Brexit’s Impact on the Semiconductor Industry

The United Kingdom’s European Union withdrawal is less than a month away, with the transition period scheduled to expire at the end of December. Starting in 2021, the U.K. will have an entirely new relationship with the EU and its member states. In the meantime, the two sides are down to the wire on negotiating a trade deal before the end of the month.

Until a deal is reached, much is still uncertain regarding Brexit’s impact on global industries, including the semiconductor sector. Trade frictions and a slow economic rebound in the COVID-19 pandemic are both cautious marks on Britain’s economic forecast, both short- and long-term. 

While the U.K. isn’t a major producer of semiconductors and power components, Brexit could impact the trade landscape in end-markets that rely on semiconductors, such as electric vehicles. It may also affect future merger and acquisition activity in the semiconductor space, as well as the availability of research and development funding and incentives. 

 

The Trade Environment

The EU is the U.K.’s largest international market, claiming around half of all imports and exports of goods. Post-Brexit, this dynamic will inevitably impact supply chains in key industries, such as consumer goods, retail, medicine, manufacturing, and logistics. 

Zooming in on the power electronics sector in particular: The U.K. is far from a dominant figure in semiconductor sales and production, neither domestically nor globally. According to 2018 data from the Observatory of Economic Complexity, the U.K. only accounts for .86% of semiconductor imports (a trade value of $785 million) and .81% of semiconductor device exports (valued at $740 million). Regionally, the U.K. only exports 5.09% and imports 3.84% of semiconductor devices traded in Europe. Germany leads Europe’s semiconductor trade landscape, claiming 33.9% and 47.5% of import and export activity, respectively, followed by the Netherlands, accounting for 13% imports and 11.6% exports. 

 

The world’s top semiconductor exporters and importers in 2018. Data and image source: Observatory of Economic Complexity

 

Still, Britain’s share only represents a small fraction of the global semiconductor trade, worth $91.2 billion in 2018. China, the top semiconductor exporter, claims $29.9 billion of that total value. 

So, while Britain’s semiconductor trade arena isn’t large enough to feel a hit from Brexit impact, an analysis of EU-U.K. trade patterns shows potential impact across semiconductor end-markets such as vehicles, transport equipment, electrical machinery and appliances. 

According to a recent U.K. Parliament report, road vehicles are the second-largest exported goods from the U.K. to the EU (behind petroleum), valued at £17.3 billion and comprising 10.2% of total exported goods. The third highest-value export is transport equipment, with a 5.8% share and a value of £9.9 billion. 

Similarly, road vehicles ranked highest among the top imported goods from the EU to Britain in 2019, valued at £48.5 billion and accounting for 18.2% of total imports and 45% of all U.K. imports of road vehicles. Medicinal and pharmaceutical products and electrical machinery and appliances claim the second and third spots, with £17.7 billion and £11.4 billion in value and 6.7% and 4.3% of total imports, respectively. Miscellaneous manufactured articles and general industrial machinery and equipment are each valued at just over £10 billion, making up 4.1% and 3.8% of total goods exports, respectively. 

Because these markets are key to the semiconductor business landscape, international manufacturers and suppliers are keeping a close eye on the ongoing trade deal negotiations happening this month. Crucially, the U.K.’s auto industry could face £55.4 billion (or $74 billion USD) in losses over the next five years if both parties fail to pass a deal (in what’s known as a “no-deal Brexit”) by Jan. 1, 2021. In this case, EU and U.K. trade rules would transfer to the World Trade Organization, which could impose a 10% tariff on cars and a 22% tariff on vans and trucks. For perspective, these tariffs would tack on an average cost of £2,000 per British-built EV sold in EU member countries. 

 

Research & Development Activity & Funding

Withdrawing from the EU means the U.K. will miss out on crucial R&D investment opportunities supported by the EU, such as the ambitious €100 billion Horizon Europe program. 

The EU’s slate of science and engineering R&D funding programs span a range of electronics applications, including smart grid and sustainable energy. For instance, the EU has invested €450 million in more than 110 micro-and nano-electronics, smart embedded components, and systems projects since 2007. 

 

Image source: Technopolis Group: ‘The role of EU funding in UK research and innovation’

 

Already, EU projects have avoided engaging U.K. leadership since the referendum vote in 2016, reports IEEE Spectrum. Brexit could also create a talent gap between the domestic and international workforce, as EU nationals may be reluctant to leave their home countries to work in the U.K. This may also impact R&D activities in technology and science, particularly among universities. 

Still, Brexit will relieve the U.K. of the EU’s limits on R&D tax credit spending, and removing the spending cap will likely create higher-value handouts and more lenient qualification criteria. 

 

Mergers & Acquisitions

Brexit is also poised to impact the pace of U.K. mergers and acquisitions by overseas companies, along with the divestiture in U.K. operations. 

The Brexit referendum vote sparked a decrease in cross-border M&A deals in 2016, later stabilizing in 2017 and 2018, then returning a stable climb in 2019. U.S.-backed M&A spiked as dealmakers sought bargains on the collapse of the value of the pound. M&A activity has since slowed temporarily amid the threat of a “no-deal Brexit.”

 

Cross-border M&A activity in the United Kingdom and Ireland. Graph via PitchBook

 

Uncertainty is high amid the ongoing negotiations taking place this year, but one recent deal could serve as a case study for assessing the moment: In September 2020, U.S.-based Nvidia announced the $40 billion acquisition of U.K.-headquartered chip giant Arm Holdings—the largest semiconductor deal since Arm was acquired by Japan’s SoftBank for $31.4 billion in 2016. That deal was announced less than a month after the Brexit Referendum, in timing with a steep decline in the value of the British pound.

Arm licenses its chip processor designs to tech giants like Apple, Samsung and Qualcomm for use in smartphones and tablets. In an investor presentation, Nvidia stated that the Arm acquisition will create a premier computing company for AI applications, “combining NVIDIA’s leading AI computing platform with Arm’s vast CPU ecosystem.”

Nvidia’s top markets are Taiwan, China and other Asia-Pacific countries, and the acquisition likely will not yield major changes to the company’s already-limited European sales. In fiscal year 2020, sales to Nvidia’s Europe-based customers only accounted for $992 million of the company’s total $10.9 billion in revenue. 

So, what does the Nvidia-Arm deal have to do with Brexit? The pressure is on U.K. lawmakers to block the takeover, with critics voicing concerns over job losses in the event Nvidia moves Arm’s operations to its California headquarters. Such a scenario would greatly threaten the U.K.’s competitiveness in the global technology market post-Brexit. 

For now, Nvidia says Arm’s headquarters will remain in Cambridge, home to around 2,500 employees. Nvidia also plans to add a new facility for research and experimentation in AI, robotics and automation. But neither of these provisions are bound by law, and Nvidia could withdraw U.K. operations as it did with British wireless startup Icera in 2015. 

Pending regulatory approval from the U.K., EU, U.S. and China, the fate of the Nvidia-Arm deal remains an open question. With approval, the transaction is expected to finalize 18 months from the time of the announcement—well into Britain’s post-Brexit future.