Let’s be honest, making our own microchips won’t solve our China woes
The UK has promised a microchips strategy, but it doesn’t need one. We think we must produce chips to face off China, but in reality we will be better off importing them, writes Matthew Lesh
Chips are the hip, cool new thing. No, not the ones made from potatoes. The tiny transistors on silicon chips that constitute the beating heart of every modern technology – from computers, mobile phones and washing machines to cars, satellites, and weapons. They have been described as “the new oil”: they might be the new scarce resource on which modern economies depend.
Geostrategic concerns about China and Covid-related shortages have drawn the attention of policymakers to this topic. The Biden Administration has signed a $52bn law to encourage domestic production and, in an unprecedented step, banned US companies from supplying chips to Chinese companies. The European Union is also pursuing a Chips Act, making €11bn available for research and development and aiming to double European chip production.
The UK government has also promised a microchips strategy – which is so far nowhere to be seen. “The government is putting UK plc at significant risk by failing to take action in support of the semiconductor industry,” business committee chairman Darren Jones has claimed.
In truth, the UK does not need a chips “strategy”.
This is not to talk down Britain’s strengths in the sector. Cambridge is the home of Arm, a globally successful chip architect, and has some domestic manufacturing capacity. But the up-front investment necessary to manufacture the most advanced semiconductors would amount to tens of billions of pounds. The UK does not have the necessary scale or skills to compete with the likes of TSMC, the world’s biggest semiconductor producer, based in Taiwan, and supplier of Apple’s iPhones. Nor would it be a particularly good investment. Just this week TSMC missed its latest quarterly revenue goals and is reducing investment in response to slowing global demand for chips.
The Covid-era shortage of chips is likely to turn into a glut, particularly as new US and EU capacity comes onto the scene with large subsidies. This will mean that British manufacturers who use microchips in their production lines will benefit from lower input costs. Thank you, American taxpayers.
More broadly, we need to get out of the mindset that the UK must produce everything it consumes. This is not a progressive policy. It reveals an isolationist, closed mindset. There may very well be a need to diversify supply chains, to reduce reliance on China. But that can come from businesses sourcing elsewhere in Asia, Europe or the United States.
The UK has benefited for centuries from being an open trading nation. “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage,” Adam Smith wrote as far back as 1776. Today we understand that this process boosts productivity, meaning higher incomes and a better quality of life.
The UK also doesn’t need a top-down strategy for every sector. Britain’s grocery sector fared just fine before the government released a 33-page “food strategy” in June 2022. It was perfectly capable of delivering millions of goods from across the world to thousands of stores across the country.
The alternative approach, championed by the likes of Mariana Mazzucato’s entrepreneurial state, advocates for a mission-oriented approach to the economy. In practice this means bureaucrats handing out taxpayer money to favoured industries. The beneficiaries are seldom the most competitive, meaning the state picks losers more often than winners. The result is wasting taxpayer money, a lessened incentive to innovate or respond to consumer needs, and ultimately a less productive economy.
The UK government spent decades subsidising International Computers Limited (ICL), a domestic British competitor to IBM for mainframe computers. Their only customers in the end were public sector entities. Whenever a business had a choice, they purchased the superior product from IBM. But that didn’t stop the farcical misuse of taxpayer money supporting ICL for many years.
If Britain is to be prosperous in the future, it’s important that we learn the lessons from the past.