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Coping with the ongoing chip crisis in the UK

China has imposed export restrictions on key semiconductor compounds, so how will the UK's National Semiconductor Strategy cope?

China is set to put in place export restrictions, in a move that could seriously impact the global semiconductor sector. The Chinese Ministry of Commerce and Administration of Customs said that from August 2023, several gallium and germanium-based compounds would be subject to export restrictions to safeguard national security and interests.

According to the Financial Times, China is the largest producer of gallium and germanium semiconductor materials, which are used in advanced telco networks, optical networks, solar panels and compound semiconductors.

This latest move by China to combat the ongoing trade battle with the US and Dutch government’s export restrictions on advanced semiconductor manufacturing equipment from ASML is set to have a direct impact on the UK’s National Semiconductor Strategy, which, among other things, aims to bolster the compound semiconductor sector.

Protecting the semiconductor supply chain is a key goal of the UK’s strategy. Charles Sturman, chair of the Techworks Semiconductor Leadership Group, said: “We are now in a world where we can’t just rely on, for example, China manufacturing everything for us. The question is what we can do in the UK versus how we can partner with friendly, like-minded countries and companies around the world.”

The UK strategy focuses on early stage innovation, design and intellectual property creation, which, according to Sturman, only addresses a subset of the industry.

“It is very difficult to see how the UK could truly be resilient in semiconductors,” he said. “But that doesn’t mean we shouldn’t try.”

Among the big problems facing inventors who want to build a semiconductor startup in the UK is funding. The software used in the design, simulation, validation, layout and fabrication of devices typically costs between $50,000 to $200,000. Then there is the fabrication of a prototype chip, which, Sturman estimated, could cost upwards of $1m. All of these costs are upfront before anything is actually in production.

The Newport legacy

Looking back on the UK’s track record on semiconductor fabs, in the 1970s, the Labour government of the time agreed to provide £50m of funding to chipmaker Inmos, in two tranches of £25m to build out manufacturing in the UK. In his book, The story of the transputer, Inmos founder Ian Barron said the Conservative government under Margaret Thatcher did not want to get involved with the semiconductor industry. The funding was there to build a wafer fab plant, and this ended up being located in Newport, South Wales.

According to the records published in Hansard in 1982, responding to a remark from a Labour MP about Inmos’ challenge in raising finance, minister for information technology Kenneth Baker said: “A company the size of Inmos needs the confidence and discipline of the marketplace if it is to succeed as it should. We would have insisted on the involvement of majority private sector finance at the outset, whether in the form of industrial or institutional investors.”

The Newport wafer fab still exists, but this is facing a legal wrangle after the secretary of state for business, energy and industrial strategy ordered chipmaker Nexperia to sell 86% of its stake in Newport Wafer Fab, following the company’s bid to buy the facility in 2021.

The legacy of Inmos and its transputer chip is that it spawned an industry of silicon and hardware firms around Bristol such as Xmos, which makes processors for audio devices and Graphcore, which makes AI accelerators.

Semiconductor fabrication plants are not cheap. Sturman said a state-of-the-art facility for 3nm technology costs many billions of dollars. This is the type of facility required by the likes of Apple and Samsung. It’s the focus of high-performance computing and artificial intelligence (AI), and is where the PC and cloud computing industry is heading. At the other end of the scale is what Sturman describes as “legacy technology”.

The UK’s attempt at a semiconductor strategy has two options: either go directly into the latest fab technology, which costs many billions of pounds, or try to establish a viable industry around older tech.

Chips manufactured on older wafer fabs are used in smart devices from car infotainment systems to smart home and smart city devices. This represents the long tail of the semiconductor industry. It’s an immense market opportunity, however, according to Sturman, access to venture capital in the UK is simply not set up in a way that supports the long-term investment needed by semiconductor startups.

Supporting the VC community may well be something chancellor Jeremy Hunt addresses in his annual Mansion House speech in July, where he’s expected to unveil major reforms to the UK pension sector.

Speaking on the BBC’s Today programme, Douglas Hansen-Luke, founder Future Planet Capital, said: “Britain is getting funded by foreign sovereign funds. They’re not just buying our football clubs, they’re also buying our scientific base.”

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While he acknowledged this was a good thing, Hansen-Luke said UK pension funds should also be setting aside some of their investment portfolios to higher-risk venture capital. Over the past 10 years, he pointed out, funds around the world have made a 23% return every single year. “Investing in venture capital is actually risky, but you will take a portfolio approach,” said Hansen-Luke. “The higher risk means a higher return.”

But while the private sector has a role to play, a long-term semiconductor strategy relies on a government commitment that often spans decades and different government administrations, with very different priorities (see Newport Legacy).

Sturman said: “I think the government should not be afraid to make significant interventions. One has to do this with a long-term view and patience.”

A paper published by the Techworks Semiconductor Leadership Group describes the proposed UK Semiconductor Infrastructure Initiative as a positive move. The paper’s authors said the UK’s strategy only addresses certain points in the value chain and business stages, and does not help all UK companies.

“Early stage innovation, design and IP creation businesses will welcome the prototyping and design tool support, but more support is still required for fabless chip vendors or IDMs (integrated device manufacturers) in their growth business phase, or UK resident manufacturing companies with a need to scale-up their operation through significant capital expenditure (CapEx),” Techworks Semiconductor Leadership group said.

The National Semiconductor Strategy is committed to £1bn of funding in the next decade to improve access to infrastructure, power more research and development, and facilitate greater international cooperation.

For Sturman, the question is whether this is enough given the extent to which other countries have supported the semiconductor sector. He said that in spite of the US being regarded as “the poster boy for global market economics”, the US government will heavily intervene when it thinks it is important to do so. Compared with the UK, the US CHIPS and Science Act aims to invests $280bn to bolster US semiconductor capacity, along with research and development.

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