Prime Minister Rishi Sunak’s government should take steps to cut UK reliance on semiconductors from Taiwan because of the threat posed by China, a draft strategy said. 

Chinese interference or an invasion of Taiwan would threaten Britain’s economy, according to the unpublished strategy seen by Bloomberg. That’s because it would compromise supplies to and from the Asian island nation, which is home to more than 90% of the manufacturing capacity for all leading-edge chips, including the world’s preeminent silicon foundry, Taiwan Semiconductor Manufacturing Company Ltd.

The strategy is important because semiconductors are used in everything from cell phones to cars, and shortages have the potential to disrupt supply chains across the economy, as seen during the coronavirus pandemic in recent years. Moreover, frustrated by the government’s delay in spelling out its approach to the industry, companies are weighing their investments in the country.

The document concluded that the supply of chips was an issue of major geopolitical and economic importance. It said that Britain should diversify with other sources of microchips from friendly and secure nations, while investing billions of pounds more in research and development. 

But Taiwan’s dominance means alternatives are not obvious, and scaling up the domestic industry would require billions of pounds of investment. In an effort to create sovereign silicon supplies, the US Chips Act has earmarked US$53 billion, while the European Union could dedicate investments worth 43 billion euros (US$47 billion) in a bid to make 20% of the world’s chips. 

The UK had not been considering subsidies close to that magnitude, the people said. The study said the government should back domestic specialisms, such as compound semiconductors. They’re made of different materials to conventional silicon chips and are useful in electric vehicles, 5G wireless, and other emerging technologies.

The government declined in a statement to comment on what it called “speculation,” saying the strategy will be published “in due course.”

The issue is being discussed as Sunak’s foreign policy advisor John Bew puts the finishing touches to a wider strategy known as the Integrated Review looking at Britain’s foreign and defence policy.  Sunak, while not as hawkish on China as his predecessor Liz Truss, is expected to project more of the nation’s resources to the Indo-Pacific, in part to secure Taiwan’s future security from Beijing’s aggression. 

UK government officials who drew up the paper also warned that Chinese-backed acquisitions of British chip businesses posed potential national security challenges. That’s a concern the UK has already begun to address, with Business Secretary Grant Shapps last year ordering Nexperia Holding BV’s Chinese owner to sell Newport Wafer Fab. - Britain’s biggest microchip-component factory - unpicking a deal completed in 2021.

The government had committed to publishing a semiconductor strategy last year. It was finalised by former tech minister Chris Philp and officials in the first half of 2022 and was ready to be released in the summer, but was delayed due to the collapse of Prime Minister Boris Johnson’s government, people familiar with the plans said.

To be sure, the final strategy could be different. Following the election of Prime Minister Rishi Sunak in October, the Department for Digital, Culture, Media and Sport is run by a new secretary of state, Michelle Donelan, who is reviewing a number of draft policies she’s inherited and has already altered some, such as abandoning the proposed privatization of state-owned broadcaster Channel Four Television Co. 

Moreover, Sunak himself takes a particular interest in technology and has repeatedly sung the praises of the entrepreneurial culture in California’s Silicon Valley. His administration is trying to lure Cambridge, England-based chip design firm Arm Holdings into a London listing since NVIDIA Corp’s bid to acquire it from its Japanese owner, SoftBank Group Corp, fell apart last year.

But at a time when other governments and businesses were making major decisions in the wake of global chip supply shortages sparked by the coronavirus pandemic, Britain’s delay in publishing the strategy has fueled concerns over national security among officials, according to people familiar with the matter, who asked not to be named because the discussions are private.

The delay has also left companies and investors in a frustrated limbo. Executives such as Americo Lemos, CEO of British-based compound semiconductor manufacturer IQE Plc, criticized a lack of planning in Britain and urged Sunak to increase financial support for the sector in what he termed a “global chips arms race.”

The chief of Paragraf, a British graphene-based electronics startup, slammed the delay in August, and threatened to move to the US. And US chip giant Intel Corp decided against the UK as a site for a new factory because of Brexit, its CEO told the BBC in 2021, and has since been targeted construction of a facility in Germany.

  - Bloomberg