Inaction risks Britain losing the battle for microchips
Ministers should back the highly successful semiconductor sector we already have, and do it quickly, or watch it eroded by US subsidies
Two years late and billions of pounds short? The Government finally announced its semiconductor strategy on Friday and some in the industry greeted it with dismay. Apparently, the Santas at the Department of Science Innovation and Technology hadn’t brought enough goodies: one chief executive even called it “flaccid”. But wiser heads were relieved.
Sometimes the best thing a government can do is to ignore the noisiest demands for prestige handouts. The UK already has a highly successful semiconductor sector, one that has cost us next to nothing. Two cheers to the Department of Science Innovation and Technology, then, which either by accident, or design, or simply thanks to the stinginess of the Treasury, has declined to indulge in a vanity exercise. It has ignored the manufacturing question, but kicked it down the road to the autumn.
There’s little excuse for being so dilatory, however. The review began over two years ago at the “Ministry of Fun”, in 2020. Yes, the same department responsible for poetry and tennis courts. Since then, spooked by the crippling supply chain shortages that followed coronavirus – the US, China and the EU have embarked on a subsidy arms race to increase their chip production capacity. For the West, reshoring production is spurred on by geopolitical anxieties too. The US chip industry is receiving around $52bn (£42bn) in subsidies, while the EU is “mobilising” – in its own words – €43bn (£37bn) to increase its global share from 10pc to 20pc, although only a tiny proportion of that is public money. Against those sums, the £1bn extra pledged by the UK over a decade may look puny.
“The industry didn’t come together to produce a short, consolidated list of requests, and asked for too many things,” one executive told me.
“Unlike the Semiconductor Industry Association in the US, who were focused, and patiently lobbied Obama, Trump and Biden.”
But “going huge” by subsidising £10bn fabrication plants (foundries, or “fabs”) to compete directly with Taiwan’s TSMC, Nvidia or Intel was never on the cards – nor would it be a wise use of money. A more useful way to think about the UK semiconductor industry is by analogy: we’re really the Brighton & Hove Albion of computer chips. Brighton knows it isn’t a Real Madrid and doesn’t have the bottomless petrostate funding of a Paris St Germain. But it does have a plan, knows what it wants to do and executes it extremely well. Both offer an enviable return on investment. Our chip industry excels in two key areas. One is our world-class chip design skills, which most people don’t recognise, even when it’s in front of them. Apple’s astonishing M1 microprocessor chip, used in its Macbooks and professional ipads since 2020, has been a game changer for the personal computer industry, a once in a generation leap: and much of it was designed in St Albans. “The most difficult part of it, too,” confirms one executive. Does it matter that the component doesn’t have “Made In Britain” etched on to the die? Or that it’s fabricated by TSMC in Taiwan? We should be shouting from the rooftops that the UK has such talent. Arm and Imagination also have a worldclass design reputation, and they’re joined by smaller start-ups.
Our second world-leading niche is harder to describe: a futuristic blend of chemistry and electronics. These are components – rather than the full-blown brains of a computer – known as compound semiconductors. And if you think that’s a clumsy mouthful, just be thankful the boffins’ choice of “wide-bandgap semiconductors” didn’t catch on). Made with exotic newer materials rather than old-school silicon, they amplify power and light – an array of them lets you unlock your iphone with your face, for example, and they are crucial in the fastest growing markets. The performance of an electric car very much depends on the quality of these parts.
The third leg of the strategy involves closer ties with Japan, a natural partner whose electronics companies have much to offer as the West’s dependency on China diminishes.
If the additional billion announced last week doesn’t sound like much, then remember that’s not the full story. Funding provided by Innovate UK and the funding agency ESRC continues and what they have spent so far has been extremely good value. Our global leadership in the semiconductor niche has been achieved by funding 450 Phds, with £753m in grants and direct support to achieve our success. That’s barely a rounding error compared to furlough fraud. But we’ve historically been better at inventing than growing up a successful business, and now we desperately need to. Here, the US Chips Act complicates things. Subsidies are traditionally frowned upon because the Government is bad at picking winners and their presence encourages companies to grow lazy. But with chips, the winner has picked itself and now they need to attract capital to grow. For example, the poster child for our compound semiconductor sector, IQE, is a Newport-based, Lse-listed company with specialised production spread across three continents, and it wants to triple in size over the next five years. It admits that when US federal and state aid can knock 30pc of the build cost off a new foundry, every manufacturer in the world has to take note. Let’s hope the Treasury is listening.
‘We are really the Brighton & Hove Albion of computer chips’