Internet & Tech

Small but significant

Newport deal a litmus test for Britain’s new stance on Chinese tech M&A


The UK’s other wafer production – though of less interest to the Chinese

If you ask British people what kind of wafers are produced in the UK, then they’ll almost certainly think about the biscuit variety – such as vanilla creams sandwiched between pink wafers. The teatime snack was originally produced by Crawford’s in Edinburgh and a slightly different version by OP Chocolate in Wales.

Wales is also home to another type of wafer production, the kind that creates computer chips. It’s currently in the news because the Newport Wafer Fab (NWF) has just been sold to Nexperia, which in turn is controlled by China’s Wingtech.

Many Britons are quite surprised to learn that any form of manufacturing still exists in the country after the industrial base was hollowed out during the 1980s. What might come as less of a shock is discovering that a surviving local manufacturer has been sold to overseas interests (the UK has historically been extremely laissez-faire about inbound purchases).

But times are changing. NWF’s sale is set to become the first test case of the UK’s new National Security & Investment Act, which passed into law in April this year. It gives the government power to block transactions on national security grounds.

Prime Minister Boris Johnson has referred the Nexperia acquisition to the government’s national security advisor: but not before trying to get the devolved administration in Wales to deliver the bad news to the Chinese first.

The UK’s business secretary, Kwasi Kwarteng, initially said that the decision rested with the Welsh administration, before Johnson told parliament that Cardiff had asked Westminster to “deal with it”. The Welsh denied this claim, stating that it had always been a matter for the UK government.

Britain’s Daily Telegraph noted that what the Welsh government had been trying to do was secure £50 million ($69 million) in external funding so the fab could double its capacity. It had previously provided the Newport-based firm with a £13 million loan when NWF’s management purchased the fab from Germany’s Infineon in 2017.

The idea was to turn NWF into a profitable enterprise (it recorded an £18.9 million net loss in 2020) and bring more silicon production to Wales by expanding an existing semiconductor cluster around Newport (via an alliance of companies, academia and the Welsh government).

So far, the Welsh government has been unable to realise its ambitions because Nexperia, NWF’s second largest shareholder, held pre-emptive rights over the firm. These were triggered when the fab failed to deliver on a contract to it.

What strikes Chinese observers are the small sums involved. NWF was reputedly sold to Nexperia for £63 million. “What kind of bargain basement price is this? That’s less than the transfer fee for a single footballer in a European league,” one netizen wrote on Sina Weibo.

Then there’s the geopolitical dimension. Acround the world, countries have woken up to the fact that manufacturing of the most advanced computer chips is controlled by a couple of Asian companies: principally Taiwan’s TSMC and South Korea’s Samsung.

The US is incentivising both firms to establish advanced manufacturing plants on its soil, not to mention encouraging homegrown Intel to keep up in the technological stakes. TSMC is in the process of setting up one such plant in Arizona at a cost of $20 billion. Taiwan’s Digitimes also reports that Washington is putting TSMC under pressure to drop plans to expand capacity at its Chinese fab in Nanjing.

The EU, meanwhile, is trying to double chipmaking capacity on the continent. Intel is proposing to invest $20 billion to set up a foundry in one European country and a plant for testing and packaging in another EU nation.

Readers of the Financial Times have compared this investment drive with UK efforts to develop a domestic manufacturing base for semiconductors. As the FT’s most-liked comment puts it, “Ah more FDI and jobs lost for us. I’ve lost count of all these Brexit dividends.”

Why then does Shanghai-listed Wingtech want a plant in Newport that one wag describes as so antiquated that for it to be cutting edge it would be necessary to “travel back in time to the late 1990s when Intel’s Pentium 3 were being made at 180nm manufacturing nodes”.

The reason is twofold. Firstly, there’s a global chip shortage and financial analysts estimate that NWF could help Nexperia to boost its overall capacity by 40% (the former produces 35,000 to 40,000 eight- inch wafers per month).

Secondly, NWF possesses a mature manufacturing process called IGBT (insulated-gate bipolar transistor). It’s a key component (an electronic switch) that’s widely used in the power industry with applicability across a lot of ‘hot’ sectors including electric vehicles (EVs), as well as wind and solar power. Wingtech has also just set up an R&D design team specifically focused on IGBT.

Equity investors responded positively to news of the sale, with Wingtech’s shares jumping 9.5% when it was announced on July 2. The stock has remained pretty flat since then.

Boris Johnson says that he doesn’t want an “anti-Chinese spirit” to “pitchfork away every investment from China in this country”. However, that sentiment isn’t really reflected in the British newspapers. Typical is The Times’ assessment. It wrote: “As Chinese fighter jets continued to enter Taiwan’s airspace last month, a Chinese firm was quietly circling Britain’s biggest semiconductor manufacturer.”

Tech journalists point out that while the UK’s chipmaking prowess is limited, that’s not the case for chip design, where it’s a world leader. Chinese tech companies are also ramping up their efforts in this area, not least China Mobile. The state telco has been designing chips for a while, but under the umbrella of the parent group. It’s now spinning this unit off into a new company, XinSheng Tech, with a view to listing it on Shanghai’s Star Market tech board.

Company officials say XinSheng has ambitions to become the world’s most innovative designer of chips for the Internet-of-Things (IoT), and this effort will include opening more overseas R&D centres.

But XinSheng’s management will still need to find a fab to produce the newly designed chips first. As ever, that’s the key question surrounding China’s efforts to develop semiconductor self-sufficiency. In order to progress with 5G, Chinese foundries need to master the 14nm manufacturing process node. But its leading manufacturer, SMIC, is still trying to ramp up production at 28nm.

Wen Xiaojun from China’s Electronics & Information Industry Development Research Institute recently said that China will mass-produce at 28nm this year and 14nm next year. That would represent a breakthrough, even though TSMC and Samsung are both now working at the 2nm to 3nm level.

Wen also said that much of the key equipment has been “realised from scratch”. This has prompted speculation that Shanghai Microelectronics (SMEE) may have finally cracked the production of a lithography machine that operates at 28nm.

As we wrote as recently as WiC546, lithography is the most complex part of chip manufacturing. For the most advanced nodes, the market is controlled by Holland’s ASML, which has been blocked from exporting its very high-tech EUV machines to China by the US government.

Talk of SMEE’s potential progress has fuelled optimism that China is closer to creating its own industry chain for semiconductor production, free of dependence on foreign firms. “SMEE was ridiculed when it first visited foreign companies in the early years,” one netizen wrote. “Foreign experts said that SMEE wouldn’t be able to make the machines even if it was given the drawings first. Look at SMEE now. It will be able to give those foreign experts a good slap in the face.”

Meanwhile the pacier development path of simply buying foreign tech firms looks a dicier proposition. The UK government’s likely veto in Wales – over the purchase of a very modest player in the global context – looks set to confirm a new status quo. Such a verdict will be significant more for what it says about attitudes to Chinese tech M&A than for the size of the deal itself.

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