This summer the Government announced it was reviewing the Chinese acquisition of the Newport Wafer Fab (NWF) semiconductor factory as a possible national security risk. Though it has since been completed, the purchase by China’s state-backed electronics firm Wingtech Technology through its Dutch subsidiary Nexperia could, in principle, still be reversed. 

The semiconductor wafers made by NWF occupy a central position in the high-tech economy. A recent White House report warned that semiconductor-based integrated circuits are “the DNA of technology” behind “essentially all segments” of the high-tech economy: they also “underpin state-of-the-art military systems” and are at the heart of the technologies that will be at the heart of future competition, like AI and 5G. NWF’s wafers are not at the cutting edge, but demand has increased due to their promising use in electric vehicles (EVs), for which China is the largest market. 

Dependence on any risky national supplier should be reduced, not increased

As our new discussion paper describes, Beijing’s strategy of increasing control over global semiconductor supply chains has profound national security implications. The US, Italy and South Korea have recently blocked Chinese firms’ semiconductor acquisitions. While our Government initially approved the sale, industry representatives have said that dependence on any risky national supplier should be reduced, not increased. US Secretary of Commerce Gina Raimondo has even called on allies to help slow China’s innovation rate in semiconductors.

Wingtech is not a private company, but a “hybrid” firm. Dutch investment screening company Datenna reports that 30 per cent of its shares can be traced to the Chinese government: Newport Wafer Fab’s ultimate owners now include four Chinese cities and one province. Wingtech’s largest shareholder is “Lhasa Economic and Technological Development Zone Wentianxia World Investment Co Ltd”, owned by Wingtech and Nexperia CEO Zhang Xuezheng. According to the Hong Kong Trade Development Council, one of the Zone’s early investors was Tibet Zhongkai Mining Group. Credible reports state that China’s security forces have confronted Tibetans protesting against Zhongkai’s digging plans at their sacred sites.

Observers are beginning to ask about the long-term results of these investments in the UK tech sector. After Canyon Bridge Capital Partners bought Imagination Technologies in 2017, its state-funded backer China Reform claimed it took no part in Imagination’s governance. An attempt to place four Chinese fund representatives on Imagination’s board followed within three years. Imagination staff are now reportedly leaving “in droves” as a result of PRC influence. 

The race is happening in the context of a global microchip shortage

The UK and US are now in a race with China in these fundamental technologies. While China has strategically increased “access to and control of” semiconductor intellectual property (IP), the UK is losing control of the core IP where it, with the US, had been a leading owner. The White House report published this summer warned US allies about the risks this will create. “Armed with billions in subsidies,” it said, “the Chinese government [has been] on a buying spree for foreign semiconductor companies.” These subsidies are distorting markets, as Beijing spends hundreds of billions of dollars to keep “Chinese companies in business even though most do not appear to be making a profit”. So when other firms have to cut their workforce and R&D spend, Chinese competitors can often keep spending. The US Administration warns that China’s fund managers often “serve as proxies” for “military-civil fusion objectives”.

This is happening in the context of a global microchip shortage, partly because of Covid. The vulnerability of our supply chains is becoming a major political issue. Given semiconductor supply chains’ dependence on the security of Taiwan, as well as the great expense and time needed to build new fabs, the Government will increasingly need to consider these acquisitions in a strategic landscape of risk, instead of with the narrow criteria used thus far. In 2005, the US Department of Defence described the loss of a “diverse base…capable of meeting trusted and certified chip needs”, which creates “such opportunities for mischief that, had the United States not significantly contributed to this migration, it would have been considered a major triumph of an adversary nation’s strategy”. The White House is aware of the growing risk of “malicious disruption” to semiconductor supply chains. 

While we do not suggest that Wingtech or Nexperia intend to contribute to China’s rapid military expansion, some of China’s semiconductor-related acquisitions have clear military ramifications. Finnish firm Beneq was acquired in 2018 by a Chinese firm whose backers included an investor 50 per cent owned by a military-civilian fund; Dutch firm Ampleon switched to focus on aerospace and defence after it was purchased in 2015. 

Beijing can demand civilian tech are shared with the military

In the UK, NWF has been developing chip technology with Cardiff University for a radar system for use in fighter aircraft, among other defence contracts. Our previous paper Inadvertently Arming China? described PRC military-linked entities’ interest in UK radar research, which, like next-generation fighter jet technology, is a priority for China. We do not imply that Nexperia or Wingtech has any intention of putting NWF’s innovations to Chinese military use. Our Government would need to be sure that this could not happen anyway, against their wishes. In the context of “military-civil fusion”, whereby Beijing can demand that civilian technologies are shared with the military, it is unclear how we could know this in advance. 

The Government should proceed with caution. We suggest that China’s purchases of semiconductor firms are in future automatically referred to the nascent Investment Security Unit. Ministers should also consider whether China should be able to acquire any UK firm that has previously received defence funding. The risks are too great to ignore.