13 August 2021

Why a row about a Welsh microchip factory is much more significant than it seems

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Newport Wafer Fab (‘NWF’) is not the sort of site you’d expect to fight at the centre of an incredibly high-stakes trade dispute. The Welsh factory produces a not-especially-large number of not-very-modern microchip components.

But the row over its potential acquisition by Nexperia, a Chinese-owned company, could have enormous repercussions for not only the United Kingdom’s trade and foreign policies, but also crucial parts of the domestic agenda such as Net Zero.

If you’ve missed the story to date, here’s the precis: the Government originally signed off on the sale, but China hawks in Parliament kicked off about it. Boris Johnson therefore ordered Stephen Lovegrove, the National Security Adviser, to review the sale.

This is unusual, insofar as NWF is not the sort of business one might typically expect to have national security priorities. But analysts suggest the review may simply be a stalling action.

For next year, the new National Security and Investment Bill (‘NSI Bill’) comes into force. This gives the Government extraordinary powers both to demand pre-clearance for takeovers in sensitive sectors, but also to call in and even void transactions. Not only that, it can do so retroactively.

There are, broadly, two grounds on which ministers might normally be expected to intervene on national security grounds. The first is to protect the UK’s competitive advantage in fields, such as AI or quantum, where it is genuinely world-leading.

The second is to protect ‘domestic sovereign capability’, i.e., the ability to do things ourselves. This is the approach Britain has historically taken towards front-line defence procurement (we build all our own warships), and would today include things such as viral vaccine manufacturing capacity.

Now, it’s true that NWF is the UK’s largest wafer plant. Nonetheless, it is home to neither cutting-edge Intellectual Property – it makes Nineties tech, basically – nor does it produce sufficient wafers to prevent Britain having to import them. The national security implications are not, on the surface, all that serious.

That’s precisely why this row is so important. Because if the Government is prepared to intervene and block the sale of NWF, that signals that it is going to block Chinese investment in sensitive areas on a very broad basis.

If it follows through on that, it will have big implications. We have already seen ministers u-turn on involving Huawei in the nation’s broadband infrastructure. But a wholesale ban on Chinese investment would also make it much more difficult, if not impossible, to expand Britain’s nuclear power plant network, so diminished is the West’s capacity to build the things ourselves.

Yet despite the difficulties, the UK can’t afford to be complacent about Chinese investment. Whilst they may share in the outward form of normal capitalist institutions, major Chinese firms and investment funds are firmly enmeshed in the Communist Party’s political system and Beijing’s geopolitical ambitions.

China has not been reluctant to use its growing economic power to exert pressure on nations such as Australia, and the Government has a responsibility to safeguard the UK against such threats.

Moreover, Chinese firms have a habit of running off with valuable IP, even when they have promised to keep them in the original country. It is so surprise that the man leading a ‘white knight’ bid to prevent Nexperia’s takeover of NWF, Ron Black, previously ran Imagination Technologies, another company at the centre of a Chinese takeover dispute (which one commentator described as a ‘mugging’).

British firms are not the only ones to have fallen victim to the naïve Nineties hopes that China would become an ordinary participant in the global economic system, and it was probably inevitable that western governments would start to intervene sooner or later. However, doing so on so broad a scale as blocking the NWF sale would suggest poses a dilemma.

If globalisation is starting to roll back, at least to some extent, then the UK and other western countries are going to have to re-shore capabilities and skills they have previously been content to import (or even forget entirely). This will involve not only increased costs – if it wasn’t cheaper to source these things overseas, we wouldn’t have offshored them at all – but huge up-front capital investment in plant and personnel.

And if you’re shutting out Chinese companies, flush with cash and prepared to make all sorts of promises about investing in Britain, where is that capital and those skills going to come from? And over what timescale?

These challenges are not necessarily insurmountable, in theory. But it might be that decades of complacent hope in the post-Cold War world have left us without the state capacity to meet them. Today’s UK is a country that can’t work out what it wants its Armed Forces to do, equip them properly, or recruit enough soldiers; it can’t make a decision on a single new runway; it can barely green-light a not especially ambitious new railway; and it can’t even build houses.

A revolution in both attitude and ability is thus vital, for two reasons. Being able to do things, and do them well, not only safeguards our own security and prosperity, but will demonstrate to governments and peoples elsewhere in the world that our system is still capable of delivering results.

NWF is not important in itself. If it is taken simply as an excuse to flex some new legislative muscles and strike a pose against Beijing, blocking the sale will undermine foreign investment in Britain and do little else. If the Government is serious about rebuilding and expanding the UK’s sovereign technological, infrastructural, and manufacturing capacity, there has to be an actual plan.

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Henry Hill is News Editor at ConservativeHome.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.