The UK government launched its long-awaited semiconductor strategy on 19 May 2023. This 20-year plan aims to secure the UK’s leadership in design, research and some advanced aspects of next generation chip manufacturing in the global semiconductor industry. It also seeks to safeguard supply chains from disruption and protect technology against national security risks. However, questions remain about how the strategy will contribute to economic security as well as the energy transition to net-zero in times of worsening geopolitical tension.
Navigating the intensifying chip war
Currently, the UK, the US, Europe, China and many industries rely on Taiwan for cutting-edge semiconductor devices. Taiwan is the world’s most important location for high-performance semiconductors, with the key company being Taiwan Semiconductor Manufacturing Ccompany (TSMC), the world’s largest foundry that counts major technology firms, such as Apple, Qualcomm and Nvidia, as its clients. It provides over half of global supply – with Samsung in South Korea as the next biggest supplier – and constituted nearly 90 per cent of the market for advanced microchips in 2020.
But this contract manufacturing model has become increasingly precarious. The pandemic disrupted chip supply chains and TSMC has become caught in a deepening battle between the US and China over technological leadership.
Indeed, the prospect of a trade blockade or a military conflict with China that threatens the supply of semiconductors from Taiwan would put global economic security and the energy transition at risk. In 2021, analysts at the US Army War College even suggested Taiwan should threaten to destroy its semiconductor industry rather than allow it to be captured by China in its Broken Nest Strategy. Such an outcome would be catastrophic, according to their strategy, not only for Taiwan, but across multiple global high-tech supply chains.
To reduce geopolitical risks and potential supply disruptions, TSMC announced in December 2022 that it would triple investment in manufacturing capacity in the US. Indeed, they are currently building a $40 billion facility in Arizona, but challenges to rapidly increasing capacity remain. There have also been early discussions on building a fabrication plant in Germany.
The limitations of insufficient funding
In this climate, the UK’s new strategy seeks to cultivate some homegrown aspects of semiconductor design and manufacturing but it will still rely on Taiwan for high-performance chips for the foreseeable future.
The £1 billion pledged by the government in the strategy is a good start and shows commitment to developing the sector. It focuses on the UK’s role in the design of compound semiconductors – a promising next-generation technology – in skills and technical expertise and in research and innovation. But it is significantly smaller than the support the US and EU are providing their industries. The US CHIPS and Science Act, introduced in 2022, provides nearly $53 billion for domestic research, development and fabrication of semiconductors which has spurred an estimated $200 billion of related private investment in semiconductor manufacturing. Meanwhile, the EU’s Chips act is a similar size, with €43 billion announced in 2022.
Potential trade-offs with environmental objectives
Semiconductors are vital components for the net-zero transition. They underpin technologies such as electric vehicles and renewable energy systems. Automakers are increasingly requiring chips with higher computing power especially as the industry transitions to electric vehicles and autonomous vehicles. But, with the invasion of Ukraine, the geopolitical risks of oil and gas dependencies have become visible. Shifting to renewable energy systems is not free from geopolitical issues since critical raw material and semiconductor supply chains are complex and vulnerable.
The UK’s approach to semiconductors therefore needs to align with net-zero transition targets and other environmental objectives. Semiconductor fabrication is highly energy-intensive, requires huge amounts of water, generates toxic waste and, as the UK’s semiconductor industry grows, so too will its carbon footprint. New fabrication facilities will need to operate with state-of-the art pollution control and water circular systems to minimize toxic waste and water.
The UK’s broader approach to economic security
Science and technology are cornerstones of the UK government’s security and economic resilience policies. The semiconductor strategy, the recent International Technology Strategy and the Integrated Review Refresh, all set goals for the UK to be a global leader in these areas.
But the UK is in a difficult position, caught between the US, a world-leading innovator, and the EU, a world-leading regulator. Both can provide significantly more subsidy to their science and technology sectors than the UK. The semiconductor strategy attempts to address this by focusing on making the UK a valued part of global supply chains. It acknowledges the UK is not able to develop a fully homegrown semiconductor industry and focuses on areas where the UK does excel like semiconductor design.
This approach means stability in global supply chains remains critical for the UK. Part of the strategy is to seek agreements with allies to improve supply chain resilience. Indeed, the UK recently agreed a semiconductor partnership with Japan and joined G7 leaders in announcing they would coordinate their approach to economic resilience. But while these agreements might signal shared intent, they are still lacking in specifics about how to share complex risks and dependencies.
Countries seeking to manage global supply chain risks and therefore subsidizing key sectors is part of a broader trend. Both the US and EU are doing more to contain Chinese economic influence and bolster their economic resilience as opposed to leaving this to the market. This ‘de-risking’ has meant both significant domestic subsidy and, for the US especially, more onshoring of critical manufacturing.