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23 November 2022

How the Chinese takeover of the UK’s largest semiconductor factory unravelled

A national security review, a bitter row and a new approach to foreign investment – the story of Nexperia’s acquisition of Newport Wafer Fab.

By Oscar Williams

In late December 2019 a Chinese tech firm then little known in the West revealed it had acquired one of Europe’s largest manufacturers of semiconductors, the chips crucial to computers, smartphones, cars and almost any electronic device. When the deal was announced, Wingtech claimed that Nexperia, the Dutch business it had bought, would remain independent and that its management team would continue to be led by its chief executive, Frans Scheper. The promise did not last long.

Scheper, a veteran of the European semiconductor industry, had worked for Nexperia and its sister companies for more than 12 years. Just three months later, however, the chipmaker said the executive had “decided to take early retirement”. News of Scheper’s retirement was perhaps exaggerated – he became Intel’s European president. At Nexperia he was replaced, with immediate effect, by Wingtech’s chief executive and founder, Zhang Xuezheng.

Zhang founded Wingtech in 2006 and built it into a major manufacturer of smartphones and semiconductors. According to the analysts Datenna, the company is 30 per cent owned by the Chinese state. Given tensions between China and the West, many Western commentators are nervous of the country’s influence on such a critical global industry.

Malcolm Penn, a leading analyst of the semiconductor industry, counts Scheper as a friend; he says Scheper “wasn’t toeing the line, so, ‘here’s the door. Adios!'” At the time Penn was a non-executive director of Newport Wafer Fab, the UK’s largest remaining semiconductor factory. Before Wingtech acquired Nexperia, the Dutch chipmaker had been sourcing chips from Newport. After the Chinese takeover it acquired the British business outright, in July 2021.

Ten months later, on 25 May, the government opened a review of the deal on national security grounds. The acquisition has been described by the founding chief executive of the National Cyber Security Centre as a bigger threat to the UK than Huawei as supplies of semiconductors have become a major geopolitical issue.

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Until now, the government had largely kept quiet on the subject of how a company part-owned by the Chinese government came to acquire Britain’s biggest chipmaker. But after markets closed on 16 November, more than 120 days since the inquiry began, the government finally broke its silence. In a landmark verdict it vowed to unwind the deal, instructing Nexperia to sell 86 per cent of its stake in Newport Wafer Fab. Nexperia has said it will appeal against the decision. The deal was only the latest in a series of Chinese investments in the UK’s deep-tech sector. This is the story of how it unravelled.

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Before Wingtech’s acquisition in July last year, Nexperia and Newport were “working quite nicely together,” says Malcolm Penn, who left Newport’s board in July 2021. But after Zhang took control of Nexperia, Penn claims, the business “simply stopped honouring the spirit of the agreement”. Nexperia withdrew financing it had offered to Newport, citing the site’s financial difficulties and claiming Newport did not meet its contractual obligations. “That’s when it started to become very aggressive… and that’s when the market turned.” 

Nexperia disputes Penn’s version of events and says it saved Newport from bankruptcy, securing the jobs of the 500-plus workers employed at the site.  

Industry experts say that the government’s delayed reaction to the sale exposes just how poorly Britain’s political leaders understand the significance of the global semiconductor industry, which is the focus of a technological arms race between the US and China and underpins advances in almost every other sector of the economy, from finance to transport, healthcare and defence. The management of Newport prior to the acquisition is also a direct result of the UK’s industrial strategy over the last four decades. Since Margaret Thatcher entered Downing Street in 1979, successive governments have incentivised overseas investors to buy up critical British businesses. Only now, as the US and EU pursue more protectionist policies, are ministers beginning to acknowledge the risks of this approach.

[See also: Rishi Sunak can’t blame financial markets for his spending cuts]

In the 1980s Britain was a leading player in semiconductor manufacturing and the site of Newport Wafer Fab played a key role in its development. The cutting-edge factory, designed by the architect Richard Rogers, who also designed the Pompidou Centre in Paris, was built for Inmos, a microprocessor production company, in 1982. At its height, the British business held 60 per cent of the global market for static random-access memory chips, which are an essential component in modern computing. 

The British state had subsidised the growth of Inmos and owned nearly three-quarters of the business. But in 1986, the Thatcher administration offloaded its stake as part of a privatisation drive. The Inmos brand subsequently disappeared after it was acquired by a French-Italian manufacturer in 1989. Between 1999 and 2017 the site changed hands a further four times. Nexperia has been keen to emphasise that in the decade leading up to its acquisition of Newport, previous owners had struggled to secure a firm financial footing for the site. 

When the German semiconductor producer Infineon Technologies acquired Newport in 2015 it was primarily used to manufacture “power semiconductors”, which, as the name suggests, transfer power from one part of an electronic device to another (as opposed to logic chips, which process data). Prior to Infineon’s acquisition, however, Newport’s owners had been developing the capability to manufacture another kind of chip: compound semiconductors. These are advanced chips that are seen as an enabling technology for more advanced batteries, solar panels, electric vehicles and mobile internet connections. 

Two years later Newport was acquired by Drew Nelson, the founder and president of the Cardiff semiconductor company IQE, through Neptune 6 Limited, on whose board Malcolm Penn sat. Newport’s new owners set up the site to operate as an “open access fabrication plant”, meaning other companies, such as Nexperia, would be able to use the facilities to develop their own chips. The site had more than 20 deals with commercial and academic clients, covering not just conventional power conductors but new compound semiconductors too. Compound chips, the new owners believed, would play a critical role in not just the future of Newport Wafer Fab, but the UK’s wider semiconductor sector.  

[See also: The future world order will be decided by the war over semiconductors]

In summer 2019 Nexperia, then still under Dutch ownership and run by Frans Scheper, signed a deal with Newport Wafer Fab to increase manufacturing of a new kind of power semiconductor thought to be made for cars. It had been working with a different supplier, and decided to transfer production to Newport. 

The deal made Nexperia a minority shareholder in Newport, and came with the promise of investment through a £12m working capital loan. It also gave Nexperia the option to appoint directors to the Newport board and even to acquire the company in the event that it was at risk of insolvency and could no longer deliver on the production commitments it had made. 

The relationship began with what Penn called “teething troubles”; he accepts that Newport was “a bit remiss on execution of certain things”, but says that its failure to meet delivery commitments occurred because the previous supplier “was being awkward about transferring the process over”. Newport and Nexperia worked together to resolve the issues. 

After Wingtech acquired Nexperia and Zhang was appointed its CEO, however, Penn says the relationship changed – and with it Newport’s fortunes. The £12m loan was abruptly cancelled. In a letter to the MPs of the Business Select Committee in August this year, which Nexperia referred the New Statesman to, Nexperia said that the loan had been contingent on Newport “showing a sufficient cash flow forecast to continue operations, not breaching any banking covenants, not failing to make any repayments on loans taken by it, and meeting production obligations under its agreement with Nexperia – all of which [Newport] failed to do”. 

Penn claims that Nexperia “found all sorts of loopholes” to not provide the loan. “You didn’t meet this contractual commitment here; we don’t like your business plan here; you haven’t given us this data here… Anybody can get out of something if they want to.” 

Nexperia says it refused to provide the loan on the basis that it didn’t want to sink any more money into a failing business and that Newport had not kept to its side of the deal. In the letter to MPs, Toni Versluijs, the company’s UK country manager, said that Nexperia’s “fundamental interest in [Newport] was as a customer, not as a prospective acquirer”. 

Penn claims Nexperia had different motives. The Covid-19 pandemic had been hugely disruptive to the semiconductor industry, pushing up demand while also restricting supply. “Once you got into a [chip] shortage situation,” says Penn, “it became critical for Nexperia to actually own the fab outright and throw everyone else out, because they needed every wafer they could get.” 

It wasn’t only Nexperia that would not give Newport the money it needed to keep operating as an independent business. The Welsh government, as the Times has reported, declined to provide any further funding in return for shares because it was “not a viable proposition”. It cited Nexperia’s shareholding, the “viability of the underlying silicon business” and falling sales and profits, and said that Newport was highly leveraged and had too few customers. The Welsh government said it would have wanted “a significant change in the management” and had “consistently” raised concerns about the prospect of failure or acquisition with the UK Department for Business, Energy and Industrial Strategy, which did not intervene at the time. 

Penn claimed in his own letter to MPs in July that, under its new ownership, “far from ‘saving Newport Wafer Fab from bankruptcy’, Nexperia stood by while the firm experienced cashflow difficulties as it ramped to full production following Covid-19”. Nexperia, Penn added, first refused access to the £12m working capital loan and then withheld approval of a “multi-million pound injection of capital” by a private equity fund. This, Penn wrote, “forced the firm to the brink of bankruptcy, thereby opening the door for Nexperia to launch a hostile takeover”.

Nexperia denies it had wanted to acquire the business. Versluijs said in his written response to the committee that Nexperia decided to withhold the capital loan because it was concerned it would not be able to recover it if Newport became insolvent and that Newport had not met “contractually agreed criteria”. Nexperia said that the Welsh government’s decision validated its position and that it had also supported Newport’s efforts to secure an alternative source of funding.

Nexperia rejected the idea that the takeover was hostile, but acknowledged in its letter to MPs that Newport’s previous owner, Nelson, whom it described as a “long-time associate” of Penn’s, was “vociferously opposed” to the deal. “To pretend it wasn’t a hostile takeover is really pushing it too far,” says Penn. “There was not a single person on the Newport Wafer Fab side that wanted that to happen. The only people on the board that did were the two Nexperia guys.”

In relation to the proposed private equity investment, which came from Palladian Investment Partners, Nexperia told MPs that it had “engaged in negotiations in good faith and did not seek to block the investment”. Ultimately, however, Nexperia said that the deal did not go through because Palladian’s financial terms were unattractive, it would need to give up “key shareholder rights” and it was “unwilling to relinquish its ability to protect its customers in the event that the continuity and quality of supply was damaged”. 

The eventual acquisition allowed Nexperia to increase its stake from 14 to 100 per cent of the business. It is this 86 per cent which it has now been instructed to sell, because the original deal is not covered by the terms of the legislation under which it was reviewed, the National Security and Investment Act. If its appeal fails, however, Nexperia is expected to sell the entirety of the business. 

Since Newport was acquired last July, Nexperia’s focus appears to have been on increasing the production of power semiconductors. This has been at the expense, says Penn, of the progress the plant’s previous owners had made in seeking to develop its compound semiconductor capabilities. 

Before the acquisition Newport had played a key role in the South Wales Compound Semiconductor Cluster, a consortium of academic and industrial partners promoting the development and manufacturing of new kinds of chip. Unlike conventional power conductors, compound semiconductors are not reliant on silicon. They are made from a variety of compound materials and can be used in a range of applications, including electric car chargers and 5G base stations. 

The importance of compound semiconductors to the big technologies of the coming decades is such that the National Security and Investment Act specifically covers facilities which can develop these chips. 

Compound semiconductors are also seen as a field in which the UK could regain some of its prowess in chip manufacturing. The UK’s big chip companies, such as Arm and Imagination Technologies (which have Japanese and Chinese owners respectively) design chips but do not manufacture them, and so take only a small cut of the value of each chip their technology helps produce. Production capacity is both lucrative and politically sensitive. 

The political importance of compound semiconductors is such that Nexperia appears not to want anything to do with them. The company’s letter to MPs stated that it had ended its involvement in a government research programme on the technology because “government scrutiny and public commentary have discouraged Nexperia from participating in projects that carry any potential perception of posing a national security threat”. A spokesperson for the company said that “no compound semiconductor capabilities existed previously and do not exist currently at Newport”. But after further enquiries, the company confirmed that while it would be impossible to process most compound semiconductors at the site, Newport had partially processed “a small number of wafers” for a kind of compound semiconductor chip made from gallium nitride. 

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Under Chinese ownership the plant has shifted from exploring technologies for new partners to increasing production for Nexperia’s clients. One of Newport’s clients prior to the acquisition was Rockley Photonics. Newport was working with Rockley to develop a cutting-edge silicon photonics chip – able to transmit information via photons, as in fibre optics – that could be used in smartwatches. Although Newport had yet to begin production of the chips, Rockley had expected that it would do so. After acquiring the plant, however, Nexperia claimed the plan to produce chips for Rockley would cost £200m and that it was “far-fetched” given Newport’s financial position. Rockley’s chief executive, Andrew Rickman, disagreed, telling the Business Select Committee that he supported the project. “We had intended to manufacture at Newport Wafer Fab… But it changed hands and the current owner, for business reasons known to themselves, don’t want us to manufacture there.” 

This change in direction is important not just to the plant, but to the wider semiconductor industry, for which Newport had been a site of research and development. Nexperia has said that it has given the plant’s previous owners the opportunity to develop semiconductor capabilities on site. But Penn and Nexperia both claim that the other side has made moving forward with the plans prohibitively expensive. Versluijs has also said that Nexperia has continued to work with academic partners in the South Wales Compound Semiconductor Cluster, while Penn says Nexperia’s lack of cooperation has created “major issues for both the associated academic community and the CS Cluster’s expansion plans”. 

This issue was identified by the government as one of the reasons to unwind the acquisition. In its verdict it said that Grant Shapps, the Business Secretary, had determined that there were national security concerns relating to knowledge transfer of compound semiconductor expertise and “the potential for those activities to undermine UK capabilities”. The statement added that concerns about knowledge transfer could also prevent the cluster from “being engaged in future projects relevant to national security”, an apparent reference to compound semiconductors. 

Versluijs said that Nexperia had told the government it would not develop compound technology itself, but the second concern in the verdict suggests that the prospect of the cluster operating independent compound research and development work in another part of the Newport site, as had previously been proposed, was also considered a national security risk. The government’s verdict indicates it thinks it will be easier to make progress on the cluster’s compound research if Newport is not ultimately owned by a Chinese company. 

Versluijs said he was “genuinely shocked” by the decision, which he considered to be “legally wrong” and “disproportionate given the remedies Nexperia has proposed”. He said it created further uncertainty for the company’s employees and would take out a “strong player” in the UK’s semiconductor industry. “We will appeal this wholly incorrect decision.” 

Economic considerations have loomed over the review too. Many of the 500-plus workers employed at Newport had welcomed Nexperia’s ownership and Nexperia had said that it was committed to the site, noting that its plant in Stockport has operated for more than 50 years. But Nexperia has only been owned by Wingtech for three of those years, and as with many Chinese businesses, Wingtech comes with its own political allegiances. 

“In the end, simple economics will always win out,” Penn wrote in his letter to MPs. “Nexperia’s parent, Wingtech, is on the verge of completing a partially Chinese government funded new high-volume factory in Shanghai, five times the size of Newport, destined to produce the identical parts but at a fraction of the cost.” 

Penn says that relocating all production to China and the subsequent closure of Newport would be both economically and politically expedient, “given the Chinese government’s semiconductor five-year plan to become self-sufficient. Once the Wingtech fab comes on line, power semiconductors is an area where this objective can now be very easily achieved.” 

Alicia Kearns, chairwoman of the China Research Group of Conservative MPs and a member of the Foreign Affairs Select Committee, said: “We have seen a pattern of Chinese takeovers in Britain’s semiconductor industry. China’s government has clear ambitions to dominate semiconductor manufacturing.” 

Kearns added that the Foreign Affairs Select Committee had seen a “messy takeover” like that of Newport before, in the case of Imagination Technologies, which was acquired by a Chinese-backed private equity fund in 2017. “We need the National Security and Investment Act to be triggered much faster to deal with this kind of case,” Kearns said. 

After the verdict was delivered on 16 November, Kearns said: “This decision should mark the beginning of delivering on policies that strengthen British national security and protect our leading tech companies and research from falling into the hands of our competitors.” 

[See also: Will China retaliate against US tech sanctions?]

While the verdict had been keenly awaited, the legal wrangling over Newport’s ownership is likely to continue for some time. Versluijs has told the Guardian that Nexperia “will do whatever is in our legal means to overturn the decision”. An appeal to Shapps would be unlikely to succeed given there hasn’t been a material change of circumstances since the decision. The more likely approach is judicial review.  

This would involve a judge’s assessment and could take several months. Peter Lu, who leads the China practice of the law firm Baker McKenzie, said he made a different application in early November for a full-day hearing that has been scheduled for ten months’ time. “It’s not going to be a quick process unless they can lay out the urgency of the issue and ask the court to consider whether to bring forward the timetable.” Because this is the first decision of its kind, it is difficult to predict the outcome. 

If Nexperia loses the case, the focus will turn to who takes over the site. Nelson, Newport’s former owner, is reported to be working with Palladian Investment Partners to reacquire the business. Under the terms of the original acquisition, Nelson has an option to buy back the foundry at the same price as it was sold, around £63m, which is believed to be less than its market value. Nexperia, however, can be expected to lobby the government to take it to auction – which it is entitled to under the National Security and Investment Act – to secure a higher price.

In an auction, Nelson and his backers could expect competition from a range of deep-pocketed investors. It is likely that one key player would be Ron Black, an American former chief executive of Imagination Technologies. Black left the chip design firm when its new investors attempted, ultimately unsuccessfully, to bring its board under Chinese control. He has announced that he would be willing to spend as much as £300m purchasing the Newport site and investing in its factory. 

The next question on the minds of those working in the industry is: will the government fully commit to the semiconductor sector? Unwinding the deal is a relatively simple move compared with developing a semiconductor strategy that would reverse four decades of industrial policy. While Rishi Sunak, the Prime Minister, is considered a champion of the tech sector, most of his work has focused on promoting high-growth startups, rather than deep-tech companies with a significant manufacturing presence.  

Industry experts are particularly concerned about what a government averse to state intervention, at least outside the energy market, will prioritise. Although the government has said it recognises the South Wales cluster’s strengths, experts fear the strategy will focus on the UK’s chip design technology at the expense of its advanced manufacturing capabilities, despite compound semiconductors being identified as a matter of national security. 

Perhaps the greatest risk is that in the event that Nexperia is forced to sell the majority of its stake in Newport, the government fails to develop and support a sufficiently robust semiconductor strategy that would ensure initiatives such as the South Wales Compound Semiconductor Cluster can thrive. This would imperil the 500 jobs that Newport sustains and the UK’s role in an industry that now underpins not just every other sector of the economy, but the geopolitics of the 21st century.

[See also: The UK’s semiconductor industry is dying – will Liz Truss save it?]

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