakeholders  through  a  future  industrial  alliance  to  establish 
strategic roadmaps and research and investment plans for processor design, deployment and 
fabrication that takes into account the full semiconductor ecosystem;  

  addressing  common  challenges  through  various  funding  mechanisms,  including  where 
feasible  through  the  national  Recovery  and  Resilience  plans,  contributing  to  a  substantial 
increase  in  the  production  capability  in  Europe  of  semiconductors  and  embedded  systems 
across  the  value  chain,  and  processor  chips  with  significant  improvements  in  energy 
performance and speed by 2025; and,  

 

the  design  of  a  multi-country  and  inclusive  European  Flagship  Project  through  the 
development of a proposal for an Important Project of Common European Interest that aims 
to  create  a  strong  dynamic  to  bolster  Europe’s  electronics  industry  with  a  focus  on  the 
design  ecosystem,  supply  chain  capabilities  and  first  industrial  deployment  of  advanced 
semiconductor  technologies,  including  scaling  towards  leading-edge  process  technologies 
for processor chips.  

European Recovery and Resilience Facility 

EU plans for investment in semiconductors have to be considered in a global context of strong 
regional support to the sector. China, the US, Japan and South Korea are examples of countries 
devoting large amounts of public resources to minimise dependencies and strengthen their global 
presence in specific segments of the value chain (e.g. manufacturing, design).  

In  this  respect  it  is  worth  noting  that  semiconductor  technologies  and  notably  processor  chips, 
are among the areas identified for investment for the Recovery and Resilience Facility. 20% of 
the  European  Recovery  and  Resilience  plans  should  go  to  digital  transition;  this  is  up  to  EUR 

181 With the involvement of Industry, Member States and the European Commission 
182 https://ec.europa.eu/digital-single-market/en/news/joint-declaration-processors-and-semiconductor-technologies  

88 

 
 
                                                           
145 billion over the next 2 to  3  years. The Recovery  and Resilience Facility presents  a unique 
opportunity to help financing the efforts identified in the December 2020 Declaration mentioned 
above. 

Europe  can  consolidate  its  position  through  joint  initiatives  and  investments  involving 
technology  suppliers  and  users,  targeting  applications  and  products  with  high-added  value  and 
strong system integration.  

The  EU  has  an  important  position  in  mobile  network  infrastructure  but  communication 
equipment  (radio  base  stations,  switching  centres,  central  offices)  is  powered  today  by 
components which are mainly designed and made outside the EU, such as critical semiconductor 
components, including secure processors, for 5G and next generation connectivity. 

Research and industrial deployment driven by leading system manufacturers covering design and 
leading-edge manufacturing could support achieving the EU’s objectives as set out in the Digital 
Decade. 

Regulatory framework that boosts competitiveness and protects EU interests 

The EU semiconductor sector has been left in  a  vulnerable position due to lack of investment. 
But investment alone is not sufficient as is evidenced by the acquisition of companies both large 
and  small  despite  having  been  supported  financially  by  the  EU  and  Member  States.  A  more 
holistic approach is needed.  

The recent EU foreign direct investment (FDI) screening regulation that became operational on 
11  October  2020  provides  the  European  Commission  the  opportunity  to  assess  the  risks  of 
foreign investments into all companies, including companies active in the semi-conductor sector 
from  a  European  perspective  in  terms  of  impact  on  security  and  public  order.  This  includes 
impact on programmes of Union interest regarding critical infrastructure, critical technologies or 
critical inputs.  

Semiconductor supply chain resilience  

Resilient supply chains  are essential in  times of crisis  to  absorb shocks, offer options to  adjust 
and speed up recovery. Most supply chains have shown remarkable resilience during the crisis. 
However,  structural  problems  such  as  massive  distortive  government  subsidies,  export 
restrictions and pandemic-related spikes in  demand contributed to  a shortage of chips  that first 
emerged in the automotive sector and then extended to other sectors, including 5G and medical 
equipment.  The  EU  semiconductor  sector  will  require  a  resilient,  diverse,  and  secure  supply 
chain to prosper. 

The EU strongly supports global efforts in the G20, the WTO and bilateral relations, to monitor 
critical supply chains, keep them open and undisrupted, and ensure fair and equitable access to 
critical goods. Enhancing the resilience and sustainability of supply chains is therefore a pillar of 
the EU’s drive towards open strategic autonomy.  

Further  in-depth  assessment  and  monitoring  is  needed  as  regards  the  risks  associated  with 
different  stages  of  the  semiconductor  supply  chain,  including  on  the  origins  and  sources  of 
supplies  beyond  the  EU.  Such  risks  may  be  related  to  critical  inputs  and  equipment  for  the 
industry, including digital products that may be vulnerable, manufacturing capacities and other 
89 

 
 
risks  that  may  disrupt,  compromise  or  negatively  affect  the  supply  chain  (e.g.  the  existence  of 
possible single or vulnerable suppliers, supply chains with a single point of failure, stages of the 
chain  established  in  unreliable  partner  countries).  The  availability  of  substitutes  or  alternative 
sources  for  critical  inputs  are  key  elements  to  consider  as  well.  Resilient  and  sustainable 
transport also plays an important role in facilitating international trade and preserving the EU’s 
supply chains. 

A  coherent  mix  of  industrial,  research  and  trade  policies  can  facilitate  the  process  of 
diversification  to  alternative  sources  of  supply  and  strengthening  of  existing  supply  chains 
through partnership and collaboration with likeminded countries.  For example, the US review of 
its semiconductor supply chain (announced on 25 February 2021) directs the US administration 
to work with partners and allies to ensure that they too have strong and resilient supply chains. 
This could offer an opportunity for the EU to engage in joint work in the framework of the new 
Trade and Technology Council bilaterally, or possibly in plurilateral settings with Japan, Korea 
or Taiwan.  

Monitoring  of  subsidy  programmes  and  market  access  barriers  will  continue  in  multilateral, 
bilateral and plurilateral settings notably in the public-industry Government Authorities Meeting 
on  Semiconductors  (GAMS)  for  the  six  semiconductor  manufacturing  regions  (US,  Taiwan, 
Korea,  Japan,  China  and  EU),  which  contributes  to  achieving  transparency  and  levelling  the 
playing  field.  This  monitoring  will  enable  the  Commission,  together  with  other  countries,  to 
assess possible solutions to potential trade distortions.  

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5.6 Cloud and Edge Computing  

a)  Context and possible weaknesses in the EU 

Data  is  becoming  a  strategic  asset  for  any  organisation  in  its  digital  and  sustainable 
transformation. Cloud computing technologies provide the data processing capacities required 
to  enable  data-driven  innovation,  and  thus  represent  a  key  enabling  technology  of  strategic 
importance  to  Europe’s  industrial  future,  as  emphasised  in  the  New  Industrial  Strategy  for 
Europe.  Cloud  computing  is  a  technology  that  combines  hardware  and  software  to  allow  on-
demand  remote  access  to  a  scalable  and  elastic  pool  of  shareable  and  distributed  computing 
resources.  Those  computing  resources  include  resources  such  as  networks,  servers  or  other 
infrastructure, operating systems, software, storage, applications and services.183  

Cloud technologies are crucial for the digital transformation of businesses and the public 
sector as they offer faster, cheaper and more flexible computing methods than conventional 
ones.  They  offer  the  possibility  to  scale  up  company  business  processes  according  to  varying 
user demands for data processing and often in a much cheaper way than traditional in-house IT 
solutions.  The  accessibility  of  documents,  software  or  videoconferencing  from  outside  of  the 
traditional  office  structures  made  cloud  an  indispensable  technology  for  running  the  daily 
business operations of European companies during the pandemic.  

Cloud is also crucial in contributing to common European sustainability goals of the Green 
Deal  by  enabling  the  transformation  of  different  economic  sectors  of  the  European 
economy,  while becoming  themselves  more  climate-neutral  and  sustainable.  In  the  context 
of Europe’s recovery, cloud technologies enhance the delivery of public services to citizens and 
will  boost  the  growth  of  small  and  medium-sized  enterprises  by  enabling  the  creation  of  new, 
added-value products and services. 

Several trends emphasise the critical importance of cloud and data processing technologies 
for  our  society  and  economy.  As  highlighted  in  the  European  data  strategy,184  we  are 
witnessing a shift in the data paradigm. The volume of generated data is greatly increasing and a 
growing proportion of data is being processed at the edge. Edge computing generally refers to a 
form of delivery of cloud computing services in a highly distributed form, closer to where data 
are  being  generated  or  collected,  thus  moving  from  the  traditional  centralised  model  of  data 
processing  to  a  highly  distributed  one.  By  2025,  80%  of  all  generated  data  are  expected  to  be 
processed  at  the  edge.185  This  shift  will  require  the  development  and  deployment  of 
fundamentally  new  data  processing  technologies  encompassing  the  edge,  moving  away  from 
centralised cloud-based infrastructure models. Cloud and edge will continue to co-exist and new 
data  management  techniques  will  enable  to  determine  where  data  are  best  processed,  in 
centralised or in more distributed capacities, closer to the users. The integration of these different 
data  processing  capacities  with  more  local  computing  resources  will  form  a  computing 
continuum  that  is  the  seamless  integration  of  diverse  computing  environments  spanning  from 

183 COM(2020)823 final, Recital 16 
184 COM(2020)66 final 
185 COM(2020)66 final, p. 2 

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high  performance  computing  and  big  data  centres  to  edge,  fog,  swarm  (highly  distributed 
intelligence) and embedded computing. 

The  data  paradigm  shift  also  means  that  cloud  technologies  are  increasingly  becoming 
strategic innovation enablers for the uptake and effective functioning of technologies such 
as artificial intelligence, and Internet of Things. In this new data paradigm, less data will be 
stored in data centres and more data will be spread in a pervasive way closer to the user ‘at the 
edge’.  Processing  data  much  closer  to  where  they  are  generated  or  collected  allows  faster 
reaction  times,  which  in  turn  enables  new  services  and  applications.  The  need  for  abundant 
computing  power  crunching  data  for  deep  learning  and  distributed  ledgers  can  be  satisfied 
through  the  computing  continuum  formed  by  the  integration  of  high-performance  computing, 
cloud  and  edge  computing.  In  the  future,  one  of  the  main  trends  for  AI  hardware  computation 
will  indeed  be  the  move  to  ‘the  edge’,  on  devices  that  are  closer  to  the  users  of  real-time  AI 
applications. This will also be the case for many other new emerging digital  technologies (data 
analytics, security of transactions, automation, etc.).  AI services are estimated to be among the 
most  transformational  services  leveraging  cloud  capabilities  across  the  computing  continuum, 
particularly at the edge to execute AI algorithms.186  

Furthermore,  cloud  computing  technologies  are  crucial  for  increasing  the  innovation 
potential  of  data  sharing  and  data  re-use  services.  To  make  the  most  out  of  the  increasing 
amount of data produced, the European data strategy foresees the deployment of EU common 
data spaces in key public and private sectors. Data spaces will foster ecosystems (of companies, 
civil society and individuals) creating new products and services based on more accessible data, 
and  as  such  increase  Europe’s  capacities  to  become  a  world  leader  in  the  data  economy.  Such 
common  data  spaces  will  heavily  rely  upon  the  availability  and  access  to  secure,  energy-
efficient, affordable and high-quality data processing capacities.  

The current COVID-19 crisis has further highlighted the critical importance of availability 
of  data processing  technologies  for  our  economy  and  society.  The  crisis  had  the  effect  of  a 
growing  use  of  cloud-enabled  services,  such  as  videoconferencing,  data  analytics  and 
collaborative  platform  services.  Secure  processing,  storage,  sharing  and  analysis  of  public  and 
industrial data as well as collaborative services, such as distance learning and teleworking have 
become essential services to EU citizens, businesses and the public sector. Cloud played also a 
crucial  role  in  coronavirus  research,  as  it  enables  availability  and  effective  sharing  of  massive 
quantities of biochemical data.187 

The  New  Industrial  Strategy  for  Europe  emphasised  that  the  strengths  of  the  European 
industry needs to be channelled towards gaining leadership in areas where the EU still lags 
behind,  such  as  on  cloud  technologies  and  data  applications.188  Currently,  the  public  cloud 
infrastructure  market  is  converging  globally  around  four  large  non-European  companies.  The 
United States  has  the most  significant  companies in  the global cloud  market,  and in  particular, 

186 IDC Future Scape: Multiplied Innovation Takes Off, Powered by AI, Distributed Public Cloud, Microservices, 
Developer Population Explosion, Greater Specialization and Verticalization, and Scaling Trust, 2019. 
187 https://www.h-cloud.eu/news/cloud-computing-and-covid-19/ 
188 COM(2020)102 final, p. 2 

92 

 
 
                                                           
the  public  cloud  infrastructure  market  that  generates  the  biggest  revenues,189  while  Europe 
currently  has  no  significant  global  cloud  infrastructure  companies.  This  market  structure  could 
create entry barriers for new or smaller companies, which lack the necessary resources to scale-
up  their  services  notably  across  borders,  or  deploy  the  latest  state-of-the-art  technologies. 
Furthermore, a strong degree of vertical integration of different cloud services (such as bundling 
of  infrastructure  and  software  services)  especially  by  large  cloud  providers190  may  also  make 
market entries of the new providers more difficult. Several Chinese companies are also starting 
to  invest  heavily  and  will  increasingly  enter  the  EU  cloud  market.  Also,  the  public  cloud 
infrastructure  market  largely  overshadowed  by  the  US  players  also  raises  concerns  over  the 
European cloud users’ ability to maintain control over strategic and sensitive personal and non-
personal data. Unfair commercial practices191 and a lack of interoperability and data portability 
between  cloud  providers  create  risks  of  vendor  lock-in,  undermining  users’  trust  in  cloud 
computing services and cloud uptake.  

However, Europe has a unique market opportunity in the next five years to strengthen its 
data processing technologies by capitalising on the changes to come, in particular related to 
edge computing. To seize it, Europe can build on its industrial expertise and strength in some 
areas of the computing value chain, such as business-to-business application, system integration, 
industrial Internet of Things systems and 5G. Finally, the EU has a unique regulatory framework 
to become a standard setter also in a global merit for non-discriminatory norms on data storage 
and  processing.  This  would  also  allow  to  address  European  users’  demand  for  increased 
transparency  and  control  over  legitimate  access,  processing  and  storage  of  their  personal  and 
commercially sensitive data. 

b)  Origin of vulnerabilities  

The vulnerabilities of the EU cloud market lay predominantly in the market’s structure.192 
A few large, foreign cloud providers dominate the public cloud market in the EU. The top four 
global  leaders  on  the  public  cloud  infrastructure  market  –  often  referred  to  as  hyperscalers 
(Amazon  Web  Services  (AWS),  Microsoft  Azure,  Google  Cloud  and  Alibaba  Cloud)  will 
account for over 80% of global revenues in 2021.193 They are also among the most popular cloud 
providers  for  European  businesses.  According  to  Synergy  Research  Group’s  data,  a  few  EU 
cloud  and  telco  providers  (OVH  cloud,  Deutsche  Telecom,  Orange,  KPN)  challenge  their 
popularity to a limited extent within selected national markets in the EU. 

189  Synergy  Research  Group,  2021:  https://www.srgresearch.com/articles/cloud-market-ends-2020-high-while-
microsoft-continues-gain-ground-amazon  
190 See section b) below 
191 The most prevalent unfair practices in cloud contracts are mapped in the European Commission’s  Study on the 
Economic  Detriment  to  Small  and  Medium-Sized  Enterprises  Arising  from  Unfair  and  Unbalanced  Cloud 
Computing  Contracts,  2019:  https://ec.europa.eu/info/publications/study-economic-detriment-small-and-medium-
sized-enterprises-arising-unfair-and-unbalanced-cloud-computing-contracts_en   
192 COM(2020) 66 final, p. 9 
193 
services-market-grew-37-point-3-percent-in-2019  

https://www.gartner.com/en/newsroom/press-releases/2020-08-10-gartner-says-worldwide-iaas-public-cloud-

93 

 
 
                                                           
Graph 38: Europe Cloud services leadership 

Rank 

Leader 
#2 
#3 

#4 

#5 

#6 

Germany 

France  Netherlands 

Rest of 
Total 
Europe 
Europe 
Amazon 
Amazon 
Amazon 
Microsoft  Microsoft  Microsoft  Microsoft  Microsoft 
OVH 

Amazon 

Amazon 

Google 

Google 

Google 

Google 
Deutsche 
Telekom 
IBM 

IBM 

Salesforce 
Deutsche 
Telekom 

Orange 

Google 

KPN 

IBM 

IBM 

Salesforce 

Oracle 

IBM 

Oracle 

Swisscom 

Source: Based on Iaas, PaaS and hosted private cloud revenues in Q1 2020. The data come from Synergy Research 
Group, 7 May 2020.194 

Compared  to  the  non-European  hyperscalers,  the  EU-based  cloud  providers  hold  a  relatively 
small market  share, both at  the European and  global  level.  The largest  European  cloud  service 
provider accounts for less than 1% of total revenues generated in the European market. 

This asymmetric market share is exacerbated by an asymmetric investment gap of EUR 11 
billion  annually  in  cloud,195  which  represents  the  estimated  difference  between  what  the  EU 
competitors  (US/China)  and  the  EU  (both  private  and  public  actors)  invest  in  cloud.196  This 
disproportion  in  investments  is  also  reflected  in  the  higher  innovation  capacity  of  the  leading 
cloud providers towards European cloud providers. 

Large foreign cloud companies are also effective in closing strategic acquisitions,197 forming 
strategic  partnerships198  and  performing  strategic  investments199.  Acquisitions  of  software 
providers  allow  them  to  provide  a  whole  stack  (i.e.  integrated  suite)  of  cloud  services 
(Software as a Service (SaaS), Platform as a Service (PaaS)) on top of Infrastructure as a Service 
(IaaS),200 which are cheaper and more convenient for customers than paying for each component 

194 https://www.srgresearch.com/articles/amazon-microsoft-lead-cloud-market-all-major-european-countries 
195 See SWD(2020) 98 final, p. 18, Table 2 which identified investment gaps in several EU digital sectors including 
cloud 
196 On average, the US cloud providers invest ten times more in the research and innovation at the different cloud 
layers than their EU competitors do 
197  For  example,  IBM’s  acquisition  of  Red  Hat  (2019),  Microsoft’s  acquisition  of  GitHub  (2018),  Salesforce’s 
acquisition of Mulesoft (2018) 
198 For example, Microsoft and Volkswagen partnership (2019) to create new automotive cloud; Deutsche Bank and 
Google Cloud partnership (2020) to co-innovate the next generation of cloud-based financial services 
199 For example, Microsoft’s USD 1.5 billion investment plan to accelerate digital transformation in Italy (2020) as 
well as its data center region investments in Greece (2020) and Austria (2020); Google’s USD 2 billion investment 
in a data center in Poland 
200  For  an  explanation  of  these  different  cloud  service  models  see  for  example  p.  33-34  of  annex  to  the 
Commission’s  communication  COM(2017)  476  final  ‘Making  the  most  of  NIS  –  towards  the  effective 
implementation of Directive (EU) 2016/1148 concerning measures for a high common level of security of  network 
and information systems across the Union’ or definitions of these service models in ISO/IEC 2014:17788 

94 

 
 
 
                                                           
separately,  although  often  leading  to  vendor  lock-in  effects.201  Strategic  partnerships  and 
investments  on the other hand allow them to intercept  early the specific geographic or product 
markets  in  need  of  specific  cloud  solutions,  and  to  establish  and  further  build  their  strong 
presence on these markets.  

From  an  EU  industrial  perspective,  the  market  position  and  scale  of  the  hyperscalers  on 
these markets makes  market entries by other competitors less rewarding (the first mover 
advantage  and  economies  of  scale)  and  prevents  the  rise  of  European  leadership  on  new 
market  segments.  Specific  EU  cloud  users’  needs    (including  processing  capacities  that  are 
close  to  the  user  with  demonstrated  compliance  with  EU  privacy  and  personal  data  processing 
legislation,  providing  for  highly-secured  processing  environments,  preventing  unilateral  access 
to the data by foreign authorities or any third party and with the reassurances on data processing 
locations) may not be served.  

In  addition,  vendor  lock-in  by  hyperscalers,202  but  also  smaller  specialized  cloud-based 
software service providers creates direct dependencies of the EU users’ base on these cloud 
providers. 203 The cloud users have in practice a very limited if non-existing possibility to switch 
between different cloud service providers or to port their data to other service providers and to 
their own data processing systems.204 This  is  caused not  only by the vertical  integration of the 
hyperscalers making it less profitable for users to seek European alternatives, but also because of 
the  lack  of  interoperability  between  the  different  cloud  solutions  that  technically  hampers  data 
portability.  Recent  developments  towards  hybrid  and/or  multi-cloud  strategies  by  cloud  users 
may  mitigate  the  effect  of  vendor  lock-in,  if  users  can  bear  the  additional  costs  of  handling 
multiple cloud contracts. The use of so-called container technology allows applications to run in 
any type of environment, including different public and private clouds. Vendor lock-in ultimately 
hampers the flow of data across the EU and beyond, a profitable functioning of data value chains 
and the creation of an open, innovative, and sustainable European data economy.  

Another  reason  for  dependency  of  EU  cloud  users  on  the  hyperscalers  is  the  (purported)  non-
existence of an equivalent cloud products offer by the European providers. This is despite EU 
cloud  users  and  public  authorities  frequently  expressing  their  concerns  with  the  use  of 
foreign  cloud  services  for  reasons  of  personal  data  protection,  cybersecurity  or  questions 
over applicable law.205 These concerns regarding potential unlawful access to their data by third 

201  IDC  and  Arthur’s  Legal  -  Switching  of  Cloud  Services  Providers  (2018)  https://op.europa.eu/en/publication-
detail/-/publication/898aeca7-647e-11e8-ab9c-01aa75ed71a1 
202  See  SWD(2017)  Impact  Assessment  accompanying  the  proposal  for  a  framework  for  the  free  flow  of  non-
personal data in the European Union:  
https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/1088-2nd-Data-Package 
203 Ibid study “Switching of Cloud Services Providers” (2018) 
204 Ibid 
205 See for example the recommendations by French national data protection authority in relation to use of foreign 
cloud  provider  for  hosting  the  French  Health  Data  Hub:  https://www.cnil.fr/en/council-state-asks-health-data-hub-
additional-guarantees-limit-risk-transfer-united-states or the German data protection authorities ruling on Microsoft 
https://www.datenschutz.saarland.de/ueber-
Office 
uns/oeffentlichkeitsarbeit/detail/pressemitteilung-vom-02102020-stuttgart-muenchen-ansbach-wiesbaden-
saarbruecken  

protection: 

data 

365 

95 

 
 
                                                           
countries,  if  the  data  is  hosted  with  the  providers  falling  under  the  foreign  jurisdiction, 
exacerbated  after the findings of the Court of Justice of the EU regarding national  intelligence 
measures  of  third  countries.206  The  EU  is  acting  to  mitigate  such  concerns  through  mutually 
beneficial international cooperation, such as the proposed EU-U.S. Agreement to facilitate cross 
border  access  to  electronic evidence207, alleviating  the risk of conflict of laws and  establishing 
clear safeguards for the data of EU citizens and companies. Additionally, in its recent proposal 
for  the  Regulation  on  European  data  governance  of  25  November  2020208,  the  Commission 
continues in its open but assertive approach of the EU Data Strategy, and introduces provisions 
fully safeguarding the protection of public data held by public sector bodies, users reusing that 
public  data,  data  intermediaries  or  recognised  data  altruism  organisations  when  transferred 
abroad.209  

Graph 39: Use of cloud computing services (2018, 2020) 

Source: Eurostat, 2020210 

The  vendor  lock-in  practices,  unfair  contract  terms,  data  protection  and  cybersecurity 
risks  as  well  as  the  lack  of  suitable  cloud  offering  satisfying  the  needs  of  the  EU  cloud 
customers are the most proliferating problems for the EU-based cloud users211 and as such 
are  the  main  reasons  for  low  cloud  uptake  in  the  EU.  According  to  Eurostat’s  data,  while 

206 See Judgment of the Court (Grand Chamber) of 16 July 2020 in Data Protection Commissioner v Facebook 
Ireland Limited and Maximillian Schrems, C-311/18, ECLI:EU:C:2020:559. 
207 https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_19_5890  
208 Proposal for a Regulation of the European Parliament and of the Council on European data governance (Data 
Governance Act), COM/2020/767 final 
209 See Article 30 of the Data Governance Act proposal 
210 
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Cloud_computing_-
_statistics_on_the_use_by_enterprises (the difference in results with the statistics on uptake of technologies outlined 
in chapter 3.1 can be explained by the fact that the survey used as a reference in chapter 3.1 has been more oriented   
towards large organisations) 
211  See  the  Summary  Report  on  the  open  public  consultation  on  the  European  strategy  for  data,  2020, 
https://ec.europa.eu/digital-single-market/en/news/summary-report-public-consultation-european-strategy-data   

96 

 
 
 
                                                           
improved compared to 2018, only 36% of EU enterprises used cloud services in 2020, mostly for 
simple  services  such  as  for  e-mail  and  storage  of  files.  Only  55%  of  those  enterprises  use 
advanced  cloud  services  relating  to  financial  and  accounting  software  applications,  customer 
relationship  management  or  to  the  use  of  computing  power  to  run  business  applications.  The 
difference  between  the  top  performers  and  the  Member  States  with  the  lowest  cloud  uptake  is 
also still significant. Cloud uptake in the EU is even lower among public administrations. Apart 
from the above mentioned reasons, an additional reason for this situation appears to be the lack 
of common criteria for procurement of cloud services in Europe.212 

The  dependencies  of  the  EU  cloud  customers  on  foreign  cloud  providers  lead  to  a  loss  of 
investment potential for the European digital industry in the data processing market, putting the 
European open strategic autonomy at risk. 

The  dependencies  are  however  not  necessarily  the  same  across  all  segments  of  the  cloud 
market and computing continuum. In particular, EU industry is for now less dependent in the 
currently nascent edge computing segment and certain market sub-segments of the cloud service 
offerings (e.g. in software as a service and data analytics) and in the system integration of smart 
and low power cloud platforms and middleware. 

European  companies  also  have  the  potential  to  grow  in  many  industrial  and  business 
sectors 
like  smart  energy  systems,  smart  home  appliances,  enterprise  systems, 
manufacturing, smart mobility, smart agriculture and food, as well as green technologies in 
general.  They  master  well  the  technologies  in  today’s  cyber-physical  and  Internet  of  Things 
(IoT) systems including industrial cloud solutions. European companies largely control today’s 
complex  value  chains  in  these  sectors  including  their  digital  components  from  sensors  and 
electronic control units to systems technologies. European Telecom suppliers and operators are 
strong in 5G, which has the potential to become the standard network technology – for the first 
time – enabling direct and seamless network communication from the far-edge level to the cloud, 
thus  supporting  the  emerge  of  a  European  cloud  computing  continuum.  In  addition,  they  still 
today enjoy a much stronger proximity with their clients, both physically and culturally. 

Opportunities for the European computing market 

Software as a Service (SaaS) market 

The  total  revenues  generated  by  public  cloud  services  (Infrastructure  as  a  Service  (IaaS), 
Platform as a Service (PaaS) and Software as a Service (SaaS)) across the EU market increased 
by  21%  between  2018  and  2019.  The  2020  DESI  report  forecasts  that  their  total  revenues  are 
expected  to  continue  to  grow  by  50%  between  2019  and  2021.213  In  2019,  SaaS  represented 
almost two thirds of total public cloud revenues generated within the EU market, a trend poised 
to continue until at least 2021. 

212 See p. 26 of H-CLOUD Green Paper, which names further reasons for the low uptake of cloud technology in the 
public sector 
213  Digital  Economy  and  Society  Index  (DESI)  2020,  Integration  of  digital  technology  report,  p.  8 
https://ec.europa.eu/newsroom/dae/document.cfm?doc_id=67076  

97 

 
 
                                                           
Graph 40: EU public cloud service revenues per deployment model, 2018 – 2021 (€ million) 

Source: European Commission based on IDC 

Between  2018  and  2019,  four  applications  (customer  relationship  management,  enterprise  risk 
management, workflow and management and collaborative applications) contributed the most to 
SaaS revenues across the EU market. They are expected to remain the most prominent until at 
least 2021 with respective revenue growth rates of 40.1 %; 44.6 %; 40%; and 37.5 % between 
2019  and  2021.214  Furthermore,  in  2019  software  security  provided  as  SaaS  application, 
contributed  with  EUR  115.5  million  to  total  SaaS  revenues  within  the  EU  market.  With  its 
revenue growth rate expected to increase by 48% between 2019 and 2021, it should be the fastest 
growing SaaS application over this period. This strong growth in software services constitutes 
a major opportunity for European providers to leverage their position in the SaaS market.  

Graph 41: Revenue of the top four SaaS applications in share of total SaaS EU revenues, 
2018 – 2021 (€ million) 

Source: European Commission based on IDC 

214 DESI 2020, Integration of digital technology report, p. 9 

98 

 
 
 
 
 
 
 
                                                           
Edge computing 

Furthermore, as introduced earlier, the way in which data is stored and processed is progressively 
changing215 with edge computing gaining momentum.216 The main users of edge services are 
healthcare, transport, financial, manufacturing, retail  and energy and utilities sectors as well as 
governments,  which  need  to  process  large  volumes  of  data  in  a  real  time.  Considering  the 
increasing trend where more and more data will be generated at the edge, this will give a market 
advantage  to  those  actors  who  deploy  the  edge  nodes.  According  to  IDC's  forecast,  the 
worldwide edge computing market will reach USD 250.6 billion (around EUR 206.5 billion) in 
2024.217  

Today,  there  are  no  dominant  players  or  world  regions  for  edge  computing.218  However  it  is 
expected that over the next several years the investments on edge computing will be concentrated 
mostly in the US, China and Western Europe (IDC estimates that the EMEA region will capture 
27.9% of the overall global edge market spending219).  

The  combination  of  (1)  a  new  technical  paradigm  (cloud  to  edge  computing),  (2)  an  emerging 
edge computing market, and (3) initial conditions where European providers (telecommunication 
sector,  cloud  providers,  edge  providers)  have  some  strengths,  constitutes  the  best  opportunity 
for  Europe  to  revert  today’s  cloud  market  structure  and  regain  autonomy  in  a  market 
dominated by non-EU providers. European focus could also be on supporting the emergence of 
smaller providers at the edge market and their growth, in order to prevent the situation where a 
few big actors dominate this market.  

Telco-cloud and multi-cloud computing 

The roll-out of 5G networks around the globe, sometimes referred to as telco-cloud solutions,220 
constitutes  another  opportunity.  Being  home  to  a  number  of  strong  telecommunications 
providers that have a key role in investing and operating edge computing capabilities over their 

215  The  reasons  for  the  increasing  popularity  of  edge  technologies  include  the  increased  use  of  connected  devices 
that are generating progressively more data and are demanding increasingly more computing capacities to provide 
real-time insights. The other factors  for the  rise of edge computing include 5G  use cases (URLLC) requiring low 
latency;  augmented/virtual/mixed  reality  that  are  requiring  faster  processing  capabilities  to  unlock  the  technology 
value;  large  volumes  of  videos  that  are  a  significant  burden  for  network  workloads;  AI  that  is  demanding  high 
amounts  of  computations  closer  to  where  the  data  are  being  produced;  data  analytics  requiring  large  volumes  of 
computer operations to accelerate speeds of insights. 
216  Benefits  of  edge  computing  include  localized  computing  power  close  to  the  user,  low  latency,  hybrid  storage 
capacity, security, energy-efficiency and increased control of the user over their data. 
217 Forecast by IDC’s Worldwide Edge Spending Guide, 2020, 
https://www.idc.com/getdoc.jsp?containerId=prUS46878020#:~:text=According%20to%20the%20new%20Worldw
ide,the%202019%E2%80%932024%20forecast%20period.  
218 It is expected that half of the edge computing market will be captured by cloud providers, the other half will be 
captured by  software, IoT, AI, consulting, telecommunication, infrastructure, system integrator and semiconductor 
companies. 
219 IDC’s Worldwide Edge Spending Guide, 2020  
220 Telco edge-cloud can be described as small data center resources required for local data processing of different 
services, with data transfer capabilities by carrier companies. Telco edge-cloud solutions typically include network 
function  virtualization  (NFV)  that  accelerates  the  speed  of  launching  5G  networks,  software-defined  data  centers 
(SDDC) and networking (SDN), as well as multi-access edge computing (MEC). 

99 

 
 
                                                           
networks in Europe, the EU also has an advantageous position to establish a visible presence in 
the telco-cloud market. Utilizing the expertise of European telecom providers combined with the 
specialization of European cloud providers, Europe can build telco-cloud solutions notably at the 
edge – leveraging the joint deployment of 5G and edge computing infrastructures – in a way that 
meets the security and environmental requirements of the European market. 

A  further  opportunity  for  Europe  is  the  market  for  multi-cloud.221  Multi-cloud  solutions  gain 
their popularity as a risk-mitigation tool in order to minimise the risks of data loss or downtime 
caused  by  local  component  failure  in  the  cloud  environment.  While  the  foreign  cloud 
hyperscalers  are  moving  towards  extending  their  leadership  also  on  this  market,  a  competitive 
European alternative for a multi-cloud solution would be needed, building on an open source and 
governance by an independent organisation. 

c)  Way forward and relevant (ongoing) measures 

While  the  recent  proposal  for  a  Digital  Markets  Act222  aims  to  achieve  a  fairer  and  more 
competitive  business  environment  between  business  users  of  cloud  services  and  so-called 
gatekeepers among the providers of cloud computing services,223 the vulnerabilities identified in 
the  EU  cloud  market  also  concern  a  broader  category  of  cloud  service  providers,  including 
smaller  cloud  providers.  There  is  a  need  to  safeguard  practical  compliance  with  the  EU 
legislative  framework,  enable  data  portability,  resolve  vendor  lock-in  issues  and  address  the 
innovation needs in a setting that applies to all cloud service providers in the EU market. 

In line with Europe’s data, green and industrial strategies and in order to capitalise on the 
data paradigm shift and next wave of innovation, a coordinated  European action between 
the  EU,  Member  States  and  industry  is  critical  to  trigger  major  investments  in  the  next 
generation cloud technologies meeting the key EU rules and standards. The advent of edge 
computing  could  serve  to  strengthen  the  position  of  EU  businesses  in  the  cloud  market,  to 
provide a complementary European supply alternative. Building on its strength in industrial and 
business applications, industrial IoT systems and 5G, Europe has a one-time opportunity to bring 
its  industrial  actors  back  to  playing  a  significant  role  in  the  computing  market  by  2025, 
improving its open strategic autonomy.  

The  EU  will  support  research  and  development,  and  the  large-scale  deployment  of  next 
generation cloud infrastructures and services across the EU. In the European data strategy, 
the  European  Commission  sets  out  its  ambitions  for  the  period  2021-2027  to  co-invest  in 
European data spaces and a European cloud federation. These investments will be channelled 
through the Digital Europe Programme, Connecting Europe Facility 2 and Horizon Europe. The 
focus must be on fostering a competitive, secure, trustworthy, sustainable, distributed, end-to-end 
European  computing  supply  that  will  adapt  to  a  multiple  vendor  environment  and  enable  the 

221 Multi-cloud can be described as a use of several cloud computing services under a single heterogeneous cloud 
architecture 
222 COM(2020) 842 final. The Digital Markets Act complements (EU and national) competition law which remains 
fully applicable. 
223 See Article 2(1) of the Digital Markets Act proposal COM (2020)842 final 

100 

 
 
                                                           
deployment  of  European  data  spaces.  This  supply  should  enable  the  transition  to  a  computing 
continuum with strong capacities at the edge and far edge in an energy efficient and trustworthy 
manner. It will ensure the gradual rebalance between centralised data infrastructures in the cloud 
and highly distributed and smart data processing at the edge across the EU.  

EU  investments  will  be  complemented  by  private  and  national  co-investments.  In  October 
2020,  all  Member  States  signed  the  joint  Declaration  ‘Building  the  next  generation  cloud  for 
business  and  public  sector  in  Europe’224  and  agreed  to  work  together  via  DEP,  CEF2  and  the 
Recovery  and  Resilience  Facility  (RRF),  to  upgrade  existing  data  processing  capacities,  shape 
the next generation cloud supply for Europe and stimulate the uptake of cloud services across the 
EU.  The  Recovery  and  Resilience  Facility  ‘Scale  up’  Flagship  (as  part  of  Next  Generation 
EU) will be a significant channel for Member States’ investments in data processing capacities. 
Under the Scale-up, cloud is identified as one of the areas for strategic investments and reforms, 
with the aim to close Europe’s cloud investment gap and foster cloud adoption. The 2021 Annual 
Sustainable Growth Strategy establishes a ‘Scale-up’ EU Flagship with the ambition of doubling 
the use of advanced cloud services225 by 2025 across the EU compared to 2018 levels (i.e. from 
16%  to  32%).  Member  States  also  have  the  possibility  to  co-invest  in  the  context  of  multi-
country-projects to foster the access to cloud and edge capacities from anywhere across the EU 
territory. 

The  Industrial  Strategy  from  March  2020  stated  that  future  Alliances  should  include 
Industrial  Clouds  and  Platforms.  A  European  Alliance  for  Industrial  Data,  Edge  and 
Cloud would be launched in 2021 to facilitate the emergence of a European offering of next 
generation,  trustworthy,  energy  efficient  and  competitive  cloud  and  edge  services.  The 
European Council’s conclusions of 1-2 October 2020 and the Member States joint declaration on 
cloud  of  October  2020,  called  for  the  creation  of  such  an  Alliance  to  strengthen  Europe’s 
industrial  position  in  cloud  and  edge  and  foster  cloud  uptake.  In  this  context,  the  Commission 
will also aim at creating synergies between national and cross-border initiatives, to enhance and 
broaden  their  scale  and  coverage.226  This  would  also  increase  the  sustainable  and  competitive 
adoption  of  cloud  by  European  businesses  and  public  administrations,  and  increase  access  and 
choice for these professional users across the EU. 

In parallel, several Member States launched an open and inclusive process to jointly prepare with 
other interested Member States a possible  Important Project of Common European interest 
(IPCEI)  focusing  on  next  generation  cloud  and  edge  infrastructure  and  services.227  The 

224 https://ec.europa.eu/digital-single-market/en/news/towards-next-generation-cloud-europe 
225  Such  as  financial  and  accounting  software  applications,  customer  relationship  management  or  to  the  use  of 
computing power to run business applications. 
226  The  Gaia-X  initiative  for  “a  European  federated  data  infrastructure”  is  a  leading  example  of  a  public-private 
initiative aiming at a broad European scope. Together with this, many Member States already have national cloud 
initiatives that can provide the basis for further cooperation. 
227 As part of Germany’s Presidency of the  Council of  the  EU, on 17 December 2020 Germany held a high-level 
online event on Important Projects of Common European Interest (IPCEIs) during which it jointly with France, Italy 
and Spain announced the intention to develop a possible IPCEI focusing on cloud and edge. Since then the Member 
States  participating  in  the  preparatory  work  of  this  possible  IPCEI  organised  several  workshops  for  the  public 

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European Commission will accompany Member States in order to set this up in accordance with 
the requirements in the IPCEI Communication.228  

Other EU investments  on cloud will support the emergence of vivid data, computing  and 
Artificial  Intelligence  ecosystems.  EU  investments  for  rolling  out  AI  into  all  sectors  of  the 
economy, support advanced skills and maximise the availability of data through the deployment 
of common European data spaces, calls for capacities for secure hosting, access, sharing and use 
of  data  at  scale  across  the  EU.  At  the  same  time,  it  will  stimulate  the  deployment  of  pan-
European  cloud  to  edge  data  infrastructures  and  services.  The  2018  Coordinated  Plan  on 
Artificial  Intelligence  points  to  the  importance  of  deploying  European  data  spaces  and  pan-
European  computing  infrastructure  and  cloud-services,  especially  given  the  international 
competition  for  access  to  data.  The  new  Data  Governance  Act229  will  set  the  right  enabling 
conditions for companies and individuals to voluntarily make their data available for the wider 
common  good  and  provide  the  framework  for  European  data  spaces.  The  future  European 
Alliance  for  Industrial  Data,  Edge  and  Cloud  will  support  connecting  the  building  up  of 
European  data  spaces  with  the  rollout  of  pan-European  cloud  to  edge  data  infrastructures  and 
services.  This  will  contribute  to  the  emergence  of  thriving  and  resilient  European-grown  data, 
computing and AI ecosystems, including small and medium enterprises. 

Finally,  enhance  access  to  fair,  competitive  and  trustworthy  cloud  solutions.  Next  to  the 
supply side, EU investments through Digital Europe will also be directed at deployment on the 
market:  the  Commission  intends  to  co-invest  in  setting  up  an  EU  online  cloud  marketplace, 
enabling EU customers with specific needs to access pre-approved cloud services. By Q2, 2022, 
an EU Cloud Rulebook will create a comprehensive overview of a common set of EU rules and 
standards applicable to cloud services operating on the EU market.230 Such a compendium will 
provide legal certainty to businesses and the public sector using cloud services, as well as raise 
the profile of those European providers meeting the requirements. The EU Cloud Rulebook will 
serve  as  a  reference  for  services  offered  on  the  future  EU  online  cloud  marketplaces.  To 
stimulate  the  public  sector  demand  and  increase  legal  certainty,  the  Commission  will  also 
develop  common  requirements  for  public  procurement  of  cloud  services,  in  close  cooperation 
with Member States authorities. 

administration and industry participants, to gather their support and to shape the project further. The project is open 
for participation to all Member States. 
228 Communication from the Commission: Criteria for the analysis of the compatibility with the internal market of 
State aid to promote the execution of important projects of common European interest (2014/C 188/02) 
229 European Commission, Proposal for a Regulation on European data governance (COM/2020/767 final). 
230 Areas of attention are: cybersecurity, energy efficiency,  fair  market practices (e.g. portability), data  protection, 
business continuity and data sovereignty 

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6  Conclusions  

This  staff  working  document  has  highlighted  the  existence  of  possible  strategic 
dependencies  in  some  more  sensitive  ecosystems.  A  bottom-up  (quantitative)  mapping  using 
external trade flows in goods across the more sensitive ecosystems as its starting point, shows the 
existence of certain dependencies notably in the energy intensive industries ecosystem (including 
raw/processed materials  and chemicals), the health ecosystem  (including  active pharmaceutical 
ingredients  and  other  health  related  products)  as  well  as  other  inputs  and  products  that  are 
relevant to support the green and digital transformation. Furthermore, an assessment of the EU’s 
performance  in  advanced  technologies  shows  strengths  but  also  certain  weaknesses  (e.g.  for 
cloud,  semiconductors),  highlighting  risks  of  possible  (future)  dependencies  in  this  area 
emerging or further materialising. Finally, also internal dependencies may exist within the Single 
Market  whereby the  EU relies on a limited number of firms within the Single Market.  Further 
discussion with  Member States and industry  will allow assessing the exact  nature of identified 
dependencies in more detail. 

Any  measures  to  address  strategic  dependencies  would  need  to  be  tailored  and 
proportionate  based  on  a  policy  mix  that  considers  the  potential  of  both  external  and 
internal  actions.  The  assessment  confirmed  the  need  to  intensify  already  ongoing  efforts  to 
identify  and  address  strategic  dependencies,  including  in  the  context  of  the  Action  Plan  on 
Critical  Raw  Materials  and  the  Raw  Materials  alliance,  the  Pharmaceuticals  Strategy,  the 
Chemicals  Strategy  as  well  as  other  specific  actions  with  regard  to  key  products  or  inputs 
necessary  for  the  green  and  digital  transformation  (e.g.  batteries,  semi-conductors,  hydrogen). 
Also concerning possible dependencies in the area of advanced technologies, ongoing efforts can 
facilitate an important step forward, including investments and research under the Recovery and 
Resilience Facility and Digital Europe, the Horizon Europe programme, as well as recent actions 
announced under the Digital Decade Communication and the Action plan on synergies between 
civil,  defence  and  space  industries  (including  the  EU  Observatory  of  Critical  Technologies). 
IPCEIs  and  industrial  alliances  can  also  play  important  roles  in  specific  sectors,  where  proved 
well  targeted,  justified  and  efficient  tools.  Finally,  regarding  possible  internal  dependencies,  a 
well-functioning Single Market and competition policy enabling  strong business dynamics play 
an  essential  role  by  diversifying  sources  of  supply  within  the  EU.  Strong  and  diversified  trade 
relationships  and  commercial  partnerships  with  third  countries  also  help  to  reduce  any  such 
internal dependencies. 

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Annex  

FactSet’s database  

Firm  level  data  on  relationships  between  companies  comes  from  FactSet’s  Supply  Chain 
Relationships  database.  The  data  covers  listed  and  other  major  companies  globally.  Therefore, 
the  dataset  is  not  a  census  and  it  may  underrepresent  SMEs,  but  its  coverage  is  sufficient  to 
capture the major trends in a given sector. The database records the existence of a link between a 
given pair of firms,  but  not  the type of product  of service traded.  For each company, the most 
prominent customers, suppliers and partners are identified according to the information disclosed 
in  annual  reports,  press  releases  and  other  sources.  As  a  result,  relationships  of  smaller 
importance  or  magnitude  may  be  kept  out  of  the  scope  of  the  database.  It  is  also  possible  to 
identify the areas of activity of a firm according to a detailed FactSet Revere Business Industry 
Classification  System  (RBICS).  The  data  use  for  the  analysis  does  not  control  for  ultimate 
ownership  of  corporate  groups.  Each  company  is  given  the  nationality  of  its  headquarters 
location. For some multinational groups this may imply that foreign subsidiary information and 
trade flows are assimilated to the mother company. 

104