(Bloomberg) -- In the auto industry’s rocky transition to electric vehicles, German Chancellor Olaf Scholz is celebrating a small but symbolic victory.

The cause is a $3 billion deal between auto supplier ZF Friedrichshafen and semiconductor maker Wolfspeed Inc. to produce chips for EVs in Saarland, a region in the western corner of Germany with an economy deeply tied to the fading internal combustion engine.

On Wednesday, Scholz and Economy Minister Robert Habeck are joining executives from the two companies in Saarland to trumpet the project as a symbol of optimism to tens of thousands of workers in Germany’s car industry who fret that the transition to electric vehicles could leave them without jobs.

The global transition to EVs and the race to produce them more cheaply has forced legacy carmakers like BMW, Mercedes-Benz and Volkswagen to rethink and sometimes reinvent decades-old production practices. In Germany, where about 786,000 people are employed by automakers and parts suppliers, the shift 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 motor 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. Last week, Ford said it will stop producing cars at its Saarlouis plant, which employs 4,500 people, by 2025. The US manufacturer is in early-stage talks with potential investors including China’s BYD Co. about selling the site, according to people familiar with the matter.

But the new 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, converting a former coal-fired power plant into the world’s largest factory for silicon carbide semiconductors. The companies are still waiting for specific subsidy commitments of about one-quarter of the total investment, but they aim for the details to be finalized within the next couple of months and expect the facility to start production by 2027, reaching full capacity three years later.

“It’s a kind of generational shift for the Saarland state,” ZF board member Stephan von Schuckmann said in an interview with Bloomberg, adding that the factory will create more than 600 new jobs. 

For Wolfspeed, the availability of well-trained engineers is what made Saarland stand out from about a dozen potential sites in Europe. 

“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”, Wolfspeed Chief Executive Officer Gregg Lowe said in an interview. “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’s confident that developments in renewables will drive prices down before the wafer fab starts production.

Scholz’s 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 US 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.

“The experience of the pandemic in particular has taught us that we in Germany and Europe need to become more resilient in technological, digital and logistical terms,” Scholz said Wednesday in Saarland. “We will therefore systematically reduce dependencies and vulnerabilities and strengthen our ability to act.”

Wolfspeed specializes in silicon carbide semiconductors, which can boost EVs’ range by as much as 15% while aslo cutting charging time compared to conventional silicon chips. The US manufacturer has entered supply agreements with Mercedes and Jaguar Land Rover for its chips. US supplier BorgWarner has invested $500 million in the company 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 which ZF supplies to electric truck manufacturers. It will also integrate silicon carbide chips in its windmill transmissions and plans to use them in electric ships. 

--With assistance from William Wilkes, Arne Delfs and Michael Nienaber.

(Updates with Scholz comment in 12th paragraph.)

©2023 Bloomberg L.P.