UK must cut chip imports from risky parts of world, review finds

Britain needs to cut its reliance on semiconductor imports from geopolitically sensitive parts of the world such as Taiwan, the government will argue when it publishes a long-delayed review of the sector.

The new strategy, which is expected within weeks will also offer hundreds of millions of pounds in long-term “targeted” financial support to the sector with a focus on the most high-tech parts of the industry, according to government officials familiar with the draft report.

It will also address the need to diversify supply chains in the industry by working more closely with friendly international counterparts, they said.

Ministers launched the review after the Covid-19 pandemic exposed the fragility of the global semiconductor supply chain, leading to a global shortage of chips, which had serious knock-on effects on many industries, such as carmaking.

Those concerns have been compounded by China’s increasingly aggressive stance over Taiwan, which dominates the global market in high-end chip fabrication.

But the political turmoil last year, which saw three different prime ministers in 10 Downing Street in less than two months, delayed the report and has left Britain lagging other countries in responding to future threats to supply chain disruption

The response by other large economies has triggered what has been termed a chip “subsidy race”. Last year, the US government committed to injecting $52bn into its semiconductor sector. Meanwhile, the EU has set out a €43bn investment plan for the industry, which has helped attract Intel to set up a $17bn plant in Germany.

The delay in publishing the review in the UK has caused frustration among executives in the sector, given the rapid pace at which other countries are moving.

Though the UK has a marginal role in the manufacture of chips, it does have a few areas of strength, relative to its size. It is home to two world-leading chip design companies, Arm and Imagination Technologies, which account for around 40 per cent of global intellectual property development in the sector.

It is also home to a number of companies developing compound semiconductors, which are made from other materials instead of silicon and are seen as a promising new area of research.

Other countries dominate parts of the sector, including Japan which is a leader in the manufacture of wafer-handling machinery and the US, which produces almost all the electronic design automation software used in chipmaking.

A recent report by the House of Commons business select committee described a Chinese invasion of Taiwan that led to the disruption of the export of semiconductors” as “a distinct potential threat”.

It added: “Such an act, coupled with the combined dominance of the Chinese and Taiwanese semiconductor markets, poses a material risk to the global economy and military and defence production capabilities.” The UK has no plants that can produce the most advanced chips, according to the report.

The warning echoed one by US commerce secretary Gina Raimondo last year, who said: “Our dependence on Taiwan for chips is untenable and unsafe.”

Last year, the government blocked the takeover of Newport Wafer Fab, Britain’s biggest semiconductor plant, by Nexperia, a Chinese-owned company.

One government figure said the sector had been “critically under pressure” in recent years with countries competing for influence and control over semiconductor technologies.

But the review will concede the UK cannot and should not meet all its semiconductor needs domestically. Instead it will recommend that the country focuses its efforts on value-added areas such as research and design, compound semiconductors and “advanced packaging”, by which several chips are combined into a single product.