ZF, Wolfspeed chip factory in Germany will help boost EV transition

In the auto industry's rocky transition to electric vehicles, German Chancellor Olaf Scholz is celebrating a small but symbolic victory.

The cause is plans by ZF Friedrichshafen and U.S. semiconductor maker Wolfspeed for the world's biggest production facility for chips made out of silicon carbide, an alternative semiconductor material that is more energy efficient than traditional silicon and helps to boost the range of electric vehicles.

Wolfspeed said it planned for the factory to start production in 2027. It will be located on the site of a former coal power plant in Saarland, southwest Germany. ZF will hold a minority stake in the plant, and a majority stake in an R&D center the two companies will establish.

Saarland, which is home to a Ford Motor factory, has an economy deeply tied to the fading internal combustion engine. The new chip plant is seen as a symbol of optimism for tens of thousands of workers in Germany's car industry who are worried that the transition to electric vehicles could leave them without jobs.

It also comes as governments in Europe jockey for new industrial projects amid unease that subsidies on offer in the U.S. via the Inflation Reduction Act (IRA) will lure planned investments in Europe across the Atlantic.

"Amid the concerns that the U.S. wants to divert investments from Europe with its Inflation Reduction Act, we are showing that a U.S. firm wants to invest in Germany," a German government source said.

Wolfspeed CEO Gregg Lowe said the Saarland site would be about one-third bigger than Wolfspeed's existing flagship factory in upstate New York.

He said Wolfspeed selected Germany after examining several European sites. The company was drawn to Germany's large manufacturing workforce, which it expects to help boost the factory's profitability.

"With the transition of ZF toward e-mobility, a lot of technicians currently working on internal combustion engines are going to become available to us," Lowe said. "We just need to train them how to work on semiconductor equipment."

While Wolfspeed is concerned about the current high energy prices in Germany, Lowe said he is confident that developments in renewable energy sources will drive prices down before the wafer fab starts production.

The global transition to EVs and the race to produce them more cheaply has forced legacy automakers like BMW, Mercedes-Benz and Volkswagen to rethink and sometimes reinvent decades-old production practices. VW warned last month that the chip squeeze meant 2023 would remain volatile and challenging, but it expected supplies to improve.

In Germany, where about 786,000 people are employed by automakers and parts suppliers, the shift to EVs is fraught with wide-reaching economic, social and political risks.

ZF and Wolfspeed's announcement is particularly timely for Saarland, where more than a dozen automotive suppliers employ roughly 44,000 people to produce components such as automatic transmissions, diesel injection technology and engine blocks.

In November, parts supplier Schaeffler said it was cutting 1,000 jobs in Germany — including 100 at its Homburg plant in Saarland — as the transformation to electric drivetrains accelerates.

Ford plant blow

Ford has said it will stop producing cars at its Saarlouis plant, which employs 4,500 people and builds the Focus compact model, by 2025. Ford is in early-stage talks with potential investors including China's BYD about selling the site, according to people familiar with the matter.

The new ZF-Wolfspeed semiconductor facility — known as a wafer fab — offers hope that the region can have a future in an electrified auto industry. ZF and Wolfspeed plan to locate the wafer fab in Ensdorf, near ZF's Saarbrücken site.

Lowe said the project would cost $3 billion and would depend on government subsidies that Wolfspeed expects to cover a "big part" of the cost. Wolfspeed has applied for the subsidies, but they still require European Commission approval.

ZF will take a minority stake in the factory, said Stephan von Schuckmann, a member of the ZF board of management. "It’s a kind of generational shift for the Saarland state,” von Schuckmann said, adding that the factory will create more than 600 new jobs.

The German  government has been working to shore up Germany's industrial sector amid a global race to get a leg up in the transition to green technologies and energy.

Scholz is urging the U.S. to ease subsidy requirements for the EV supply chain, and earlier this week visited Brazil, Argentina and Chile as part of a push to secure supplies of lithium and other key materials needed for the batteries that power EVs.

Mercedes, JLR customers

Wolfspeed specializes in silicon carbide chips, which can boost EVs' range by as much as 15 percent while also cutting charging time compared to silicon chips. The company has entered supply agreements with Mercedes and Jaguar Land Rover for its chips.

Wolfspeed announced in September a new plant in the U.S. due for completion in 2030, which it said will be the world's largest silicon carbide materials facility.

U.S. supplier BorgWarner has invested $500 million in Wolfspeed to secure as much as $650 million annual capacity for the silicon carbide devices.

Together with the factory, ZF and Wolfspeed also plan to set up an R&D center in Germany, majority-owned by ZF, to explore further uses of silicon carbide chips to make power inverters more efficient.

ZF plans to integrate Wolfspeed's chips in inverters that ZF supplies to electric truck manufacturers. It will also integrate silicon carbide chips in its wind turbine transmissions and plans to use them in electric ships.

Reuters contributed to this report