Chip shortages have worsened since the second half of last year, forcing many European carmakers to cut production. The crisis has made the EU determined to reverse Europe's chronic underinvestment in chip production and lure chip giants to set up factories in Europe with huge subsidies.

Silicon Valley, located in the Elbe Valley in Saxony, Germany, has seen the decline of The European chip industry. In the 1990s and early 2000s, AMD, an American chip company, invested billions of dollars in a state-of-the-art plant in Dresden, the capital of Saxony, which was sold in 2009 to the United Arab Emirates' state-controlled sovereign wealth fund. In the same year, Euromemory chipmaker Qimonda, the largest semiconductor factory in "Silicon Valley" in Saxony, declared bankruptcy after losing out to Samsung.

Bosch's chip plant north of Dresden, which opened in June, is almost the only greenfield investment in chip production in the EU in more than a decade. Saxony's "Silicon Valley" now aims to challenge TSMC and Samsung.

Peter Altmaier, Germany's federal Minister of economy and Energy, said he was ready to provide billions of euros worth of financial support for chip projects, so that Germany and Europe can become more independent in the chip field.

German media have disclosed that the EU plans to establish a "chip alliance" including Europe's leading chip companies, with the goal of increasing The share of European semiconductor production capacity to 20 percent of the world from the current 10 percent by 2030, and basically achieving local production of European chip needs.

The EU semiconductor production support plan, which is at a very preliminary stage, includes allowing EU governments to inject funds into chip research and production under looser state aid rules, the sources said. The EU is also interested in luring chip giants to set up high-end chip plants in Europe with huge subsidies.

The issue remains controversial within the EU. Some experts argue that the EU should first support chip development and design, rather than pouring money into uncompetitive, labour-intensive packaging and testing plants. Some EU officials are also suspicious of the strategy of relying on non-EU companies to build factories, arguing that EU companies might work better with foreign counterparts.

Robert Holtzmann, a member of the Council of the European Central Bank, thinks the chip shortage is only temporary. Given the amount of money invested in chip production, the world could see a glut of chips within a year. Thierry Breton, the European Commissioner responsible for the internal market, predicts that With industry co-ordination and substantial government funding, Europe could transform its position in the global chip industry in about two years.

Europe would have to invest $240bn - $330bn to become self-sufficient in chip supply, according to calculations by the Boston Consulting Group and the American Industry Association. That would require an additional $25 billion to $60 billion a year.