For years, the UK government allowed processor manufacturing to move offshore. However, the COVID-19 pandemic and geopolitical conflicts have underscored the critical importance of domestic capability. Consequently, the country is now making concerted efforts to regain its footing in this field. Nevertheless, it’s worth noting that many other nations are also racing to bolster their microchip industries.
During the late 1990s, visitors disembarking at Newcastle station were welcomed by a memorable slogan:
“Fish Into Chips – From Mackerel Economy To Micro Technology. Invest In North Tyneside – Siemens Did.”
In an era marked by the relentless advance of globalization following the fall of the Berlin Wall, this distinctly British play on words reflected a certain confidence on the global platform. It alluded to a substantial £1.1 billion microchip facility established by the German industrial powerhouse in the Wallsend district of the city, a venture facilitated by public funding and personally negotiated by John Major.
Yet, in a surprising turn of events, less than 18 months after a grand inauguration graced by Queen Elizabeth in May 1997, which closely followed Tony Blair’s resounding election triumph, Siemens abruptly shuttered the facility. This decision resulted in the termination of 1,000 jobs, and the company declined to reimburse substantial amounts of taxpayer funds provided as support. Jonathan Blackie, who spearheaded the project as the senior civil servant representing the government in the north-east during that period, reflects:
“It didn’t sit well with anyone. It had been operational for approximately two years, and a substantial sum had been invested in it. I was deeply involved throughout the entire journey, from the project’s inception, through its construction, and ultimately its closure. From dawn till dusk.”
Fast forward to 2023, and the United Kingdom is once again venturing into the realm of microtechnology. It’s embarking on this path amidst a frenzied competition for investment subsidies, involving not just the US but also the EU and China. In the wake of the severe semiconductor shortages that shook the world during the COVID-19 pandemic, substantial financial investments are being injected into the development of domestic production facilities to ensure a consistent supply of these indispensable components.
Geopolitical conflicts play a significant role in the equation, as the United States and China endeavor to curtail each other’s influence in the microchip sector. Just last week, the White House unveiled intentions to restrict American investments in advanced Chinese microconductors. Furthermore, in May, China asserted that chips produced by the US manufacturer Micron posed a security risk.
In the United Kingdom, Rishi Sunak’s government unveiled a proposal in May to allocate £1 billion over the course of a decade towards semiconductor research, design, and production. Nonetheless, this plan faces stiff competition from significantly larger subsidies being offered elsewhere, such as Joe Biden’s $52 billion Chips Act and the €43 billion in EU subsidies. The challenges are compounded by years of industry offshoring and a gradual decline in the UK’s microchip sector, as exemplified by Newcastle’s brief foray into the industry. Despite having approximately 25 “fabs” (the term for microchip factories), the UK’s semiconductor industry accounts for just 0.5% of global semiconductor sales.
The UK government does recognize the significance of microchips. In the past year, it intervened to prevent the acquisition of Newport Wafer Fab in South Wales, the country’s largest microchip factory (although it primarily produces lower-end chips), by the Chinese-owned Nexperia. This intervention was justified on national security grounds.
However, the UK has opted against attempting to match the substantial subsidies provided by other nations. Paul Scully, the Digital Economy Minister, recently conveyed to the Financial Times that the UK should emphasize its strengths, particularly in chip design, an arena where Cambridge-based Arm holds significant prominence. Arm is presently preparing for an initial public offering (IPO) on the New York Stock Exchange, having dismissed the notion of a listing in the UK. Scully remarked:
“We are not seeking to replicate the semiconductor landscape of Taiwan in South Wales; it’s simply an unrealistic goal.”
Scott White, the founder of Pragmatic Semiconductor, a prominent UK manufacturer, pointed out:
“Early innovation occurred just as much here as it did in the US. During the 1980s and 90s, we possessed a robust foundation in silicon manufacturing within the UK. However, much of it has since shifted overseas. Unfortunately, at that time, the government did not take any measures to halt this trend. There was essentially no support aimed at retaining these capabilities within the UK, and as a result, it gradually shifted abroad.”
Located in Cambridge, with production facilities situated in County Durham, Pragmatic has expanded its operations by incorporating a US-based entity to leverage the substantial microchip subsidies offered by the Biden administration. While generally in favor of Sunak’s efforts to compete in this field, Scott White, the founder, underscores the critical importance of investment incentives.
“We have the option to explore substantial incentives in the US, the EU, India, and various other locations. This situation poses an intriguing dilemma: although we have a desire to expand within the UK, if we don’t receive comparable support incentives as in other regions, how can we justify this decision to our shareholders solely on the basis of our British identity?”
Investments in the semiconductor industry are firmly rooted in economic and geographical considerations. Semiconductor fabrication facilities (fabs) necessitate expansive areas, a skilled workforce, energy resources, access to water, and a robust transportation infrastructure. As globalization gained momentum and China embraced international markets in the 1990s, presenting fresh, cost-effective competition, the industry progressively shifted its operations overseas.
Starting from a relatively modest position in the 1970s, Taiwan, in particular, has emerged as a dominant force in the microchip industry. Its flagship company, Taiwan Semiconductor Manufacturing Company (TSMC), has achieved a remarkable 50% share of the global market, primarily due to its proficiency in crafting cutting-edge chips. Rather than engaging in direct competition, most US and European manufacturers have opted to distribute TSMC’s products worldwide. However, mounting concerns about the potential for a military conflict between China and Taiwan have prompted many companies to reevaluate the balance between cost-efficiency and supply chain security.
“Covid underscored the vital role of microchips as essential inputs and the concentrated nature of production in these two nations [China and Taiwan],” highlights Peter Arnold, Chief Economist for the UK at EY.
“One of the trending concepts in the post-pandemic era is ‘friendshoring’—the idea that it might not be critical to produce something domestically if you can acquire it from a dependable foreign source. However, the inherent risk remains. We’ve witnessed during the pandemic the implementation of various trade barriers among long-standing allies, affecting various products. Evaluating the trade-off between risk and reward is essential in this context.”
During the 1990s, cautions regarding the outsourcing of vital industrial production in the UK often fell on deaf ears. The country ardently pursued initiatives aimed at luring substantial foreign direct investment projects, all in the pursuit of regional economic growth and development.
Following the successful attraction of Nissan to establish its European car manufacturing hub in Sunderland back in 1987, government officials made concerted efforts to duplicate this achievement. They sought to entice foreign companies to invest in regions grappling with the decline of traditional industries such as coal, steel, and shipbuilding.
“It represented a significant turning point,” Jonathan Blackie reflects on Siemens’ choice. “That foreign direct investment initiated the revitalization of the north-east, which was burdened with declining industries and a past captured in black and white photographs. It marked the transition to a future illuminated by new technology and electronics, aligning with the goals of Thatcher’s government, which was keen to facilitate such developments.”
Siemens came close to selecting Merseyside as the location for its microchip factory, but apprehensions regarding labor relations in the strongly unionized Liverpool area swayed the company’s executives to opt for Tyneside instead. However, within a span of less than two years, amidst a worldwide decline in microchip prices, the facility ceased operations, even though Siemens maintained production activities in Germany, France, the United States, and Taiwan.
The dormant facility resumed production in 2000 under the management of the US-based firm Atmel. However, Atmel decided to exit the site seven years later, opting to pursue expansion activities in Texas instead. The equipment used for manufacturing highly sought-after eight-inch wafers was subsequently sold to TSMC and transported to Shanghai for deployment in its mainland China operations. Eventually, the Wallsend factory was demolished.
Prior to the agreement with Siemens, the Japanese technology company Fujitsu had already committed to establishing a cutting-edge microchip factory in Newton Aycliffe, located in County Durham. Additionally, Korean electronics manufacturer Samsung was convinced to inaugurate a facility for manufacturing microwave ovens and computer monitors on Teesside.
However, all of these ventures have subsequently departed, underscoring the importance of a sustainable industrial strategy that ensures companies remain active well beyond the initial celebratory inauguration. Dubbed “Mr. North East” by the local media due to his responsibility for allocating over half a billion pounds to the region before his retirement from the civil service in 2011, Blackie acknowledges that the existence of these facilities has yielded some enduring advantages.
Despite Siemens and Fujitsu’s brief presence, Blackie maintains that the north-east possesses a lasting legacy within the microchip industry, which, with adequate support, could serve as a foundation for future development. He notes:
“There is substantial evidence to suggest that individuals recruited by Siemens and Fujitsu remained in the region and were able to secure alternative employment, similar to how engineering firms that once supplied shipyards in previous eras have successfully transitioned into the offshore wind sector.”
In the introduction of its semiconductor strategy, the government emphasized the north-east’s capacity as an established hub for high-tech manufacturing, aligning it with other clusters in regions such as south Wales, Bristol, Scotland, Northern Ireland, and Cambridge.
Although Fujitsu maintained operations at Newton Aycliffe for approximately seven years before departing in 1998, the facility remains operational, albeit with a reduced workforce. Over the years, it has changed ownership multiple times, including a brief period when it was backed by former Chelsea FC owner Roman Abramovich.
Pragmatic has hired several former Fujitsu employees at its fabrication facility, which is located on a science park established by Durham council in the nearby Sedgefield area. White explains:
“We benefit from that historical foundation, which offers a fairly solid platform for gradually redeveloping our capabilities.”
“However, due to the global enthusiasm for reshoring, numerous governments are offering substantial incentives. The UK’s dilemma lies in the fact that it will only occur here if there are incentive systems in place to create a fair competition,” he added.
