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The “Hiroshima Accord” and the scramble for chip certainty

From London to Tokyo, Washington to Berlin, policy makers are scrambling to rethink semiconductor supply chains, in no small part lest (and few put it this bluntly) China invades Taiwan – gaining access to the Taiwan Semiconductor Manufacturing Company, which produces 90% of the world’s leading-edge semiconductors.

Some are that blunt: gaining control of those plants would make China “like the new OPEC of silicon chips” and allow them to “control the world economy,” Trump’s former National Security Advisor said earlier this year – suggesting that the plants would be destroyed by the US if they ran the risk of falling under Chinese control.

The hyperbole was extreme and his position contentious. More sober voices talk about the need for supply chain diversity owing to Taiwan’s TSMC semiconductor production dominance; the chips it produces power smartphones, cutting edge weapons, satellites and vehicles and the concentration risk is real. (“Losing access to Taiwan-produced chips would be disastrous, the worst disruption to manufacturing output since the Great Depression” as Chris Miller, the author of Chip War recently put it in a Council for Foreign Relations blog.)

With global semiconductor sales having reached a record $574 billion in 2022 and reliance on them deepening across every sector (domestic boiler shortages during the pandemic, for example, were attributed to chip supply issues for their controllers), the need for supply chain diversification is clear (as it is in many sectors as companies move from “just in time” to “just in case” strategies; just this week the G7 agreed an “urgent need to address existing vulnerabilities” in the highly concentrated supply chains of clean energy components.)

Flying to Japan this week and announcing investment deals across defence and clean energy, British Prime Minister Rishi Sunak touted the creation of a “Hiroshima Accord” that will, on semiconductors, see the two “pursue ambitious R&D cooperation and skills exchange, strengthening our domestic sectors and bolstering supply chain resilience in an increasingly competitive market” – words with the air of a high hot air quotient.

A new UK semiconductor strategy has been promised this week. It comes after industry stakeholders in June 2022 savaged the government over its lack of any discernible UK semiconductor industry strategy, with manufacturers, defence firms, academics and industry groups criticising failures to safeguard or bolster the country’s chip production in a series of submissions to HMG. (With one respondent, Andy Birnie, saying “I haven’t seen any direction from government on growth or security in this industry. I am UK country manager of NXP Semiconductors, we have approximate turnover of $12 billion [and are] a top 10 global supplier of semiconductors so I hope if there was any government direction, it would have been made visible to me.”)

Industry will watching closely for substance to both the Japanese talks and the forthcoming strategy.

Some foreign policy experts, meanwhile, take a different approach to the Taiwan issue.

Kurt M. Campbell, a US Assistant Secretary of State  from 2009 to 2013, and Jake Sullivan, a former National Security Adviser argued in Foreign Policy this week that “Taiwan is not only a potential flash point; it is also the greatest unclaimed success in the history of US-Chinese relations,” they said in a thoughtful, if optimistic piece.

“The island has grown, prospered, and democratized in the ambiguous space between the United States and China as a result of the flexible and nuanced approach generally adopted by both sides. In this way, the diplomacy surrounding Taiwan could serve as a model for the increasingly challenging diplomacy between Washington and Beijing on a variety of other issues, which are similarly likely to include intense engagement…”

With billions in subsidies being bandied about from Washington to Frankfurt, momentum is building regardless to reduce Taiwan's criticality to semiconductor supplies. Yet on n the ground in what is less of a geopolitical hotspot, but arguably the future hub for any renewed British semiconductor work, policy makers remain deeply frustrated by government torpor. As Wales' Economy Minister, Vaughan Gething, wrote to HMG this week to say: "The semiconductor sector requires long-term investment. Companies, and indeed the Welsh Government, need to understand the UK commitment to this industry at the earliest opportunity. If not, investment decisions will be made elsewhere.

They added: "I would hope the strategy contains a significant investment commitment by the UK Government that will be proportionate to the commitments being made in the US and EU [Ed: ambitious!] The strategy will, I expect, commit to developing our R&D and skills for the sector, but it should also commit to building the infrastructure that enables the industry to grow and develop" -- The Minister also drew the Secretary of State’s attention to the situation at Nexperia/Newport Waferfab in Newport, which, as a result of a Security and Investment Order, faces an uncertain future. Gething noted: "Urgent progress is now required to ensure prospective investors can take on this key site, preserve hundreds of high value jobs, and protect the capability the plant offers to the sector in the UK."