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February 10, 2023

UK government urged to avoid semiconductor ‘subsidy arms race’

When the UK semiconductor strategy arrives, it should avoid big subsidies in favour of targeted measures for manufacturers, a new report says.

By Matthew Gooding

The UK’s eagerly awaited semiconductor industry strategy should avoid engaging in a “subsidy arms race” and instead focus on other measures to help the nation’s chipmakers, a new report says.

The UK semiconductor strategy could focus on low-cost ways to boost strong areas like chip design (photo: Gorodenkoff/Shutterstock)

Instead, the authors of the paper from the Centre of Policy Studies thinktank argue, the government should focus on a series of low cost measures which can support the country’s existing strengths in areas such as chip design, which has seen it spawn the likes of Arm, Graphcore and Imagination.

Entitled Cashing in our Chips: How to strengthen the UK’s semiconductor sector, the report is endorsed by MP Alicia Kearns, who chairs parliament’s foreign affairs select committee. She said: “This report sets out clear steps the UK government can take to support our domestic semiconductor industry and work with allies to reduce the numerous national security concerns and vulnerabilities within our current supply chain.

“These creative market-driven solutions are not the industrial strategy of old, they simply allow sectors the Government has rightly recognised as critical to our economic and technological growth to thrive, without creating an uncompetitive market dominated by stagnating firms that survive off government handouts.”

Can the UK compete with other countries on semiconductor production?

The last two years have seen countries around the world invest billions in semiconductor production after the global chip shortage of 2021 exposed the reliance of many industries on a small selection of chipmakers in South East Asia. Growing political tensions between the US and China have also highlighted the complex and fragile nature of the sector’s supply chains.

Pressure has mounted on the UK government to produce a strategy to safeguard supply for the nation’s businesses. But it has been beset by delays and, on Friday, MPs on the government’s Business, Energy and Industrial Strategy Committee said the continuing absence of a semiconductor strategy was an “act of national self-harm”. The government says it will be published “as soon as possible”. The committee had previously accused the government of “overlooking” the sector in a damning report published in November.

When the strategy does materialise, it is highly unlikely the UK government will commit to the levels of spending on semiconductor production seen in the US, where the CHIPs and Science act, which provides subsidies of up to $280bn, or South Korea, where a $451bn investment plan, involving public and private money, was announced in 2021.

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This is why the UK should take a different approach, according to Gerard B. Lyons, CPS business researcher and co-author of the report. “If the UK wants to continue supporting a vital sector and onshore as much of the supply-chain as possible, we need to play our hand right,” Lyons said.

“The US and EU – among others – have put their cards on the table with their subsidy arms race, but a market-led, investment-friendly, approach is the ace Britain can – and should only – play to support our fledgling domestic semiconductor sector and capitalise on our existing strengths in this strategic industry.”

What should the government do to boost semiconductor production?

The report says the government should introduce tax and investment incentives for high-intensity research industries like the chip sector. It suggests a bespoke R&D tax credit for companies in the sector.

However, this comes against a backdrop of the government reducing existing R&D tax credits in November’s autumn statement, with the changes hitting loss-making tech companies, such as those working on capital-intensive R&D projects, particularly hard.

Elsewhere, the authors call for the establishment of a Emerging Technologies Strategic Investment Fund (ETSIF) within the British Business Bank to court international capital for the UK’s emerging technology industries, and would like to see improvements made to the immigration system for highly skilled STEM graduates and emerging technology firm workers. 

It also says adding flexibility to the planning system to encourage the construction of scientific infrastructure such as laboratories and manufacturing plants, would be a boost for semiconductor companies.

“The window of opportunity for the UK setting out its stall in the global chip race is closing, and we risk falling behind our international competitors,” says Zachary Spiro, co-author of the report. “By taking decisive action now, we can cement advantage not just in semiconductors, but an entire range of industries that Britain could lead the world in. The policies set out in this report would, at little cost to the Exchequer, provide the support and security firms around the world are looking for when deciding where to invest.”

Read more: UK could form new chip hub as part of semiconductor strategy

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