How the UK can help solve the semiconductor shortage

There is no faulting the ambition. Last week, Ursula von der Leyen, the president of the European Commission, announced a new “Chips Act” to coordinate European efforts to create a microprocessor industry.

After falling way behind Taiwan, South Korea, the United States and China, the EU plans to take control of its member states’ industrial policy, and make sure the bloc takes at least 20% of the global chips market by the end of the decade.

Billions of euros will be made available for investment in research and development (R&D) and factories, and markets will be protected if necessary, while officials in Brussels will no doubt steer the continent’s car makers, electronics companies, and telecoms suppliers towards EU-based manufacturers.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The EU’s problem

There is certainly space for more players in this market. The challenges of the pandemic have created critical supply shortages this year. Even once that sorts itself out, as it will, there will still be huge and growing demand for processors. However, the EU is not nearly as good at creating new industries as it likes to pretend it is, and the more high-tech they are the worse its record.

Most recently we have seen that in vaccines. The EU hijacked control of the procurement of inoculations to deal with Covid-19. It ordered the wrong vaccines, in the wrong quantities, and found itself in a war of words with AstraZeneca, the manufacturer of the most cost-effective jab on the market. Far from boosting European industry, one of the intentions, it ended up completely reliant on the American-controlled Pfizer and Moderna vaccines, and while it caught up eventually it was way behind the US and UK.

We’ve seen the same with other projects. Remember Quaero? It was the alternative European search engine to Google that received hundreds of millions of euros in EU funding. Launched with huge fanfare, it quickly disappeared without trace. Or take the Europe 2020 strategy, launched in 2010, to create an “Innovation Union” that would be a world leader in new technologies. In the subsequent decade, it has fallen even further behind. The UK has as many tech “unicorns’” as the whole of Europe put together. The EU’s record is only consistent in one respect. It always fails. There is no reason it will be any different this time.

The EU doesn’t have the expertise to create a microchip industry. It will move too slowly, back the wrong technologies, and invest money where it is politically expedient rather than where it is needed. However, that creates an opportunity for the UK to fill the gap that undoubtedly exists. Britain has produced some huge microprocessor companies such as Arm, and promising ones such as Newport Wafer Fab – but it allowed them to be sold off. There are three obvious steps the government should take to repair that damage.

Three steps to a better strategy

First, expand the freeports so that chip plants can be built tax free. We are already building low-tax, low-regulation zones around the country. Let’s expand three or four of them and encourage microchip0- manufacturers and start-ups to base themselves there.

Next, create an R&D hub modelled on the new Vaccines Manufacturing and Innovation Centre in Oxfordshire. This would be a centre of excellence, bringing together cutting edge science and state-of-the-art manufacturing.

Finally, target state aid at selected manufacturers in computing. Even better, the Treasury should use its new Breakthrough fund, which invests in early-stage businesses that might struggle to attract funding elsewhere.

Most of all, a UK microprocessor strategy should be market-led, and work with the US and China instead of against them. Small countries can do well in this industry: Taiwan is a world leader. But top-down, statist, politically compromised industrial strategies almost always fail. The Chips Act will be added to that list, quickly bogged down in politics and suffocated in red tape. The UK should seize the opportunity. We might even be able to sell some processors to the rest of Europe.