When it comes to the $590 billion global semiconductor industry, Newport Wafer Fab is a true minnow. Yet the future of this small, loss-making chip-making company based in South Wales, U.K., has become the center of an international storm.

On May 25, Britain’s Business Secretary Kwasi Kwarteng — the equivalent of the U.S.’s secretary of commerce — announced the government would undertake a full national security assessment of a deal struck in July last year — widely reported to be worth $79 million — in which ownership of Newport Water Fab was transferred to Nexperia, a Dutch company ultimately owned by Chinese technology firm Wingtech.

Kwarteng’s decision to review this relatively small deal, over which the British government initially had few concerns, comes after months of mounting pressure, both from within his own governing Conservative party, and from U.S. politicians.

The survival or otherwise of Newport Nexperia, as it’s now known, would make little difference to global semiconductor supply; nor does it produce the kind of cutting-edge silicon chips China has been itching to get its hands on, experts say. But as U.S. and European governments, fearful of future supply chain disruptions, look to become more self-reliant in semiconductor manufacturing, the acquisition of even a small British chip-maker by a strategic adversary has come into question.

“Semiconductor sovereignty is tied to national sovereignty today,” says Ron Black, chief executive of the German semiconductor firm Codasip, and who is part of a consortium considering purchasing the Newport facility if the Nexperia deal is eventually blocked. “Semiconductors are in everything.”

Kwarteng’s announcement of a new review follows months of flip-flopping over whether the sale warrants official intervention. When murmurs of the acquisition first arose in early 2021, it seemed a low priority for the government. Newport Wafer Fab had been losing money since 2018, following numerous ownership changes over a short span of time. Nexperia, a larger company with fabs already in Manchester, U.K., and Hamburg, Germany, appeared a suitable new owner.

In response to a letter of concern sent in May last year by Tom Tugendhat, a Conservative parliamentarian who chairs the influential House of Commons Foreign Affairs Select Committee, Kwarteng said he would not intervene, noting that “commercial transactions are primarily a matter for the parties involved.” 

But shortly after the acquisition was formally announced last July, Prime Minister Boris Johnson contradicted Kwarteng, and asked the U.K.’s National Security Adviser, Stephen Lovegrove, to look into it – albeit this request stopped short of calling for a formal review of the deal under the country’s national security laws. 

The EU and U.S. are trying to bring manufacturing back onto home soil, so the British decision to sell this foundry is really going against this trend.

Dr Monique Chu, semiconductor security issues expert and Chinese politics lecturer at the University of Southampton

Criticism of the deal picked up again this spring, when the Tugendhat-led foreign affairs committee published its own report questioning the government’s approach and the progress of Lovegrove’s review. Around this time, the deal had attracted U.S. political attention: A group of Republican congressmen in the U.S., including House Foreign Affairs Committee Republican lead Michael McCaul (R-TX) and Mike Gallagher (R-WI), sent a letter on April 19 to President Biden, urging him to persuade the British government to block the deal. 

The rising concern about the sale of Newport, which has now led the British government to backtrack on its initial decision, in part demonstrates how widespread suspicion has become of Chinese technology investment overseas, no matter how small in scale. But it also shines a light on the concern Western governments have about their future access to the chips which are vital to so many industries.

Producing semiconductors is an expensive, technical process requiring a diverse range of skills and inputs. As the industry has developed, different countries have come to specialize in various stages of the supply chain. Firms in the U.K., U.S. and Europe dominate in core intellectual property and chip design, having largely ceded advanced chip manufacturing to South Korea and Taiwan. 

For years, this model has served companies and customers well. But the knock-on effects of the pandemic have brought its drawbacks into sharp relief: Output disruptions in various locations have dominoed through global supply chains, creating mass shortages of chips used across a range of sectors including cars, consumer electronics, and power technologies. Add in the potential for geopolitical instability in key chip-manufacturing regions like Taiwan over the medium-term, and the picture looks still bleaker for Western governments eager to secure all-important chip supplies.

“We have really been enjoying 30 years of relative geopolitical stability, and the economic implication of that has been the development of a very delicate supply chain that has really stressed economic efficiency,” says Sujai Shivakumar, a senior fellow and director of the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington. “Today, with the pandemic and the [Russian] invasion [of Ukraine] in Europe, I think that calculus is changing … Supply chains need to be wired to be more robust: There needs to be more duplication, more fallback capacity.” 

At a large scale, there is no way the U.K. (or any country) can viably replicate the complete semiconductor supply chain within its own borders, at least without massive subsidies, compromises in performance, significant price rises and many other inefficiencies.

John Lee, director of consulting firm East West Futures

Such thinking is driving governments to look for ways to bring more of the chip-making process back home. In January 2021, the U.S. Government passed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act: although Congress is yet to agree on a funding model, it’s set to include $52 billion worth of incentives for U.S. chip-makers. The European Commission has proposed an 11 billion euro investment under the Chips for Europe initiative, which still needs to be approved by EU Parliament and member states.

Concerns about chip supply appear to lie behind the desire of some to keep Newport out of Chinese hands. “The EU and U.S. are trying to bring manufacturing back onto home soil, so the British decision to sell this foundry is really going against this trend,” says Monique Chu, an expert in semiconductor security issues and lecturer in Chinese politics at the University of Southampton in the U.K.

Additionally, Newport is home to some innovation in alternative chip materials, known as compound semiconductors, that China highlighted as a development priority in its 14th Five-Year Plan. Chu says the value of this technology shouldn’t be underestimated: Despite a general perception that Newport “is not a state of the art foundry”, she says, compound semiconductors “actually have very wide defense end uses.”

These alternative chips have strong prospects for future development, but are expensive to make and currently comprise a small share of the global semiconductor market. John Lee, director of consultancy East West Futures, said in an email response to The Wire that he sees Newport’s acquisition as “basically an issue of supply chain security and longer term economic competitiveness, rather than a question of immediate security threats.”

Lee and others also point out that a country like the U.K. would have to do far more to guarantee an adequate chip supply domestically than simply block deals like Newport’s sale. “At a large scale, there is no way the U.K. (or any country) can viably replicate the complete semiconductor supply chain within its own borders, at least without massive subsidies, compromises in performance, significant price rises and many other inefficiencies,” he says.

Black, the CEO who is part of the consortium interested in buying Newport, doesn’t think the entire chip supply chain needs to be on-shored.

“But you do need to have a strategic thought process that defines what must be onshore, what must be near shore, what is far shore, and what is okay to be produced by an adversary who can wake up one day and, like the issue with oil or natural gas today in Europe, turn [supply] off,” he says.

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