Semiconductors, where industrial strategy and geopolitics meet

Taiwan landscape with two emerging mechanical arms and a semiconductor between them.

Our everyday lives, wealth and security rely on the tiniest of things – semiconductors. These microchips are essential components in our healthcare, communications including phones and tablets, appliances, computing, clean energy, transport, military and defence systems.

You might be surprised to learn though that despite the ubiquity of these technologies the world is heavily dependent on just one country for their manufacture, Taiwan, which produces 65% of the global supply of semiconductors.

We have arrived at this position because the factories and skills required to build these chips are very sophisticated and cannot easily be transferred. The comparative advantage Taiwan is developed since it first prioritised semiconductors in the 1970s is massive, and with factories costing are $10bn to build it is hard for even America and China to catch up.

While this situation is undoubtedly good for the Taiwanese economy, and an example Labour may wish to consider as it looks to it’s own modern industrial strategy, is poses some problems for Britain as well.

Precarious Supply

Despite also being dependent on Taiwan for chips, China views the island as part of its own territory and has repeatedly threatened to take it back. What if China were to do the unthinkable and start a conflict with Taiwan? What would happen to our supply of semiconductors and microchips that drive our economy and standard of living?

The stakes are extremely high and the UK needs to develop a clear strategy on this. Our security and prosperity depend on it. Our own renowned small scale semiconductor manufacturing and innovation capability is not in doubt but the ability to upscale and commercialise to meet our own needs as well as of our allies is simply not there.

What if we committed to the manufacturing of semiconductors in the same footing as we have with utilities like gas, oil and water in the past? The UK had a vibrant semiconductor manufacturing industry but one which, thanks to Margaret Thatcher’s policies, rapidly became foreign-owned.

We have allowed the industry to disintegrate because of the obsession with offshoring and search for lowest cost (not to be confused with value for money). Instead of innovation, research and utilising our innovative skills and ideas to put into production, we chose to become reliant on contracting out and importing. Under the last 12 years of the Tories, we’ve had the least investment in our economy of the G7 countries and the least growth.

At a time when the United States and Europe are investing in start-ups, new skills and technology developing their supply chain of semiconductor chips, our Conservative government has allowed Nexperia, a holding company of China’s Wingtech Technology to start buying Newport Wafer Fab, a UK semiconductor business, in 2022. Labour in Government would never let an industry so key to our national security go under the hammer. The Conservatives used to claim that they were the only party that would protect our national security yet through their inaction our future national security is being degraded.

Strategy for Semiconductors

A Labour government can take the bold steps that are needed. First, it should enshrine an Act, like that of the US, to develop R&D and production capability of semiconductors, in order to boost competitiveness, security and innovation. We must reduce our overwhelming reliance on Taiwan for our semiconductors. Not for nothing has the US committed $39 billions to finance their CHIP Act and $258 billions over the next decade for R&D and new technology.

Second, Labour should develop skill zones, specific to semiconductors and new technology, through investment subsidies and tax credit for new tech start-ups. These will specialise in innovation and research for semiconductors and workforce development. We are where we are because of offshoring, and this has led to loss of skills and labour.

Third, Labour should ensure that all new technology works towards mitigating its impact on climate change. Through the use of renewable energy sources, semiconductor production should aim for net-zero carbon impact with timescales aligned to our existing environmental pledges and targets. This approach will ensure viability and sustainability of the sector in the future.

Taiwan shows how an activist industrial strategy can pay off.  But it also shows the precariousness and interconnected nature of global supply chains the complex geopolitical considerations that have to go into domestic investment.  A Labour government must use its industrial strategy to secure our vital industries and ensure safety and prosperity for the UK.

To read more about solving issues in the supply of global goods in the face of conflict, see ‘Connectivity Conflicts and the Contest for Cyberpower: On the Age of Unpeace’