Should Britain protect semiconductor production from autocracies?

Yesterday, in the first part of this series on semiconductors, Dr Radomir Tylecote looked at how the People’s Republic of China (PRC) is focused on procuring semiconductor technologies and manufacturing capabilities to expedite the country’s emergence as a superpower. In this latter part of the series, he asks whether Her Majesty’s (HM) Government should take the challenge more seriously and protect British companies from Chinese procurement.

The car industry has lost billions this year through a (merely temporary) chip shortage caused by Covid-19 lockdowns. Experience with solar photovoltaic modules, where the PRC’s mercantilist support for its companies has had a deleterious effect on manufacturing in free and open countries, shows what the PRC may do with even partial control of semiconductor supply chains. That means that while the United Kingdom’s (UK) historically permissive attitude to Chinese acquisitions has been intended as a defence of free-market principles, it also includes elements of naivety. 

In Wealth of Nations, Adam Smith himself backed the navigation acts[↗] which barred Dutch ships from English colonies, even at the cost of fewer foreign buyers, calling them ‘the wisest of all the commercial regulations of England’ because defence was ‘of much more importance than opulence’. Here, defence and opulence are two sides of the semiconductor coin.  

The US is beginning to ‘reshore’ some manufacturing: semiconductors will not be the last sector where it does. In the new, old world of belligerent nation states, the US has realised that it cannot depend on design (top-of-the-value-chain, white-collar, de facto service-sector) for security. As the US Department of Defence put it[↗] in 2005, the loss of defence semiconductor manufacturing creates 

such opportunities for mischief that, had the United States not significantly contributed to this migration, it would have been considered a major triumph of an adversary nation’s strategy.

U.S. Defense Science Board Task Force on High Performance Microchip Supply, February 2005

The White House has described[↗] the growing risk of ‘malicious disruption’ to the semiconductor supply chain. Consequently, TSMC is now building a foundry in Arizona[↗].  

There is a British counterargument to all this: none of this matters because the UK will continue to depend on the US, which has much more influence on the PRC’s technological trajectory. But while the UK should avoid any unnecessary swing towards techno-nationalism, HM Government should also avoid increasing the PRC’s direct leverage. Electric vehicles contain thousands of chips, and like the semiconductor industry generally, the sector is vulnerable[↗] to being ‘weaponised’. 

Technology companies are beginning to form alliances with car firms, like Foxconn and Yulon Motor in Taiwan. Beijing hopes a challenger to Tesla will emerge from among its local companies, but for that they need their own semiconductor suppliers, like Newport Wafer Fab (NWF). The UK’s strong defence sector means HM Government should also be especially wary about the Chinese military, the People’s Liberation Army (PLA). A report by the House of Commons Defence Committee – ‘The Extent of Foreign Involvement in the Defence Supply Chain’ – concludes[↗] that the PRC’s 2008 purchase of Dynex, a Lincoln-based high-power semiconductor company, ‘could have helped the development’ of Chinese naval railguns, which use electromagnets to fire projectiles at around 5,000 miles per hour.   

The PRC’s purchase of Swedish firm Silex is also notable[↗]. Chinese buyer Navtech – now Sai Microelectronics – specialises in navigation technologies for space, aviation and arms industry use. The micro-electromechanical systems that Silex makes have applications in microscopic sensors and a new factory that uses its technology has appeared in Beijing. 

It is increasingly well known which parts of the supply chain interest the PLA. The PRC’s strategic place[↗] in the industry was recently mapped, with each part of the semiconductor industry assessed against three ‘strategic dimensions’: competitiveness, national security, and resilience, based on the PRC’s position versus the US and others (these are in turn divided into three more dimensions: in national security these were espionage potential; military utility; and the degree that concentration creates a chokepoint which might be ‘weaponised’ by nations with dominant market share). In terms of ‘military utility’ and ‘choke point danger’, trailing-edge fabs like NWF carry substantial risk. Allowing NWF to remain in Chinese hands would sit oddly against Arizona’s fab-building.

The US approach to Huawei may also be instructive. While HM Government rightly blocked Huawei’s involvement in Britain’s fifth-generation (5G) telecommunications infrastructure, the US’ strategy of denying the company access to licensed intellectual property and manufacturing equipment, including through Taiwan, has caused a sharp fall[↗] in Huawei’s smartphone sales. 

At the other end of the strategic spectrum is what the UK allowed to happen to two of its semiconductor firms. Arm, the jewel in the Cambridge tech-crown and a world-leader in the design segment, was purchased by Japan’s Softbank in 2016 with an ease that astonished many Japanese, as Britain gave away strategic-economic leverage at the top of perhaps the world’s most important value chain. US firm Nvidia’s attempt to buy Arm from Softbank is the subject of another HM Government review[↗]. Arm is now engaged in a byzantine struggle for control[↗] of its 51% locally-owned Chinese branch: Arm China distributes Arm’s intellectual property in the country and its shareholders include Chinese state-backed funds. 

In 2017, Imagination Technology was bought by a Chinese state-backed private equity fund which had claimed to have no say in its governance, before attempting to insert Chinese fund representatives in 2020, which was only prevented by ministerial intervention. Staff are said to be leaving[↗] ‘in droves’; one ex-executive has said[↗] that ‘once you lose the core of a company, it is almost impossible to come back’. If HM Government would think twice before allowing Chinese control of Britain’s defence firms, what about semiconductor firms, on whose innovations future defence technologies will depend? What the PRC cannot make, it will try to buy, especially from technologically dynamic[↗] free and open countries.

The UK needs a genuine semiconductor strategy: HM Government might start by asking whether Beijing should acquire technologies with possible use in military jet radars and missile trajectory calculation, and include future agreement with close partners like the ‘Five Eyes’ about what the PRC should not be allowed to buy, including defence-funded firms like NWF. HM Government should also ask what manufacturing capacity might be needed in a future crisis, and what skills. Taiwan and South Korea have focused on this over generations. HM Government’s expected announcement on NWF in January 2022 will be an early indication of which direction it plans to take.

Dr Radomir Tylecote is Director, Defence and Security for Democracy, at Civitas. This two-part article is based on his recent report on this area ‘The acquisition of Newport Wafer Fab by China’s Wingtech’, with Henri Rossano. In February 2021 he published ‘Inadvertently Arming China? The Chinese military complex and its potential exploitation of scientific research at UK universities’ with Robert Clark.

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