It was on that plot outside Dresden that the chancellor, wielding a shovel, broke ground for a large plant of Taiwan Semiconductor Manufacturing Company on a hot day in August. He rushed to start digging first, alongside European Commission President Ursula von der Leyen and other dignitaries.

Less than a month later, that enthusiasm suffered a crushing blow as another bigger project by rival Intel Corp. to produce some of Europe’s most advanced microchips went awry. That decision to halt a more than €30 billion ($32 billion) investment in Magdeburg, also in the east, followed what officials cite as repeated reassurances of the company’s intention to plow on.

The aspiration to turn Germany into a semiconductor superpower, described by insiders as personally driven by Scholz, now looks increasingly hopeless. Aides insist he will stick with it, even though the Intel announcement just robbed his key industrial policy of its centerpiece.

With the three-way coalition in tatters, the Social Democrat chancellor soon faces elections where voters may punish his failure to secure firm foundations for growth in the region’s biggest economy. No less in disarray is Europe’s wider strategy to expand chip capacity enough to reassert itself as a pillar of global prosperity.

Germany’s attempt at reinvention as a semiconductor hub is part of a worldwide race to win control over the oil of the digital age, and the driving force behind future technologies such as artificial intelligence.

“These microchips are everywhere — in our phones, vacuum cleaners, fridges and cars,” Vice Chancellor Robert Habeck told Deutschlandfunk radio on Monday, explaining why Germany shouldn’t give up on Intel. “Our entire economy depends on them. Dependence on Russian gas is nothing compared to that.”

The European Union’s goal is to raise market share in global semiconductor output to 20% by 2030 — an aim that seems unattainable. The level in 2024 was just 8.1%, and without further investments, it would fall to 5.9% by 2045, according to analysis by German industry lobby group Zvei and consultancy Strategy&. 

None of the world’s leading chip manufacturers — Intel, Samsung and TSMC — is from the region. Europe further strains to catch up in outbidding other governments’ subsidies: China has allocated $142 billion to the cause of semiconductors, while the US offers tax cuts in its Inflation Reduction Act and $39 billion of aid via its CHIPS Act.

Intel’s push to make some of its most modern chips in Germany was touted earlier in 2024 as a “huge leap forward to all of Europe” by then-chief executive officer Pat Gelsinger. While the project is now on a two-year “pause,” many industry insiders consider it as essentially forsaken.

The setback was the worst in a series for Scholz. Struggling US chipmaker Wolfspeed Inc. and German automotive supplier ZF Friedrichshafen AG have also rowed back expansion plans, and GlobalFoundries Inc. has relocated some production from Dresden to Portugal.

The site Scholz helped inaugurate in August is part of Germany’s remaining viable joint venture, ESMC, made up of TSMC, Infineon Technologies AG, NXP Semiconductors NV, and Bosch. That’s all that’s tangibly left of his grand vision of attracting international investment to establish a high-tech cluster in the east, create thousands of jobs and cushion the demise of once prosperous sectors like coal mining.

Other European countries have had setbacks too. Intel postponed plans for a Polish factory, and a €7.5-billion joint venture of autochip maker ST Microelectronics and GlobalFoundries in the French town of Crolles is also on hold.

But nowhere the head of government had so much riding on the investment as in Germany, where Scholz championed microchips and the push to lure Intel with €10 billion in taxpayers’ money.

He first enlisted Habeck of the Green Party and they worked together on then-Finance Minister Christian Lindner of the market-friendly Free Democrats to fall into line. Scholz’s chancellery led talks in coordination with Habeck’s economy ministry, according to people familiar with the negotiations who sought anonymity discussing confidential matters. 

Officials knew the company was struggling but stayed in regular contact with Gelsinger, who insisted everything was going to plan even just a few days before the construction halt. Poland’s dialog was similar, according to Deputy Digitization Minister Dariusz Standerski. 

“Information about the company’s financial problems was common knowledge,” he said in an interview. “But when we raised it on the working teams, it was pointed out that this investment could help Intel get out of these problems.”

Intel’s decisions on Poland and Germany were “based on anticipated market demand,” according to a statement from the company.

“We will assess this opportunity at the end of the two-year pause,” Intel said. “If market demand returns to expected levels the opportunity for us would be to fulfill that demand locally in Europe.”

The Magdeburg stoppage in September, alongside Volkswagen AG’s warning that month of auto-factory closures, was a body blow to Scholz’s government, which collapsed in November amid differences with Lindner on the federal budget. Elections will take place on Feb. 23.

The Intel debacle has divided industry insiders, speaking on condition of anonymity to communicate frankly. Some say Scholz can’t be faulted for trying, but others criticize that his plan didn’t feature a simultaneous push to determine and drive demand from prospective clients. 

For observers including Veronika Grimm, a member of Scholz’s panel of independent economic advisers, and Lars Feld, a professor for economic policy who advised Lindner at the finance ministry, a more fundamental issue is the use of subsidies in the first place.

“A strong state is not necessarily one involved everywhere,” Grimm said in an interview. “You can’t combat unfavorable framework conditions with subsidies.” 

The government remains in continuous communication with Intel, according to an economy ministry spokesperson who declined to disclose further details about confidential talks. The spokesperson noted good progress with ESMC and another Infineon project in Germany.

For all his disappointment, Scholz hasn’t given up hope of recasting Germany as a center for chip manufacturing, and officials are seeking alternatives. 

One target they have been courting is Samsung, a senior government official familiar with the matter told Bloomberg, asking to not be identified since the efforts aren’t public. The company has yet to express an interest in expanding production in Europe. 

Meanwhile the economy ministry is touting yet more semiconductor subsidies: it started a new tender in November with an intended volume of around €2 billion, people familiar with the plans said. The government wants to support 10 to 15 projects in a range of fields including production of raw wafers and chip assembly. 

For Germany to be putting out cutting-edge AI chips in the future, alternatives to Intel are sparse: TSMC will not produce its most advanced chips outside of Taiwan. 

That fundamental truth means that for now, Scholz’s dream of building a meaningful German presence at the vanguard of chipmaking innovation is set to remain elusive.

Even if it could be achieved one day, he may be running out of time to see it through. Polls show the opposition Christian Democrats on course to win in February.