The quiet Czech town that’s helping Europe compete in the global chip war

The Czech city of Roznov on the Radhost It was best known for its sweet rum-soaked pastries and an open-air museum displaying historic wooden houses. Then an announcement was heard that shook the quiet place.

American chipmaker ON Semiconductor Corporation. In June, Roznov was chosen as a new $2 billion manufacturing hub. In recent weeks, there has been a flurry of visits from property developers, the head of a local university and government officials, followed by television crews.

The interest is not surprising, as it is the largest investment a foreign company has made in the Czech Republic in three decades, but it also reflects that there is more at stake in the plan to manufacture a new generation of microchips than in the prospects of a corner of central Europe.

Onsemi to expand existing site to manufacture chips for electric vehicles and the renewable energy industry, with a contract already in place with Volkswagen AG. Success is not only important for the city and the stagnant Czech economy, but also for the European Union’s ability to secure supplies amid a global battle for critical components.

“Semiconductors are becoming the backbone of the modern economy,” said Industry and Trade Minister Jozef Sikela. “The more new technologies we can produce at home, the better for our economic security.”

Onsemi’s investment is modest compared to other technology projects elsewhere in Europe, but the current Roznov plant already plays an important role within the company, designing and producing semiconductors. That is key to moving the Czech economy toward a more profitable and less labor-intensive industry than traditional car and car component manufacturing.

About 2,200 Onsemi employees in the country produce 10 million chips a day for industrial, automotive and telecom customers such as BMW AG, Mercedes-Benz AG, Siemens AG, Apple Inc. and Samsung Electronics Co.

While the planned investment will create only 800 new jobs over the next seven years, Onsemi expects annual revenue at Roznov to gradually quadruple to at least $1.2 billion as the expansion will focus on more cost-effective silicon carbide semiconductors with higher capacity.

The first challenge, however, is making sure the town of 16,000 can cope with the expansion. To allay residents’ concerns about a lack of schools, doctors and housing, Mayor Jan Kucera said 300 to 400 new apartments will be built, while the city will spend the equivalent of $85 million to improve local roads, parking and other services. “Every mayor’s dream is a high-tech investment in a brownfield from a company he already knows that will attract educated people,” Kucera said at the renovated Roznov library. “And that’s exactly what we’re getting.”

The prospect of the city joining the new industrial era contrasts sharply with the challenges facing the neighbouring region of Ostrava, just an hour’s drive away. Since the end of communism in 1989, the easternmost part of the Czech Republic has been plagued by a sharp decline in traditional mining and metallurgical industries and chronic unemployment.

This summer, a dormant steelworks in Ostrava declared bankruptcy after failing to pay energy bills and the wages of its nearly 5,000 employees.

Semiconductor production at Roznov dates back to the early days of the Cold War, when communist Czechoslovakia moved part of its electronics industry there from a location near the German border. After the fall of the Berlin Wall, the conglomerate — then called Tesla Roznov — was broken up and its chip unit was sold to mobile-phone pioneer Motorola Inc., which later became part of its Arizona-based subsidiary Onsemi.

The new facility will handle the entire manufacturing process, from growing silicon carbide crystals to the final product, rather than splitting it between Onsemi plants on three different continents.

This means chips will be made closer to customers in the automotive industry, the traditional engine of the Czech economy and now beset by rapidly rising wages, disruptions in the global supply chain and competition from Chinese electric vehicles.

A month after announcing Roznov’s expansion, Onsemi signed a multi-year deal to supply silicon carbide parts to Volkswagen, owner of the dominant Czech manufacturer, Skoda Auto AS. Both VW and Skoda have had to repeatedly reduce or suspend production over the past three years due to disruptions in supplies of chips made mainly in Asia.

The expansion of the Roznov plant is an “important step in efforts to reduce the EU’s dependence on imported raw materials and strategic components,” said Helena Horska, chief economist at the Czech unit of Raiffeisen Bank International AG and an adviser to Prime Minister Petr Fiala. Since Onsemi’s chips are also used in solar panels, the investment could help reduce the country’s dependence on cars, she said.

Onsemi is still negotiating with the Czech government and the EU for financial support, which could cover about a quarter of the investment. If all goes well, the company plans to start building a new production facility across the street from its current site in Roznov next year.
Ivana, a resident of Roznov, said she saw the long-term benefits for the Czech Republic, but expressed concern about the pressure being put on public services by the influx of new workers. It is hard enough finding a dentist for her young children, she said as she walked with them through the town’s colourful main square.

“I have mixed feelings,” said Ivana, who preferred not to be identified by her full name when speaking to the media. “I know this is important for the country and good publicity for Roznov, but I am worried about the local impact.”

Indeed, the project has been heralded by politicians and business leaders as a boon for a country that was once a model of economic transformation from communism to the free market.

The EU’s lowest unemployment has proven to be a curse rather than a blessing: wage growth has significantly outpaced productivity for years, contributing to an inflationary crisis from which the country is still recovering.

The Czech Republic has begun to lag even its poorer regional peers when it comes to foreign investment, particularly in new technologies. A year ago, Intel Corp. chose neighboring Poland to build a $4.6 billion chip assembly and testing plant, while neighboring Hungary is becoming a European hub for electric-vehicle battery production.

According to Ales Cab, head of the US company’s Czech business, Onsemi wants to help fill that gap. Once new supply chains are established, carmakers and other chip buyers are likely to stick with them for at least two decades, he predicted.

“Now we have the opportunity to join this trend,” Cab said at the company’s headquarters in Roznov. “A window of opportunity like this opens once in a while.”