Britain’s semiconductor plan goes AWOL as US and EU splash billions

LONDON — As nations around the world scramble to secure crucial semiconductor supply chains over fears about relations with China, the U.K. is falling behind.

The COVID-19 pandemic exposed the world’s heavy reliance on Taiwan and China for the most advanced chips, which power everything from iPhones to advanced weapons. For the past two years, and amid mounting fears China could kick off a new global security crisis by invading Taiwan, Britain’s government has been readying a plan to diversify supply chains for key components and boost domestic production.

Yet according to people close to the strategy, the U.K.’s still-unseen plan — which missed its publication deadline last fall — has suffered from internal disconnect and government disarray, setting the country behind its global allies in a crucial race to become more self-reliant.

A lack of experience and joined-up policy-making in Whitehall, a period of intense political upheaval in Downing Street, and new U.S. controls on the export of advanced chips to China, have collectively stymied the U.K.’s efforts to develop its own coherent plan.

The way the strategy has been developed so far “is a mistake,” said a former senior Downing Street official.

Falling behind

During the pandemic, demand for semiconductors outstripped supply as consumers flocked to sort their home working setups. That led to major chip shortages — soon compounded by China’s tough “zero-COVID” policy. 

Since a semiconductor fabrication plant is so technologically complex — a single laser in a chip lithography system of German firm Trumpf has 457,000 component parts — concentrating manufacturing in a few companies helped the industry innovate in the past.

But everything changed when COVID-19 struck.

“Governments suddenly woke up to the fact that — ‘hang on a second, these semiconductor things are quite important, and they all seem to be concentrated in a small number of places,’” said a senior British semiconductor industry executive.

Beijing’s launch of a hypersonic missile in 2021 also sent shivers through the Pentagon over China’s increasing ability to develop advanced AI-powered weapons. And Russia’s invasion of Ukraine added to geopolitical uncertainty, upping the pressure on governments to onshore manufacturers and reduce reliance on potential conflict hotspots like Taiwan.

Against this backdrop, many of the U.K.’s allies are investing billions in domestic manufacturing.

The Biden administration’s CHIPS Act, passed last summer, offers $52 billion in subsidies for semiconductor manufacturing in the U.S. The EU has its own €43 billion plan to subsidize production — although its own stance is not without critics. Emerging producers like India, Vietnam, Singapore and Japan are also making headway in their own multi-billion-dollar efforts to foster domestic manufacturing.

Now the U.K. government is under mounting pressure to show its own hand. In a letter to Prime Minister Rishi Sunak first reported by the Times and also obtained by POLITICO, Britain’s semiconductor sector said its “confidence in the government’s ability to address the vital importance of the industry is steadily declining with each month of inaction.”

That followed the leak of an early copy of the U.K.’s semiconductor strategy, reported on by Bloomberg, warning that Britain’s over-dependence on Taiwan for its semiconductor foundries makes it vulnerable to any invasion of the island nation by China.  

Taiwan, which Beijing considers part of its territory, makes more than 90 percent of the world’s advanced chips, with its Taiwan Semiconductor Manufacturing Company (TSMC) vital to the manufacture of British-designed semiconductors.

U.S. and EU action has already tempted TSMC to begin building new plants and foundries in Arizona and Germany.

“We critically depend on companies like TSMC,” said the industry executive quoted above. “It would be catastrophic for Western economies if they couldn’t get access to the leading-edge semiconductors any more.”

Whitehall at war

Yet there are concerns both inside and outside the British government that key Whitehall departments whose input on the strategy could be crucial are being left out in the cold.

The Department for Digital, Culture, Media and Sport (DCMS) is preparing the U.K.’s plan and, according to observers, has fiercely maintained ownership of the project. DCMS is one of the smallest departments in Whitehall, and is nicknamed the ‘Ministry of Fun’ due to its oversight of sports and leisure, as well as issues related to tech.

“In other countries, semiconductor policies are the product of multiple players,” said Paul Triolo, a senior vice president at U.S.-based strategy firm ASG. This includes “legislative support for funding major subsidies packages, commercial and trade departments, R&D agencies, and high-level strategic policy bodies tasked with things like improving supply chain resilience,” he said.

“You need all elements of the U.K.’s capabilities. You need the diplomatic services, the security services. You need everyone working together on this,” said the former Downing Street official quoted above. “There are huge national security aspects to this.”

Referring to lower-level civil servants, the same person said that relying on “a few ‘Grade 6’ officials in DCMS — officials that don’t see the wider picture, or who don’t have either capability or knowledge,” is a mistake. 

For its part, DCMS rejected the suggestion it is too closely guarding the plan, with a spokesperson saying the ministry is “working closely with industry experts and other government departments … so we can protect and grow our domestic sector and ensure greater supply chain resilience.”

The spokesperson said the strategy “will be published as soon as possible.”

But businesses keen for sight of the plan remain unconvinced the U.K. has the right team in place for the job.

Key Whitehall personnel who had been involved in project have now changed, the executive cited earlier said, and few of those writing the strategy “have much of a background in the industry, or much first-hand experience.”

Progress was also sidetracked last year by lengthy deliberations over whether the U.K. should block the sale of Newport Wafer Fab, Britain’s biggest semiconductor plant, to Chinese-owned Nexperia on national security grounds, according to two people directly involved in the strategy. The government eventually announced it would block the sale in November.

And while a draft of the plan existed last year, it never progressed to the all-important ministerial “write-around” process — which gives departments across Whitehall the chance to scrutinize and comment upon proposals.

Waiting for budget day

Two people familiar with current discussions about the strategy said ministers are now aiming to make their plan public in the run-up to, or around, Chancellor Jeremy Hunt’s March 15 budget statement, although they stressed that timing could still change.

Leaked details of the strategy indicate the government will set aside £1 billion to support chip makers. Further leaks indicate this will be used as seed money for startups, and for boosting existing firms and delivering new incentives for investors.

There is wrangling with the Treasury and other departments over the size of these subsidies. Experts also say it is unlikely to be ‘new’ money but diverted from other departments’ budgets.

“We’ll just have to wait for something more substantial,” said a spokesperson from one semiconductor firm commenting on the pre-strategy leaks.

But as the U.K. procrastinates, key British-linked firms are already being hit by the United States’ own fast-evolving semiconductor strategy. U.S. rules brought in last October — and beefed up in recent days by an agreement with the Netherlands — are preventing some firms from selling the most advanced chip designs and manufacturing equipment to China.

British-headquartered, Japanese-owned firm ARM — the crown jewel of Britain’s semiconductor industry, which sells some designs to smartphone manufacturers in China — is already seeing limits on what it can export. Other British firms like Graphcore, which develops chips for AI and machine learning, are feeling the pinch too.

“The U.K. needs to — at pace — understand what it wants its role to be in the industries that will define the future economy,” said Andy Burwell, director for international trade at business lobbying group the CBI.

Where do we go from here?

There are serious doubts both inside and outside government about whether Britain’s long-awaited plan can really get to the heart of what is a complex global challenge — and opinion is divided on whether aping the U.S. and EU’s subsidy packages is either possible or even desirable for the U.K.

A former senior government figure who worked on semiconductor policy said that while the U.K. definitely needs a “more coherent worked-out plan,” publishing a formal strategy may actually just reveal how “complicated, messy and beyond our control” the issue really is.

“It’s not that it is problematic that we don’t have a strategy,” they said. “It’s problematic that whatever strategy we have is not going to be revolutionary.” They described the idea of a “boosterish” multi-billion-pound investment in Britain’s own fabricator industry as “pie in the sky.”

The former Downing Street official said Britain should instead be seeking to work “in collaboration” with EU and U.S. partners, and must be “careful to avoid” a subsidy war with allies.

The opposition Labour Party, hot favorites to form the next government after an expected 2024 election, takes a similar view. “It’s not the case that the U.K. can do this on its own,” Shadow Foreign Secretary David Lammy said recently, urging ministers to team up with the EU to secure its supply of semiconductors.

One area where some experts believe the U.K. may be able to carve out a competitive advantage, however, is in the design of advanced semiconductors.

“The U.K. would probably be best placed to pursue support for start-up semiconductor design firms such as Graphcore,” said ASG’s Triolo, “and provide support for expansion of capacity at the existing small number of companies manufacturing at more mature nodes” such as Nexperia’s Newport Wafer Fab.

Ministers launched a research project in December aimed at tapping into the U.K. semiconductor sector’s existing strength in design. The government has so far poured £800 million into compound semiconductor research through universities, according to a recent report by the House of Commons business committee.

But the same group of MPs wants more action to support advanced chip design. Burwell at the CBI business group said the U.K. government must start “working alongside industry, rather than the government basically developing a strategy and then coming to industry afterwards.”

Right now the government is “out there a bit struggling to see what levers they have to pull,” said the senior semiconductor executive quoted earlier.

Under World Trade Organization rules, governments are allowed to subsidize their semiconductor manufacturing capabilities, the executive pointed out. “The U.S. is doing it. Europe’s doing it. Taiwan does it. We should do it too.”

Cristina Gallardo contributed reporting.