Britain Wargames a Crash Far Worse Than Covid If Chip Supplies Are Shut Off | Tech News

Britain Wargames a Crash Far Worse Than Covid If Chip Supplies Are Shut Off

Everything from energy security to medical treatment would be at risk — and Brexit has left the UK with fewer options than other western countries.

By:BLOOMBERG
| Updated on: Feb 17 2023, 10:32 IST
semiconductor
The spark for a fictitious tech shortage could also have been a tsunami big enough to knock out factories in Taiwan, South Korea and Japan. (Bloomberg)

It's 2027 and London's black market for vintage smartphones is thriving. Second-hand cars are selling faster than any rolling off UK assembly lines. Internet blackouts are common, inflation is surging and waiting lists for public health services are lengthening again. Britain is in the grip of a global semiconductor crisis.

In this hypothetical scenario, chip supplies dried up a year after China stormed Taiwan and blockaded production at Taiwan Semiconductor Manufacturing Co. Ltd., which makes 92% of the world's most advanced semiconductors. Broader tensions in the region disrupted supplies from other key producers in Japan and South Korea, and Beijing restricted its own exports for economic leverage against the US.

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The spark for a fictitious tech shortage could also have been a tsunami big enough to knock out factories in Taiwan, South Korea and Japan. Such are the very real potential shocks envisaged in a war-game exercise the UK government will conduct to prepare for a chip shortage that people familiar with the plans claim would cause dire economic consequences.

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The UK is preparing a contingency exercise across multiple government departments, Bloomberg has learned, and the pandemic offered a mere preview of the chaos that tiny silicon wafers can unleash. Since 2020, shortages were blamed for Honda Motor Co. closing its Swindon factory and contributing to flagship battery start-up Britishvolt Ltd.'s collapse, according to a new paper from Associate Professor Chun-Yi Lee at the University of Nottingham. MPs said the crunch slowed Britain's smart-energy meter rollout.

But the Covid dry-run was nothing compared with the catastrophe that would engulf the UK if the world's chip supply is cut off in its East Asian heartland, where more than half of all semiconductors are made.

“There will be much higher prices to consumers,” Lee said by email. “The iPhone won't be a grand, but three-to-five grand, because the chip making will be from South Korea, or from Arizona.”

In a 2021 paper by the International Monetary Fund modeling a controlled “technological decoupling” of China from the US and Europe, the most open economies including the UK suffer economic losses of 5% of gross domestic product within a few years.

A similar 2022 exercise by Britain's Office for Budget Responsibility on the impact of a “plausible rise in trade barriers rather than the type of global disintegration which may occur” in the event of a Chinese invasion of Taiwan would drive borrowing up £20 billion ($24.1 billion) in year one. Prices for electronic goods would soar. Within four years, 2% would be wiped off GDP growth, rising to 5.2% of GDP in little over a decade and blowing a £57 billion permanent hole in the public finances — the size of the defense budget.

If the cause is military escalation by China, the OBR assumes UK defense spending rises from 2% to 3% of GDP, adding another £25 billion to the deficit just as rising trade barriers strangle Britain's growth potential, putting the national debt on an unsustainable trajectory.

And that's the best-case scenario. To prepare for a worst-case, the government will run a stress test — much like its pandemic simulation four years before Covid — and has placed chip supply resilience as a top priority in its Integrated Review of national security and international policy.

“We have no resilience and no contingency plans, unlike the US building a microchip factory in Arizona. We need a Plan B and to start that we need an urgent stock check,” Tory MP Tobias Ellwood, chairman of the Defence Select Committee, said in an interview.

“The problems of grain exporting from Ukraine will be dwarfed. China knows this,” he said. “It's not just a long-term ambition to regain what they say is their territory but its economic competition with the west.”

China sees Taiwan, a democratically run island, as part of its territory. Beijing has said it prefers a peaceful solution to regain control of the island but has reserved the right to use force if necessary.

UK officials acknowledge they have been slow to realize the dangers. One said the decision by President Vladimir Putin to switch off gas to Europe after Russia's invasion of Ukraine was a jolt to Whitehall thinking. That has led to a discussion in Rishi Sunak's government about how to diversify supply but any suggestion the UK could follow the US with manufacturing subsidies are wide of the mark, the person said.

The shock of a TSMC shutdown would be felt immediately and in every corner of British life. The auto industry would struggle to survive. In Covid, registrations collapsed by almost a third because cars couldn't be shipped for assembly until chips were installed. TSMC makes 35% of world's automotive microcontrollers, according to the Rhodium Group.

Other domestic industries reliant on Taiwanese chips include “e-commerce, logistics, ride-hailing, entertainment,” a report by Rhodium said. Spare parts for medical devices such as insulin pumps could become scarce, and “ultimately, the full social and economic impacts of a chip shortage of that scale are incalculable, but they would likely be catastrophic.”

With most devices, modules and board-level components also assembled in Asia, even domestic chip plants wouldn't be a silver bullet. Chips are a key point in fragile supply chains that stretch around the world.

At least the internet would keep working — in the short term.

Before long, though, new equipment for repairs or more capacity would be depleted, despite mobile data demand that's increasing roughly 30% per year. As a result 4G and 5G mobile antennas, fiber network nodes and home routers would be hard to repair or replace once stockpiles ran out, leading to serious outages in the networks which underpin much of modern life, connecting everything from families to banks to hospitals.

Peter Claydon, president of Picocom, a UK startup designing chips for new mobile networks, which are made in Taiwan, said if the country was blockaded “we would probably go out of business very quickly.”

“We don't have much stock, and after that we wouldn't be able to make any more,” he said. “I don't think any bank or financial institution would be prepared to invest to keep us going.”

Taiwan makes 70% of smartphone chipsets, Rhodium said, so prices of handsets, laptops, smart TVs and other home entertainment devices would surge instantly — supercharging inflation. As prices soared and supplies dwindled, consumers would turn to legacy technology for which less advanced chips are more available. In the pandemic, the dynamic played out in used cars, which briefly cost more than new models.

National defense would also be at risk. Chips are fundamental to almost all military systems, including the UK's F-35 fighter jets, according to a review from the White House, which also mentions emergent technologies like artificial intelligence, 5G, satellites, hypersonics and cybersecurity.

The most advanced chips are also used in precision medicine, financial modeling, fraud detection, weather forecasting and seismic data analysis, according to American chipmaker Intel Corp.

In the UK's National Health Service, the shortage of cutting-edge equipment like MRI scans would only get worse, causing treatment delays. Defense think tank RUSI says Britain's energy security is dependent on chips, which are needed for solar, electric vehicles, and energy transmission.

Most western countries would struggle, but Britain is particularly exposed. Less than 1% of global chip production is in the UK, according to Malcolm Penn, chief executive of Future Horizons Ltd., but UK manufacturers account for 2% of global consumption. There is no realistic prospect of onshoring or building a domestic industry, either. Commercial-scale chip plants cost upwards of £10 billion and construction takes at least three years.

Britain's departure from the European Union leaves it especially isolated in the battle for chip resilience. Manufacturing capacity that might have been based in the UK as a single-market member will be located inside the bloc where there are no border frictions. Speaking last month about the EU's broader subsidy plans, Energy Security and Net Zero Secretary Grant Shapps said the UK would have been a net contributor rather than beneficiary of any package.

Meanwhile, the race to ramp up government-incentivized capacity has already started elsewhere. The US and the European Union last year set out subsidy and investment plans for their domestic industries — $52.7 billion earmarked from Washington and €43 billion ($46 billion) from Brussels. China has already provided about $130 billion of state-backed investment in its industry, according to UK government estimates.

The UK can't compete with such sums.

Instead, its “route to resilience lies in focusing on co-operating with trusted long-term partners” and building up its science and university based research and development hubs, the business and energy select committee said in November.

Britain needs to make itself indispensable through “growth and leadership in next-generation technologies.” Yet the country has a skills shortage, has not seen any meaningful growth in domestically trained electronic engineers between 2007 and 2020 and is competing for foreign talent.

People familiar with government thinking hint at the UK's paucity of options. Beyond the ambition to be at the bleeding edge of research, the plan is simple: stockpile chips and build relations with friendly allies to ensure a secure supply.

Yet the pandemic was a lesson in how those friendships can fail at their first test. In the initial months of the health crisis, dozens of countries imposed export restrictions on medical supplies, according to the World Trade Organisation and the World Bank. As vaccines came available, nations hoarded supplies in beggar-thy-neighbour self-interest. After Russia blockaded food supplies from Ukraine's Black Sea ports, it happened again. At one point, 19 countries had bans on the export of food staples.

The only company other than TSMC that makes the smallest cutting-edge chips is South Korea's Samsung Electronics Co. So an incursion into Taiwan could set off vaccine-style nationalism for the world's remaining capacity.

Britain's strategy for chip resilience depends on friendly suppliers. But, according to analysis by Boston Consulting Group, the US's chip subsidies would provide only enough manufacturing capacity “to meet domestic demand for chips used in national security systems, aerospace, and critical infrastructure” such as telecom, energy, utilities, healthcare and financial services.

The US would have no chips to spare. For complete manufacturing self-sufficiency, $400 billion of state subsidies would be needed as part of a total $1 trillion investment over 10 years, BCG calculates.

In Europe, according to EU strategic working group ESPAS, severe supply disruption could deplete Europe's chip reserves “within a few weeks, grinding many European industries to a halt.” Britain's fond relationships and “principles of freedom” would become collateral damage to friendly nations' domestic priorities.

“No one is predicting China will do anything serious in Taiwan for another four to five years,” Ellwood said. “But to be prepared we need to act now.”

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First Published Date: 17 Feb, 10:26 IST
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