Gerard B Lyons is a Business Researcher at the Centre for Policy Studies, the UK’s most influential centre-right think tank, which produces reports and advises the Government on a host of domestic policy areas – ranging from taxation and economic growth to welfare policy and the green agenda.  He covers financial regulation, tax and innovation policy. Coming from a financial communications background in the City of London after graduating from Cambridge, he has written several reports on how to improve the UK’s international competitiveness, on post-Brexit regulatory reform and how to simplify the tax system. 

Ahead of the publication of the Government’s long awaited semiconductor strategy, this interview discusses his latest report’s recommendations for what the UK’s policy on semiconductors should look like.

Very briefly – what are semiconductors, and why are they so critical?

The simplest answer is that they are a material with a capacity to conduct electricity, which lies between that of a pure metal, such as copper, and that of an insulator such as rubber. The distinct feature is that they can be used to control how, when and where electricity flows. They are constructed at the scale of nanometers and underpin technology as varied as personal computers, dishwashers and missiles. They are also vital to future policy and economic shifts: without a reliable supply of high-quality semiconductors, the Net Zero transition or proliferation of AI will likely not be deliverable, just as the wars of the future cannot be won.

Broadly speaking, you have three types of semiconductors. The most established and mature technology is silicon semiconductors, which make up 80% of the world’s semiconductors. You then have compound semiconductors, which are made up of more than one material and they make up around 20%. And there are other advanced semiconductor materials, such as graphene or diamond. Although these are not in high demand in the current market, it is estimated that over the coming decades graphene will replace silicon as the primary material in semiconductors. 

The big question for the UK is how it positions itself within this landscape. The UK has a nascent semiconductor sector, but it is not a major player in traditional silicon

chips. And, given the direction of travel, it should not try to become one. The UK does, however, have internationally recognised strengths in other more competitive parts of the sector. These include world-leading chip design companies, such as Arm, and early-stage R&D and basic IP. For the UK, it should be about playing to these existing strengths and having the right policy environment in place so it is well positioned to capitalise on the next generation of semiconductor technology. It is about doubling down and looking forward. 

You mentioned trying to achieve net zero: how do semiconductors help us reach that goal?

I’m not best placed to comment on that specifically. Our report focuses on creating the ideal policy environment – and what levers the Government can pull – for the UK to be competitive in the sector and what the overarching approach to semiconductors and other innovative technologies that will come to define the future should be. 

We argue in the paper that rather than joining the global subsidy arms race, or trying to

select national champions only to see them crushed by their Taiwanese, American

or Dutch rivals, the UK needs to be smart – not least because of the UK’s 

fiscal constraints. Crucially our suggestions are, at their core, market-led. The history of UK industrial policy is littered with firms who have grown fat on public subsidy, before finally succumbing to market forces. We argue the Government should instead focus on creating an environment which is conducive to growing R&D-intensive sectors, with a particular emphasis on semiconductors.

As alluded to, you have a lot of countries looking at how they can onshore as much of the semiconductor supply-chain as possible. The existing intricate logistical network of semiconductor assembly is very vulnerable and the world is still recovering from a global chip shortage because of the pandemic. On top of this, China’s posturing towards Taiwan has made many Western nations review their own semiconductor capacity, not least as an insurance policy if Taiwan were to be invaded. This is the backdrop in which countries are operating. Semiconductors are a technology that is not only economically lucrative – trade was worth $1.7 trillion globally in 2019 – but are of importance for national security and fundamental to economic stability. This is what has led many countries to offer massive subsidy packages to attract firms to locate operating in their countries. Most notably, the US CHIPS and Science Act is more than a $70 billion injection into the US semiconductor sector. The European Union has set out a €43 billion investment plan for the industry, which has helped attract Intel to set up a $17 billion plant in Germany. And then there are other countries, such as South Korea and Japan which both have ambitious packages to bolster their existing domestic sectors. 

Given the UK is a medium sized economy and does not have the same fiscal firepower as the US and EU, it would be unwise to copy their approach. Instead the approach has to be about leveraging our existing world-leading industrial strengths and creating an attractive environment so the UK is well placed to capitalise on the next generation of semiconductor chips. That is where the real opportunities lie. 

A significant self-inflicted challenge is that the UK is one of the very few countries that has not come out with a semiconductor strategy. That’s a major disadvantage primarily for two reasons: first, the optics aren’t great. If the Government  is saying that it wants the UK to be a “science superpower”, but its strategy for one of the most strategic sectors is over a year late then the rhetoric means little to the business community. Second, the investment decisions companies are making have long lead times, so businesses need certainty and a sense of the direction of travel. 

The recommendations we make in the paper fall into four buckets: (1) introducing tax and investment incentives for high-intensity R&D industries, (2) improving the immigration system for highly skilled workers, (3) adding flexibility to the planning system to encourage the construction of scientific infrastructure and (4) strengthen the focus on semiconductor policy within Whitehall. And within each of these there are specific recommendations. 

For example, taking the first of those, among other things, we recommend the Government offers a bespoke R&D tax credit for companies that fall within the “families of UK strength and opportunity” as set out in the Government’s own Innovation Strategy. While spending on R&D has risen in recent years, it is still lower than the OECD average. We also call on the Government to permanently introduce full expensing for non-R&D related plant and machinery, in addition to structures and buildings, for companies in sectors that fall within the ‘families of UK strength and opportunity. And we say the British Business Bank should establish an Emerging Technologies Strategic Investment Fund, to actively court international capital that can be invested in the UK’s emerging technology industries. 

This might sound technical and dry, but the reasons we recommend these policies is because – and this transcends the semiconductor sector but applies to the economy more broadly – the UK has a longstanding lack of business investment in part because it has one of the worst tax systems in the OECD for capital cost recovery, which is the ability of firms to write off investments against tax. The UK also has longstanding funding gaps meaning firms that are growing cannot access the necessary finance to achieve their potential. These challenges – among others – do not just impact this sector, but a host of industries. 

As I understand it, the main idea of your paper is, ‘we accept we have very limited resources, let’s try and maximise the use of those resources’. One way you propose doing that is by encouraging skilled foreign immigration. The current government scheme for that is the High Potential Individual Visa (HPIV). Could you explain what that is and how we can improve it?

Despite the relatively small numbers of people employed in the semiconductor sector, the UK has for years suffered skills shortages. And these shortages have become more pronounced since the pandemic. These shortages, it should be noted, also impact other sectors that require scientific skills. That’s why we have suggested the HPIV is tinkered with. 

Last year, the Government introduced the HPIV, which permits recent graduates of the world’s top 50 universities to live and work in the UK for up to two years. However, as currently designed, the HPIV is too narrowly focused to bring individuals with relevant skills for high-end technology manufacturing and commercial research – needed by the semiconductor industry – into the UK. This is because roles in these sectors often require advanced degrees – such as Masters or Doctorates. As a result, the relatively narrow focus of the HPIV on the world’s top 50 universities excludes many world-class institutions where relevant advanced degrees are regularly awarded. Simply put, the current rules would permit a recent languages graduate from Harvard to enter the UK without a job offer, but would prevent an engineering PhD from Carnegie Mellon (currently ranked 4th in the US but absent from the Government’s global universities list) from doing the same. To resolve this, the HPIV should be expanded, such that any advanced degree holder in a STEM field from a top 20% university in a set of named countries is eligible. This list of countries should include allied nations, such as the US, EU members, Japan, New Zealand, Canada, Australia, India and Taiwan. 

On top of this, applicants under this part of the HPIV should be exempt from having to pay the health surcharge. These charges – currently £624 per year for adults – amount to a big upfront cost on top of other application and relocation fees. 

You touched on how the UK should create ‘vehicles’ to court international investment since it has very little to put in of its own. Given that the UK has such little funding compared to the US and EU, how do you propose making the UK an attractive target for semiconductor investment?

Let me step back a bit. The UK does have very deep pools of capital, it has just proved very difficult to liberate them. For example, the long-term capital available in the form of UK pension funds, insurance assets and private savings is estimated to be worth £6 trillion – making it by far the largest and deepest pool of capital in Europe. Yet, only a tiny fraction of it is productive investment. 

Trying to unlock some of this capital is a focus of current government policy, and this is partly why in the media at the moment there are lots of articles about the Government wanting to review and rewrite some of the regulations introduced after the 2008 global financial crisis. And I am supportive of what they are trying to achieve as there are definitely many areas that are ripe for regulatory reform. And implementing changes, in consultation with the relevant industry voices, needn’t be at odds with maintaining high regulatory standards and the appropriate safeguards in place. 

So, coming back to your question. Trying to liberate the domestic pools of capital we have is key – not just for semiconductors but for a variety of sectors and the economy at large. We also recommend in the report, as touched upon earlier, the creation of the ETSIF within the British Business Bank to court international capital that wants to invest in the UK’s emerging technologies. Without getting into the weeds of how it would work, the ETSIF would provide several benefits to investors such as being a one-stop shop for international investors as well as providing the ETSIF fund managers with access to Government expertise in emerging technology sectors – including regulatory advisers, cluster and sector mapping. 

But stepping back further, it comes back to what I said earlier about ensuring that the whole policy environment in the UK is attractive – while being sustainable. I say sustainable because many businesses are calling on the Government to mirror what other countries are doing with regard to massive subsidy packages – as you would expect – but that would be the wrong approach for the UK. A sectoral policy contributed by billions of pounds of direct industrial subsidy is highly unlikely to deliver a strong and growing semiconductor industry, or any other emerging technology industry, but it would definitely be incredibly expensive. So, that is where the four buckets of policy recommendations come into play. Making sure firms have a tax system that incentives investment, making sure they can attract the skilled workers they need, making sure they can actually build factories in the places where it makes sense to, and making sure they know who they need to talk to in Government / what the Government’s vision is. If you get those fundamentals right, then the UK will become a more attractive target not just for semiconductor investment but all investment. 

On foreign investment – in your report, you discussed how the UK sought to tighten national security controls on foreign investment after the controversial Chinese acquisition of a Welsh semiconductor fab. What threat does Chinese investment pose to the semiconductor industry?

A think-tank that covers foreign policy will be better placed to comment on the China element of your question, but what I can add is that there is a global trend – it is not just in the UK – of having a rigorous screening process for sectors, companies and assets that are deemed to be of strategic and or national security importance so that they are not acquired by hostile actors.

In January 2022, the UK’s version of this screening process – the National Security and Investment Act – came into effect. It imposes new limits on takeovers and acquisitions of UK companies. In terms of the specifics, it has been pointed out that the legislation does not actually define “national security”, and that the 17 “sensitive” sectors it spans cover so much of the economy. The challenge is how do you provide clarity to businesses and investors about which acquisitions and deals may be subject to the screening process, while also giving yourself enough flexibility to act where you think it is necessary.

It reminds me of the quote a Supreme Court Justice gave when he was asked to describe his test for what constitutes pornography: “I know it when I see it”. It can be hard – although it’s not impossible – for the Government to provide clarity about what may be subject to the screening process, but it also needs to have the ability to act unilaterally when it is necessary. What you want is predictability, while providing enough flexibility so you do not tie your hands. A way in which you can do this is by providing a detailed explanation of why the Government has interacted with a certain deal. At the moment, the Government tends to publish just a handful of sentences that don’t say much. 

Often the word you hear on this topic from businesses and investors is “uncertainty”. Take the example you mentioned, in July 2021 the Welsh semiconductor manufacturer Newport Wafer Fab was fully acquired by shareholder Nexperia, which is fully owned by Chinese firm Wingtech. In response to pressure from the MP Tom Tugendhat, then Chair of the Foreign Affairs Select Committee, the then Prime Minister Boris Johnson committed to a review of the acquisition. Fast forward to November 2022 and following several delays the then Business Secretary ordered that the sale be unwound. Irrespective of the merits of the decision, the fact this process was lengthy and triggered by a backbench MP does not provide much certainty to the business community about what deals could become subject of being screened and potentially unwound. 

Let’s keep looking internationally. TSMC, Taiwan’s biggest semiconductor company, just spent $40 billion on a semiconductor fab in Arizona. Do you think America and Europe will be successful in developing domestic semiconductor industries, or are they doomed to lag generations behind Taiwan?

The likelihood of any country achieving its own semiconductor self-sufficiency is incredibly unlikely. Plus with the example you cite, even with the US’s huge investment including the new fabrication plant in Arizona, it is still expected to leave the US trailing a generation behind the cutting-edge work being done in Taiwan.

This reinforces why the UK should take the approach we suggest: get the fundamentals right, and the UK could make inroads in the next phase of semiconductor production. Forget trying to onshore manufacturing of traditional silicon chips, focus on the UK’s existing strengths and the future semiconductor and innovative technologies.

Stepping back and looking at this through the lens of geopolitics, the big global shift is towards onshoring (or ‘friendshoring’). Jeremy Hunt, the Chancellor, has used the term “nearshoring”. The unifying idea is that you and your allies should have an end-to-end supply-chain, instead of trying to do it all yourself. Now that this is firmly set as the foreign policy approach of the West, the question for the UK is how and whether it will benefit from this transition.

More on friendshoring – if we’re going to become less dependent on Taiwan for semiconductors and will be able to depend on a reliable supply from Europe and America, isn’t it time for the UK government to pivot from semiconductors to quantum computing, AI and other cutting-edge technologies?

I don’t see it as either/or. The policies we recommend in the report don’t just benefit the semiconductor sector, even though that is the framing for the report.  The recommendations are deliberately tailored for R&D-intensive sectors, with a particular emphasis on semiconductors. The bigger point is that the UK will need to do the same – or at least very similar things – if it wants to become a big player in quantum computing, AI and other cutting-edge technologies. From a free-market perspective, it shouldn’t be about picking winners. You don’t want to pick one sector and say, ‘let’s go for it’, you want to create the environment for a whole host of sectors to do well.