When the chips are down…

Waiting for announcements on the UK’s semiconductor strategy is a bit like waiting for a bus; nothing comes for ages but then two announcements arrive in quick succession.

Semiconductors – or microchips – are increasingly key to the global IT supply chain, making appearances in everything from smartphones, laptops, medical devices and military equipment – as well as powering important developing technologies such as AI and IoT.

Shortages of these chips – as witnessed during the Covid-19 pandemic – have acted as a wake up call for many global leaders. This has prompted the US’s chip strategy and the EU’s European Chips Act with both investing tens of billions of dollars to ensure that, in the future, there are suppliers closer to home.

In the UK, however, nothing was announced in the usual Autumn statement. Or the previous budget. Or the one before that, meaning UK businesses have had to wait a little longer for the government’s response.

Meanwhile a House of Commons Committee report, released last autumn, noted that the UK was missing out on semiconductor investment due to the continued delay in action.

Rising sun

Fast forward to last week, when the bus analogy became true, with two announcements made in quick succession.

On Thursday the UK government announced a new partnership with this year’s G7 host Japan. The bilateral ties, which UK Prime Minister Rishi Sunak announced in Tokyo this week, sees the two nations “pursue ambitious R&D cooperation and skills exchange” – with the UK committing £2m in early-stage research next year.

Japan – home to electronics giants such as Panasonic, Sony and Toshiba, used to make more than half the world’s chips in its consumer electronics heyday, and recently announced a slew of initiatives to start ramping up production again.

For now, though, its neighbours South Korea, China, and Taiwan (which owns 50% of the chip world market) dominate – but with rising political tensions between the latter two (Beijing views Taiwan as a breakaway province of China), an outbreak in hostilities could have a global economic impact.

The yet-to-be published semiconductor agreement between UK and Japan – called the Hiroshima Accord – hopes to manage such geopolitical risk.

Design-led approach

Only a day after the accord was announced came the second bus. The UK unveiled its own long-delayed National Semiconductor Strategy to the relief of many British businesses that had been urging for clarity on the issue amid complaints of missed investment opportunities.

Plans include investing £1bn over the next decade to improve access to infrastructure, power more research and development and facilitate greater international cooperation. Up to £200m of this money has been promised between now and 2025.

The UK’s focus, the government said, would be on semiconductor design, IP and research – rather than large scale chip manufacturing – which firms such as Cambridge-founded Arm Ltd have made billion-dollar businesses out of. The UK outlined plans to become leaders in the design of compound semiconductors, for instance.

“Compound semiconductors can do things silicon chips can’t, with use cases in evolving technologies, such as autonomous driving and future telecoms. Their creation requires expertise in advanced materials, an area of UK science leadership,” said the statement.

Crucial to this implementation, says the government, will be a UK Semiconductor Advisory Panel comprised of key figures from industry, government and academia.

Will it work?

One billion pounds over a ten-year period pales in comparison to US ($52bn) and European (43bn Euros) investment in chip production, and it wouldn’t be enough to build one onshore chip factory (or fab, as they are known). By comparison, Intel has announced plans to build a fab in Germany, costing around £17 billion.

So, the government’s intent is clearly to invest in key areas where the UK already has a track record, rather than trying to compete in the capital-intensive semiconductor supply chain.

This is perhaps a wise move given the disastrous attempts at trying and to get gigafactory Britishvolt off the ground in the North of England last year.

But while the plan may seem like a sensible one, the question arises: why hasn’t this been done before? Why are there so few other successful companies like Arm in the UK – even before the world woke up to the geopolitical importance of the silicon chip?

For the plan to work, and grow dozens of Arm-style start ups, the UK would need to be able to hold onto these firms and their IP and create an investment ecosystem that sees them supported when they reach scale-up size and require larger amounts of cash.

It’s at this stage that most UK scale-ups go West of East, as the view still holds that  there’s not enough capital in the UK or even among the European markets, although the UK  government and regulators are currently working on a raft of initiatives to try to turn this around.

Arm, however, didn’t have this support and was bought by Softbank – ironically a Japanese investor –  in 2016. The chip design firm recently chose the New York Stock Exchange to list on over London, which doesn’t say much about the tech industry’s current confidence in the UK as a place to do business.

The second thing to note about this strategy is that it resigns the UK to relying on overseas manufacturers. Whether these are countres that are politically aligned to the UK or not, it doesn’t necessarily resolve the UK’s supply chain issues when the chips are down.

And during a worldwide shortage, the nearer you are to the supply the more you get to call the shots – just look at India’s ban on Covid-19 vaccine exports despite its agreement to supply the UK.

And then there’s the additional hurdle of Brexit, and soured relations with the EU which may not endear member countries to partner on production.

While Russ Shaw – founder of Tech London Advocates and Global Tech Advocates – welcomed the government’s clear plan of action to further develop research and commercialisation, he clearly recognised the need to use the strategy “as a basis to strike up other key international partnerships and areas of collaboration with like minded economies”.

He added: “This will not only strengthen the domestic tech sector, but also bolster the development of British industry broadly and drive wider economic growth.”