The increasing importance of electronics in everyday life is omnipresent. Most of our work is done on a computer, over the internet, or through our ‘phones. We live our lives online; high-grade electronics are in our televisions, radio, cameras, cars, ‘planes, medical devices.
Our microwave can now ‘talk’ to our ‘fridge over the IoT, but high-tech components are also an essential part of our supply chains, energy infrastructure and national security. Even at the World Cup being played in Qatar now, FIFA have implanted microchips in the match balls to help with the semi-autonomous refereeing that the association is trying to introduce to the game globally.
The issue of strategic electronic component supply chain security has raised its head again today as a committee of UK lawmakers lobbied the government to take urgent action with regards to microchip manufacture in the country after it blocked the sale of British microchip manufacturer Newport Wafer Fab to Nexperia, a Chinese-owned company, on national security grounds.
Need for investment
Although the government’s intervention was largely supported, it has not come up with a solution or strategy to ensure that Newport Wafer Fab’s future is secured, or the wider microchip industry is supported and developed in the UK. The cross-party group of MPs who sit on the Business, Energy and Industrial Strategy Committee have now proposed the creation of a new a ‘open fab’ in South Wales, that would allow any firm to produce at facilities there.
The MPs warned the UK was missing out on semiconductor inward investment as international competition in the sector heats up and said in a report released today (28th November) that the government should secure partnerships with strategic allies to secure lucrative investment in the UK semiconductor industry. By comparison, the US government is investing USD52bn in its microchip industry, and the EU is supporting microchip manufacturers in Europe by USD43bn and following a Covid-19 shortage, governments across the world are investing heavily into home-grown fabrication facilities to secure their own tech industries.
The committee’s chairman, Darren Jones, MP for Bristol West, near to the facility said: “The government is putting UK plc at significant risk by failing to take action in support of the semiconductor industry. Other countries are investing in the resilience of their semiconductor supply chains yet ministers in the UK can’t even publish their semiconductor strategy on time.”
The committee pushed for the government to engage with potential buyers to secure the Newport Wafer Fab facility in South Wales and develop a manufacturing centre in the area.
No coherent strategy
John Macmichael, managing director of the components division of Redditch-based Solid State Plc LON:SOLI, an electronic components distribution and manufacturing company said: “…to my mind, there is no coherent national strategy to support the semiconductor and electronics industry,” which could see the UK fall behind its competitors, or even become reliant on foreign manufacture for its technology sector. “…Politics-aside, having gone through Brexit, the UK doesn’t have access to European supply-chains in the same way we used to have, which leaves us in a more-exposed position,” he said.
Macmichael explained that the microchip sector operated in two distinct parts: Integrated Device Manufacturers and Pure Play. Pure Play semiconductor fabrication plants, or foundries refer to those manufacturers who only fabricate integrated circuits (ICs), without having any in-house design capabilities. They will be taking contracts from mostly fabrication-less semiconductor companies like Qualcomm, Broadcom, Xilinx, Nvidia and will be fabricating the ICs of these companies. Well-known foundries falling into this category are TSMC and Global Foundries. IDM or Integrated Device Manufacturers refer to companies like Intel and IBM who also have their own fabrication units and thus they design as well as fabricate their ICs on their own. Because of the high costs associated with the latter, fabless semiconductor companies are becoming more popular, and along with that pure play foundries are coming to the forefront.
Supply chain security
Macmichael said most Pure Play foundries supplying the UK are based in Taiwan, which given the unstable China-Taiwan situation raises the spectre of securing supply chains that are outside of the China sphere. Solid State has built up its inventory of components “significantly more than in the past few years” to build up a buffer for its customers, “the best we can do is ensure that our customers are working on the latest technology.”
Solid State also works with its customers to redesign their products to make them more flexible to supply-chain disruption. “We can send out an engineer to resign a product to integrate a component that is plentiful in supply [and] we also are seeking out new supply lines with emerging markets [in component manufacture] like Turkey or India,” said Macmichael.
However, he added, that: “…there’s very little [government] engagement at the coal face [of the electronics component industry] …and the government needs to establish partnerships in the industry and engage [more closely] with the electronics components sector.”
Solid State supplies commercial, industrial and military markets with durable components, assemblies and manufactured units for use in specialist and harsh environments. The company specialises in industrial and ruggedised computing, displays, battery power solutions, communications including antennas and secure radio systems, imaging technologies, electrical and electronic components and is involved in assembly as well as the supply of components.
Complex engineering
A key part of the company’s operations is finding solutions to complex engineering challenges requiring design-in support and component sourcing. Its products are used by the military, the renewable energy sector, in healthcare, offshore in oil and gas, transport, as well as in consumer and retail applications and the company also provides technical support, design and R&D.
Solid State has five principal trading companies in the UK: Solid State Supplies, Steatite, Pacer Components, Active Silicon and Willow Technologies. Willow Technologies also has a US-based subsidiary, American Electronic Components Inc (AEC) based in Indiana. Macmichael said that Solid State had identified the US as a key strategic market and was looking to expand in North America through acquisition. The company has been in business for 51-years and has been a component of AIM for 25-years and has around 300 employees. Its subsidiary, Steatite was founded in 1938.
Strong revenue growth
The company is under coverage by FinnCap, and David Buxton, an industrial analyst at the brokerage said in a recent report: “The half year update is encouraging, with strong revenue growth (CER growth of around 30%) and order intake assisted by the accretive acquisition of Custom Power, which is trading well. The 13% stronger dollar boosts revenues, although partly offset by higher dollar input costs, resulting in a 6.1% increase to EBITDA. Higher 2H22 interest costs are expected, giving a GBP0.1m increase to FY23 adjusted PBT to GBP9.4m. The shares continue to trade at a 21% discount to its peers, with our 1,535p price target offering significant upside as the group continues to drive its value-add proposition.”The company opened trading today at 1,256p and has offered a year-to-date return of -7.2% and a one-year return of 3.9%. The company has a market capitalisation of GBP141m and its shares have ranged between 913p and 1,419p over a 52-week period.
Macmichael concluded: “There needs to be a commitment of investment into the UK wafer fab [a procedure composed of many repeated sequential processes to produce complete electrical or photonic circuits on semiconductor wafers in semiconductor device fabrication process] sector. It’s something that we should have. It’s really important, and it’s not like we couldn’t [have investment], but that’s a political decision.”
