Sovereignty for sale: follow-up to the acquisition of Newport Wafer Fab

1 Introduction: previous work on foreign investment and implications for UK national security

1. In April 2020, we launched an inquiry into the role of the Foreign, Commonwealth and Development Office (FCDO) in blocking foreign asset stripping in the UK. The purpose of this inquiry was to understand what role the FCDO is, and should be, playing in identifying and mitigating the risks of hostile foreign investment to the UK’s security and broader interests. As part of this inquiry, we examined the long-awaited National Security and Investment (NSI) Bill, which received Royal Assent on 29 April 2021 and came into force on 4 January 2022. The Act expands the Government’s powers to identify and intervene in foreign investments that may present national security concerns, while continuing to allow and support inward foreign investment to the UK.¹

2. In January 2021, we published an interim report, Striking the balance: protecting national security through foreign investment legislation,² which outlined our recommendations for how the NSI Bill might be improved to ensure that it was fit for purpose. In July 2021, we published the second and final report in this inquiry, Sovereignty for sale: The FCDO’s role in protecting strategic British assets, in which we recommended how the FCDO should contribute to the successful implementation of the NSI Act. Moreover, we examined the ways in which certain foreign investments might pose a national security risk to the UK. Specifically, we highlighted the possible risks associated with the acquisition of Newport Wafer Fab by Nexperia and called for Government intervention.

Box 1: Overview of Newport Wafer Fab and Nexperia

Source: HC 197

3. Given the importance of semiconductors to the UK’s national security, we identified the acquisition of the UK’s largest semiconductor manufacturer by a company backed by the Chinese Communist Party (CCP) as a cause for concern; even more so in the context of global semiconductor shortages. We argued that it is crucial that the Government gets the new investment screening regime right from the beginning—both to ensure that our national security is protected and that we remain firmly open to valuable foreign investment.⁴

2 The Government’s response to the acquisition of Newport Wafer Fab by Nexperia

4. On 8 March 2021, Chinese-owned semiconductor company Nexperia installed two of its directors on the board of NWF.⁵ At the time, we raised concerns with the Business Secretary (Rt Hon Kwasi Kwarteng MP) that this move may be a precursor to a stealth takeover, similar to the attempted board takeover of Imagination Technologies by Canyon Bridge in 2020, which was subsequently abandoned after we brought the case to the Government’s attention.⁶ We requested that the Business Secretary call the transaction in for review using his existing powers under the Enterprise Act 2002; however BEIS declined to intervene. In May 2021, we wrote to Mr Kwarteng to request that he explain the rationale for this decision.⁷ In his response, the Secretary of State stated that it was for the Welsh Government to decide on matters of economic development.⁸ As national security is not a devolved matter, and given the sensitive nature of the assets involved in this deal, we were not convinced by this argument and expressed this concern in a follow-up letter to the Secretary of State (see Annex A for all relevant Committee correspondence with the Government). The response we received stated that “the overwhelming majority of investments in the UK’s economy raise no national security concerns, [and that] mergers and takeovers are primarily commercial matters for the parties involved.” The Government had, therefore, assessed that NWF was one of these cases and did not raise any security concerns.

5. On 5 July 2021, Nexperia announced that it had acquired 100% of NWF, for a reported sum of £63 million. Prior to the formal announcement, a Government spokesperson informed CNBC that the Government were aware of the planned takeover but did not consider it appropriate to intervene.⁹

6. In our July 2021 report Sovereignty for sale: The FCDO’s role in protecting strategic British assets, we concluded the following:

The takeover of Newport Wafer Fab by Nexperia represents the sale of one of the UK’s prized assets to a strategic competitor, at a time when global chip shortages means that the products manufactured by NWF are of vital national importance. Failure to conduct a detailed assessment of this transaction under the NSI Act would indicate that the Government continues to hold an unrealistically optimistic understanding of the Chinese government’s intentions and is prioritising short-term commercial interests over the long-term security of our country. The case of NWF may yet serve to demonstrate that, despite the stated intentions of the NSI Bill, the Government has not yet learned the lessons of previous years.¹⁰

We therefore recommended that the Government call in the acquisition of Newport Wafer Fab by Nexperia for review and imposition of appropriate mitigating measures, as a matter of urgency.¹¹

7. In response to our recommendation, in October 2021, the Government stated that:

The Government does not and will not prioritise short-term commercial interests over national security considerations. The Government is committed to the semiconductor cluster and the vital role it plays in the UK economy. While the Business Secretary will have powers to retrospectively ‘call in’ transactions when the Government’s investment screening regime under the National Security & Investment Act commences in January 2022, as the Prime Minister set out in his evidence to the Liaison Committee on 7 July, the National Security Adviser [Sir Stephen Lovegrove] is presently conducting a review into the acquisition of Newport Wafer Fab by Nexperia. The review will consider carefully the various aspects of this acquisition. It would be inappropriate to comment further before the conclusion of the National Security Adviser’s review.¹²

8. At the Liaison Committee evidence session on 7 July 2021, our Chair asked the Prime Minister directly about the Government’s decision not to intervene in the takeover of Newport Wafer Fab. The Prime Minister responded that:

We will look at it again… I have asked the National Security Adviser to look at it.¹³

Follow-up to the Prime Minister’s assurances of a review into the Newport Wafer Fab acquisition

Correspondence with the Prime Minister

9. The decision by the Prime Minister in July 2021 to request an investigation by the NSA into NWF was a surprising one. Mechanisms were already in place for Government screening of foreign investments: both through the NSI Act, which has enabled the Business Secretary to retroactively call transactions in for review since it came into force in 4 January; and the Enterprise Act 2002, which permits Government intervention on national security grounds, albeit with higher thresholds, and would have been applicable to the NWF case until the NSI Act came into force in January 2022. While we welcomed the decision to review the acquisition, Prime Ministerial intervention should not be required if the investment review system is functioning as it should.

10. Following the Prime Minister’s announcement of the NSA’s review, we wrote to the Prime Minister to seek clarification on the rationale for this decision. This letter asked how the intervention process worked in the case of Newport Wafer Fab, and what new information had influenced the Prime Minister’s decision to intervene after BEIS had previously declined to do so.

11. The Business Secretary responded on the Prime Minister’s behalf. Mr Kwarteng stated that, pending the NSI Act coming into force in January 2022, consideration would be given under the Enterprise Act 2002 if relevant to the circumstances arising in the case of Newport Wafer Fab.¹⁴ The NWF acquisition was not called in under the Enterprise Act 2002 nor, to our knowledge, has it been examined by the Investment Security Unit since the NSI Act came into force. The NSA’s review under the Prime Minister’s instruction therefore remains the only form of Government scrutiny that the deal has supposedly been subjected to.

Correspondence with the National Security Adviser

12. At the time of this report’s publication, the outcome of the NSA’s review has not been published. We have on multiple occasions requested an update on if and when the Government would publish the outcome of the review and have also sought reassurances that the review is in fact being conducted as the Prime Minister assured the Liaison Committee it would. Neither of these requests has been met to our satisfaction.

13. On 8 December 2021, we wrote to the NSA to request an update on how the review was progressing. We received the following response on 17 January 2022:

Thank you for your letter dated 8th December.

As you know, the Prime Minister asked me to review this case, and the government will not hesitate to take further action if needed. The Government is considering the case, and will continue to monitor the situation closely. We are unable to comment on the details of businesses’ commercial transactions, or on national security assessments. We remain committed to the semiconductor sector, and the vital role it plays in the UK’s economy. At this stage, given the sensitivities involved, it would be inappropriate for me to comment further.¹⁵

14. A copy of our letter to the NSA and his response is provided in Annex A of this report.

15. We appreciate the national security sensitivities of the NSA’s work and would not seek to compromise the integrity of an ongoing investigation. However, we consider that our questions—which did not ask for any specific details on the internal review process—could reasonably be answered without raising security concerns. We therefore followed up on 5 January 2022 to request an appropriate level of detail on the review timelines and the anticipated completion date, as well as to ask for assurances that the review had indeed been conducted. We requested a response by 14 January.

16. We received a belated response on 8 February and were surprised to find that the contents of the letter were almost an exact replica of the NSA’s previous letter. Notably, the date referencing our previous letter had not even been changed, indicating that the text had simply been copy-pasted from the NSA’s previous letter with a couple of minor edits (see Figures 8 and 10 in Annex A).

17. The National Security and Investment Act was designed to increase the transparency of the UK’s investment review process. The Government’s failure to examine the NWF deal through existing legal mechanisms, as well as its reluctance to reveal even the simplest of details about the NSA’s review, is at odds with this stated desire for transparency and accountability. The NSA has been unable to provide us with any assurances that the review ordered by the Prime Minister has indeed taken place. In the absence of any other evidence, we conclude that the review has not happened.

3 Conclusion

18. In the absence of any evidence to the contrary, we have no choice but to assume that the NSA review that the Prime Minister said he had initiated has not, in fact, been started. In its response to this report, we ask that the Government set out the circumstances in which the National Security Adviser is engaged in reviews under the National Security and Investment or Enterprise Acts; the reasons why the Prime Minister asked the NSA to undertake a review of Newport Wafer Fab; why the NSA did not undertake such a review; and for an update on the nature of the continued monitoring by the Investment Security Unit.

19. The Government has explicitly recognised the criticality of semiconductors to the UK’s national security and wider global interests; likewise, the Chinese Government’s ambitions to achieve self-sufficiency in semiconductors and the means by which it aims to achieve this are well documented. These factors, compounded by the current global semiconductor shortage, mean that the Government’s apparent failure to take this matter seriously is likely to damage the UK’s national interest.

Conclusions and recommendations

Conclusion

1. In the absence of any evidence to the contrary, we have no choice but to assume that the NSA review that the Prime Minister said he had initiated has not, in fact, been started. In its response to this report, we ask that the Government set out the circumstances in which the National Security Adviser is engaged in reviews under the National Security and Investment or Enterprise Acts; the reasons why the Prime Minister asked the NSA to undertake a review of Newport Wafer Fab; why the NSA did not undertake such a review; and for an update on the nature of the continued monitoring by the Investment Security Unit (Paragraph 18)

2. The Government has explicitly recognised the criticality of semiconductors to the UK’s national security and wider global interests; likewise, the Chinese Government’s ambitions to achieve self-sufficiency in semiconductors and the means by which it aims to achieve this are well documented. These factors, compounded by the current global semiconductor shortage, mean that the Government’s apparent failure to take this matter seriously is likely to damage the UK’s national interest. (Paragraph 19)

Annex: Correspondence with the Government on Newport Wafer Fab

Figure 1: FAC to Business Secretary, 20 May 2021

Figure 2: Business Secretary to FAC, 28 May 2021

Figure 3: FAC to Business Secretary, 18 June 2021

Figure 4: Business Secretary to FAC, 30 June 2021

Figure 5: FAC to Prime Minister, 13 July 2021

Figure 6: Business Secretary on behalf of Prime Minister to FAC, 22 July 2021

Figure 7: FAC to National Security Adviser, 8 December 2021

Figure 8: National Security Adviser to FAC, 17 December 2021

Figure 9: FAC to National Security Adviser, 5 January 2022

Figure 10: National Security Adviser to FAC, 9 February 2022

Formal minutes

Tuesday 29 March 2022

Members present:

Tom Tugendhat, in the Chair

Alicia Kearns

Stewart Malcolm McDonald

Andrew Rosindell

Graham Stringer

Draft Report (Sovereignty for sale: follow-up to the acquisition of Newport Wafer Fab), proposed by the Chair, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 19 read and agreed to.

Summary agreed to.

Resolved, That the Report be the Sixth Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available (Standing Order No. 134).

[Adjourned till Tuesday 19 April at 1.30 pm

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Session 2021-22

Session 2019-21

Footnotes

1 The National Security and Investment Bill was introduced by the Government in November 2020, described as an improved tool for fighting state threats and strengthening UK security, while continuing to attract inward investment. The NSI Act received royal assent on 29 April 2021. Correspondence with RT Hon Kwasi Kwarteng, 24 May 2021; National Security and Investment Act 2021

2 Third report of session 2021–2022, Sovereignty for sale: the FCDO’s role in protecting strategic British assets, 6 July 2021. HC 197

3 https://www.southwalesargus.co.uk/news/19073566.newport-firms-develop-parts-longer-range-electric-vehicles/

4 Tenth special report of session 2019–21, Striking the balance: Protecting national security through foreign investment legislation: Government Response to the Committee’s Sixth Report, 23 February 2021, HC 1263

5 Companies House, Appointment of Mr Stefan Tilger as a director on 8 March 2021, 16 March 2021; Companies House, Appointment of Mr Charles Smit as a director on 8 March 2021, 15 March 2021.

6 Correspondence with RT HON Dominic Rabb, 30 April 2020.

7 Correspondence with RT Hon Kwasi Kwarteng MP, 20-28 May 2021.

8 Correspondence with RT Hon Kwasi Kwarteng MP, 20-28 May 2021.

9 Sam Shead, Chip plant says it has not heard anything from UK government on national security probe, CNBC, 3 August 2021.

10 Third report of session 2021–22, Sovereignty for sale: the FCDO’s role in protecting strategic British assets, 6 July 2021, HC 197, para 21.

11 Third report of session 2021–22, Sovereignty for sale: the FCDO’s role in protecting strategic British assets, 6 July 2021, HC 197, para 22

12 Fourth special report of session 2021–22, Government response to the Committee’s Third Report: Sovereignty for sale: the FCDO’s role in protecting strategic British assets, HC 807, October 2021, p. 2.

13 Oral evidence taken before the Liaison Committee on 7 July 2021, HC (2021–22) 491, Qq46, 49

14 Correspondence with Rt Hon Kwasi Kwarteng MP, 13 and 22 July 2021.

15 Correspondence with Sir Stephen Lovegrove, 17 December 2021.