Making social science accessible

26 Jun 2023


After repeated delays, the UK government has set out its semiconductor strategy.

Peter Jurkovic explains what semiconductors are and why they have become such a hot international topic, outlines what the UK semiconductor strategy says, and compares it to the approach taken by the EU and US.

 What are semiconductors? And why are they important?

Scientifically speaking, a semiconductor is a material with conductivity greater than an insulator (e.g. glass) but worse than a conductor (e.g. copper), which gives them a range of current and voltage-handling capabilities.

However, when we talk about ‘semiconductors’ we are usually referring to chips, such as integrated circuits or computer chips, that are made with semiconductors — most commonly silicon — due to their unique properties.

These chips are key components in most of the electronic devices we use today, such as smartphones, cars and other vehicles, as well as in weapons that states require for national security, and are needed for advanced technological innovations such as AI and quantum computing.

Semiconductors are also an important technology for countries trying to transition to net-zero since solar panel systems, wind turbines, and electric vehicles (EVs) are all dependent on semiconductors in large numbers.

Why does the UK need a semiconductor strategy?

The motivation for the UK to establish a semiconductor strategy comes from both a longer-term concern and a more immediate pressure.

The long-term concern is the need to bolster supply chain resilience and security. The disruption to global trade caused by the Covid-19 pandemic and Russia’s invasion of Ukraine has helped many states to recognise their vulnerabilities, and has consequently prompted them to find ways of enhancing the resilience of their supply chains.

This is a particular concern with semiconductors, for which the supply chains of most states are extremely fragile. This was made clear during the Covid-19 pandemic which caused disruptions to freight routes and ports as well as triggering a surge in demand for electronic devices as people were forced to work from home. The result was a significant increase in waiting times for chip orders, which meant that many businesses from Apple to automotive companies had to delay production.

The Russian invasion of Ukraine added to short term disruption, as Ukraine produced 50% of the world’s chip-grade neon gas (the gas used to control lasers that etch chips).

On top of these disruptions,  there is a lack of resilience given the great global dependence on Taiwan for semiconductors. Over 90% of the most advanced semiconductors and more than 60% of all semiconductors are produced in Taiwan — and most of these by one company, the Taiwan Semiconductor Manufacturing Corporation (TSMC).

There has been an added urgency to reduce dependence on Taiwan because of the increasingly aggressive actions of Beijing in the South China Sea. A Chinese invasion of Taiwan would cause a huge disruption to semiconductor supply chains, which would likely have a devastating impact on many Western states.

How are states responding to these concerns?

The more immediate pressure for the UK to set out a semiconductor strategy comes from the recent policies that have been announced by other large economies.

The US Chips and Science Act, announced last year, will invest $52bn of government funding to support semiconductor manufacturing, including $11bn for advanced semiconductor R&D, in addition to huge support available through the Inflation Reduction Act. Meanwhile the EU aims to invest €43bn in order to double the EU’s share of global semiconductor production to around 20%.

China’s support greatly surpasses these figures, as its government has pledged a trillion yuan ($143bn) to boost its domestic semiconductor production. Other countries such as India, Vietnam, Singapore, and Japan have also recently stepped-up efforts to boost production.

As a result, there has been concern that the UK is falling behind. Industry leaders have complained that the lack of clear UK strategy was discouraging investment in the sector and was pushing semiconductor firms to consider relocating to the US or the EU where they could benefit from subsidies.

An early warning sign was when Arm, a leading chip design company, which produces over 95% of the processors in smartphones globally, opted to publicly list itself in the US rather than the UK.

IQE, a producer of compound semiconductors, which are used for many emerging technologies such as EVs and 5G, has also threatened to move abroad unless the government comes up with a plan in the near future.

Furthermore, the chief executive of Paragraf, which is developing an advanced, and much faster, form of microchip, has also warned he may relocate his company abroad, citing the lack of infrastructure and Brexit making it harder to recruit skilled workers. It has called for greater clarity from government in terms of support and regulation.

Finally, the Newport Wafer Fab, a large semiconductor plant which produces silicon wafers, could be forced to close down after the government decided to block the sale of the plant to the Chinese company Nexperia on national security grounds.

Why has it taken so long for the strategy to be published?

A national semiconductor strategy was first intended for release in the summer of 2022 but was continuously delayed.

In February 2023, MPs from the Business, Energy and Industrial Strategy (BEIS) Committee criticised the delays in the publication of a strategy as an ‘act of national self-harm’.

The initial delays were supposedly a result of the instability caused by the resignations of Boris Johnson and Liz Truss in quick succession. More recently the strategy was delayed due to Secretary of State for Technology Michelle Donelan going on maternity leave.

However, a report by the Centre for Policy Studies (CPS), blames the long delay on the inefficiency of the government’s approach. The report criticises the decision to give six different Whitehall departments responsibility for different aspects of the semiconductor strategy, which it claims has led to fragmentation and incoherence.

The report recounts that semiconductor firms have complained about the contradictory messages they have received from separate departments during the drafting process.

By comparison, in the US just one department, the Department of Commerce (DOC), has responsibility for rolling out programmes to support the semiconductor industry.

The delay is comparable to that of other sectors such as clean energy technologies and electric batteries for which the government has still not released a comprehensive strategy. This could also be seen as part of a broader criticism of the Sunak government that has, so far, failed to develop a new industrial strategy. The previous industrial strategy developed by Greg Clark was scrapped under the Johnson government.

What’s in the plan?

On 19 May, the government announced its ‘National Semiconductor Strategy’.

The plan offers British semiconductor firms £1bn over the next decade, which the strategy says will be targeted towards the UK’s areas of strategic advantage in the sector: semiconductor design, compound semiconductors, and R&D institutions.

The strategy lists three key objectives that it aims to fulfil.

First, it will seek to grow the domestic sector by increasing support for academic and commercial R&D; improving access to key infrastructure for semiconductor companies, such as design tools and prototyping facilities; and enhance technical skills and qualifications to meet the needs of the sector.

Second, the strategy will attempt to reduce the risk of supply chain disruptions. Here, the focus will be on developing supply chain resilience, particularly for critical sectors, such as healthcare and defence. The strategy sets out plans to develop a baseline level of manufacturing of the chips required for critical infrastructure, as well as to increase collaboration with external chip suppliers of key sectors of the economy.

This can be seen as building on the partnership that the UK agreed with Japan days before the release of the strategy. The deal establishes R&D cooperation and skills exchange between the countries, in order to combine Japan’s strength in manufacturing with the UK’s design capabilities.

Third, the plan aims to fortify UK national security. The strategy acknowledges that the acquisition of chip firms and technologies by ‘hostile states’ can present national security issues. As a result, it sets out plans to make use of the National Security and Investment Act as well as export controls to protect the ‘most sensitive’ areas of the sector.

This increased caution has been reflected in Business secretary Grant Shapps’ decisions to reverse the sale of the Newport Wafer Fab to a Chinese-owned company and block the acquisition of HiLight Research, which designs advanced integrated circuits, by SiLight, a Shanghai Company.

A ‘UK Semiconductor Advisory Panel’ made up of government figures as well as industry and academic experts will be responsible for delivering the strategy.

Why has so little been invested?

A central criticism of the strategy has been about the amount being invested.

The CEO of Paragraf said that the funding commitment was insignificant relative to the amount the industry needs and the strategy as a whole does not address ‘the fundamental challenges British chipmakers face’.

This was echoed by the Shadow Secretary of State Lucy Powell who said that the plan failed to match the ambition of the UK’s competitors.

Indeed, the £1bn offered in the UK strategy pales in comparison to the $52bn (£42bn) announced by the US and the €43bn (£37bn) by the EU.

However, this should not come as a surprise, as it is consistent with how the UK has approached these issues up until this point. Since President Biden signed the Inflation Reduction Act, the UK has, unlike the EU, not sought to match the wide-ranging subsidies on offer for green technology. This has reflected a divide within the government over the role of the state when it comes to industrial strategy.

Furthermore, because the UK is a smaller economy than the US and the EU, it would struggle to offer similar levels of subsidies. Indeed, the government has explicitly asserted that, rather than engaging in a ‘subsidy race’ with the EU and the US, it intends to support the sectors where it already has expertise and a strategic advantage.

Full semiconductor self-sufficiency has yet to be achieved anywhere in the world and many see it as an impossible ambition for most countries.

Onshoring mass-scale chip production is extremely expensive and time-consuming — chip foundries can cost up to $10bn and often take years to build.  And manufacturing only represents one part of the semiconductor supply chain.

Both the design and assembly stages of the supply chain are also critically important in order to keep up with technological innovation — which has led to the supply chain of semiconductors to be highly specialised across the globe.

It is for this reason that some have described the EU’s costly subsidies to spur chip production as a misplacement of resources. Indeed, there is a fear that as a subsidy arms race kicks off, different regional blocs could try to cover all parts of the supply chain, leading to expensive duplication.

The UK strategy, therefore, rather than striving for semiconductor self-reliance, by offering large amounts in subsidies for manufacturers, instead seeks to offer targeted investment in specific areas such as design and IP, and simultaneously to build alliances with the likes of Japan for manufacturing.

This can be seen as part of a plan to ensure supply chain security through trade and interdependence. The strategy makes clear that by holding ‘world leading’ positions in particular sectors of the semiconductor industry, the UK will be able to build partnerships with allied states, allowing each to  provide the other with parts of the supply chain they lack.

Indeed, the recent partnership between the UK and Japan, is evidence of this approach, as the UK will be able to benefit from Japan’s strength in manufacturing in exchange for the UK’s design capabilities.

The UK is combining this strategy with plans to invest in a low-level of manufacturing capability to protect key sectors from sudden supply chain disruptions.

However, this approach would still make the UK vulnerable to global supply shocks and there are still questions around whether this approach adequately reduces the UK’s dependence on Taiwan.

Are there any other criticisms?

There are other critiques of the strategy, beyond the amount being invested.

A central complaint is based on the recruitment of skills that the sector needs. The strategy sets out the intention to develop UK capabilities in electrical engineering and computer science. However, no clarity is provided on the immigration or visa policy for high-skilled workers in the sector, which has previously frustrated industry leaders.

The plan also lacks a clear blueprint of how the UK can meet the objectives set out in the strategy.

For example, there is no clear plan on how the money dedicated to developing compound semiconductor manufacturing infrastructure will be allocated. Rather, the strategy sets out plans for a research study, to be released in the autumn, which will identify domestic manufacturing needs. Such issues will have to be developed by the Advisory Panel if there is a genuine partnership approach between government and industry to underpin the chip strategy (which is seen as good practice in modern industrial strategy design).

Moreover, there is no clear plan or framework for how decisions will be made with regard to acquisitions by ‘hostile actors’ in sensitive areas of the semiconductor sector. Instead, the strategy aims to work with businesses on these questions and provide updated guidance in the future.

So, although the UK’s long-awaited strategy somewhat helps to clarify the approach by which the government will attempt to support the domestic semiconductor industry and enhance supply chain security, it has not yet provided concrete proposals for how this will actually be achieved. More might be forthcoming if and when the government says more about its industrial strategy later in the year.

By Peter Jurkovic, Researcher, UK in a Changing Europe


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