The UK chip plant that’s being sold to a Chinese-owned firm has over a dozen contracts with the British government

LONDON – Newport Wafer Fab, a chip plant in Wales that’s been sold to Chinese-owned Nexperia, has over a dozen U.K. government research contracts, according to a document seen by CNBC.

The contracts are largely funded by Innovate UK, the U.K. government’s innovation agency, through various grant schemes that amount to around £55 million ($75 million), a person close to the deal, who wanted to remain anonymous due to the sensitive nature of the discussions, told CNBC.

“I don’t think anybody realized that there were a couple of defense-related projects in there,” said the source.

NWF, which employs around 450 people in the Welsh city of Newport, in the U.K., makes the wafers that electronic circuits are printed onto. While Nexperia is based in the Netherlands, it is owned by Chinese-headquartered Wingtech, which is partially owned by state-backed investors. Nexperia declined to comment on this article and Wingtech did not immediately respond to a CNBC request for comment.

U.K. Prime Minister Boris Johnson ordered his national security advisor, Stephen Lovegrove, to investigate the acquisition after lawmakers in his party said it should be blocked on security grounds. “We have to judge whether the stuff that they are making is of real intellectual property value and interest to China, whether there are real security implications,” said Johnson.

Lovegrove, whose office did not immediately respond to a CNBC request for comment, is expected to announce his verdict in the next few weeks. 

Companies and individuals with knowledge of NWF were asked by Lovegrove’s team last week what the plant does and who for, the CNBC source said. The source added that Lovegrove’s team has been provided with a list of NWF’s contracts, seen by CNBC, and informed that Nexperia plans to terminate some of them so that it can focus on sending chip wafers back to China.

A person familiar with Nexperia, who preferred to remain anonymous due to the nature of the discussions, denied this is the case and said the company will honor any existing contracts. However, the source stressed there would be nothing Nexperia could do if NWF’s outgoing Chairman Drew Nelson decides to take the U.K. government contracts to his new fab, which he is spinning off as part of the deal.

The Innovate U.K. contracts are one of the issues under negotiation as part of the spin off, according to a third source close to the deal, who also asked to remain anonymous due to the nature of the discussions.

One NWF defense contract involves developing chip technology with Cardiff University for a radar system that would be used in fighter jets. The £5.4 million project aims to deliver technology to defense contractor Leonardo, missile developer MBDA and aerospace chipmaker Arralis.

“Britain has paid for the research that makes Newport Wafer Fab a key partner in a U.K. government defense project,” Tom Tugendhat, leader of the U.K. government’s China Research Group and chairman of the Foreign Affairs Select Committee, told CNBC. “That’s why we need a complete review of the decision on national security grounds, including asking why the deal was initially waved through.”

“The U.K. and Welsh governments have spent tens of millions of pounds supporting compound semiconductor innovation in Wales — with NWF at the heart,” he added. “While there’s a global shortage, and Beijing has hopes to dominate the market, we need to be much clearer about our interests, not just company profits or rivals’ opportunities.”

Located on a 28 acre site in South Wales, NWF produces around 8,000 wafers a week and many of them are sent to Asia because the U.K. doesn’t have the facilities to turn them into chips. NWF’s 200mm wafers are largely used for power supply in the automotive industry, which has been hit particularly hard by the chip shortage, but they have many other applications.

Nexperia, which was already a shareholder in NWF, has paid around £63 million for the facility. NWF was trying to raise capital earlier this year so that it could remain independent but Nexperia triggered a contractual clause that enabled it to take over the facility, the first CNBC source said, confirming what has previously been reported by The Telegraph. While the deal is being reviewed, a flag showing Nexperia’s logo has already been raised above the NWF sign at the site’s entrance.

“A £63 million price tag for a wafer fab is minuscule,” Glenn O’Donnell, an analyst at research firm Forrester, told CNBC. “Most wafer fabs cost well over £1 billion. Even if this is older tech, this deal is ridiculously cheap.”

Amanda Solloway, a minister in the U.K.’s Department for Business, Energy and Industrial Strategy, reiterated on Thursday that the government does not plan to intervene, saying it’s not currently a national security concern.

“It is right that commercial transactions are primarily a matter for the parties involved,” she said. “The government has been in close contact with Newport Wafer Fab but it does not consider it appropriate to intervene in this case at the current time.”

Her comments came after former Conservative Party leader Iain Duncan Smith said he thinks the U.K. government is in an “unwholy mess” in relation to the deal.

“I wonder in the course of this failure to make a decision did they look at what China thinks of semiconductors?” he asked. “China is the busiest exporter in the world and is busy buying up semiconductor technology everywhere it can find it.”