HC Deb 27 July 1971 vol 822 cc468-76

5.30 a.m.

Mr. Brian Harrison (Maldon)

Last week The Times published an article which began: What is it that sold for £3 in 1967, sells for 3p today and caused Sir Arnold Weinstock to decide to close down two factories earlier this month? Answer: a microcircuit. I wish to draw the attention of the House to the problem that is facing this industry and to persuade the Government to act to ensure that the factories and the expertise associated with microcircuit production is not lost to Britain.

This industry which has developed the manufacture of microcircuits here in the United Kingdom is not an old-fashioned industry asking to be propped up because it has traditional methods and has not modernised itself. It is an up-to-the-moment business and probably is only just beginning its effective and important life.

The factory which I know, which is in my constituency at Witham, is run by G.E.C. Semiconductors Limited and is one of the most modern, custom-built factories I have ever seen. Most of the assembly work is carried out either automatically or under a microscope in conditions of complete sterility and pure air. When one considers that a microcircuit is so small that a fully processed silicon wafer, the size of a new 10p piece, could contain several hundred integrated circuits of the E.C.G/S.L. type used in high speed computers, one gets some idea of the importance of working where no speck of dust falls. It seems to me that this is the type of industry, with high technology and easy transportation, that we require to develop in the United Kingdom.

This factory, built at a cost of between £2½ and £3 million, with investment grants to the tune of about £200,000, was opened only in 1968. It is now threatened with closure. The factory was planned and developed to supply the demands of the G.E.C. company, but when the expansion in the market seemed to be very large, it was decided that G.E.C. Semiconductors Limited should develop not only for the local markets but on an international scale. Contracts were tendered for—and successfully—from organisations in the United States, Canada, Germany, Italy and a wide variety of companies in the United Kingdom.

It was not until the second half of 1970, when, one assumes, there was a recession in the American aerospace and defence orientated industries, that the financial state of the company suffered along with all others. The major reason for this was the flooding of the market with cheap products which could not be economically produced in the United Kingdom, or in fact economically produced anywhere else.

What happened can be illustrated by tracing the history of a typical standard microcircuit known as a "quad gate". It was introduced by Texas Instruments in the mid-1960s. This circuit carries the equivalent of three transistors, nine diodes and 13 resistors and is connected to the outside world via 14 leads. It is a tiny thing, smaller than the full-stop in typescript. In 1967 the price of this circuit was £3. But by 1968–69 the price had come down to about 15 shillings, mainly through improved production technology. In August 1969 the price was still about 15 shillings. But by December it had dropped to 5s. 6d. as output zoomed far ahead of demand and companies slashed prices to keep their stocks moving.

Throughout 1970, the price of the quad gate continued to fall. At the end of the year, it stood at a shilling in Britain and, incredibly, at 7½d. in the United States. I say "incredibly", because British industry estimates that the raw materials cost not less than 8d.

The importance of a semiconductor industry in the United Kingdom is twofold. Semiconductors and micro-electronics are the bricks on which computers and other highly sophisticated electric and electronic instruments are made. If we do not have a micro-electronic industry in the United Kingdom we shall be dependent entirely on designs made by other countries. Furthermore, our own design teams will have to modify their ideas to fit in with the components which they can get from the supplying countries. I am sure that hon. Members will realise that this would be a most undesirable situation for a manufacturing country like the United Kingdom.

What is more, at any time the components could be altered, and those that had been manufactured and used in a British piece of equipment could go out of production. This would mean that spare parts were not available, and that a competitor using slightly modified equipment, no doubt supplied by the same country as that which was building the circuits, could take over our markets. It could result also in only sub-systems being sold, and not the small components, thus doing away with the possibility of manufacturing an earlier stage here in the United Kingdom.

One action that it was thought possible for the Department of Trade and Industry to take was to apply the antidumping and countervailing legislation which we have already on the Statute Book. However, it is just possible that this is a non-starter, since the components may be being sold at the same price in the United States or in the home markets of other foreign producers, despite the fact that they are being sold below the cost of production, in which case we should not be able to apply this legislation. But I cannot believe that it is beyond the wit of the Department of Trade and Industry to find some way in which support can be given to this lynch-pin industry over what I believe to be a transitory period.

We must face the fact that we are not facing fair competition here. The price has been brought down because overseas suppliers in Europe and North America have been able to use cheap labour in places like Taiwan, Korea and Singapore and bring small components over here.

However, this is not the whole story. Some people are of the opinion that even the raw materials here are more expensive than the present piece of equipment which we get. Such sale prices can be designed only for one purpose, and it is to put our industry into such a financial state that it collapses, with the result that, at a later date, the people manufacturing these components can move in and hold us to ransom for whatever price they require. If our manufacturers go out of business, that is exactly what will happen.

In addition, if that happened and we became wholly dependent on overseas suppliers, they could dictate to us the markets in which we could operate. For instance, some United States legislation could prevent us from supplying computers and other equipment to markets behind the Iron Curtain.

Another factor which I should like my hon. Friend to consider is that, over the last few years, G.E.C. has succeeded in getting together in various parts of the country teams of highly skilled and integrated people living round factories such as the one at Witham, in my constituency. Such teams and such highly skilled labour are not easy to come by. But they are there, and established, and able to contribute considerably to the wellbeing of our industrial society. It would be a national tragedy were we to lose these groups of people and were they to move out of this industry, as well as being personal tragedies for many of them.

I hope that my hon. Friend will look at this particular problem to see whether there is some way that such an important and vital industry to the future of this country can be preserved and developed.

5.41 a.m.

The Under-Secretary of State for Trade and Industry (Mr. David Price)

My hon. Friend the Member for Maldon (Mr. Brian Harrison) has raised a very important subject this morning. Although he gave notice that he would raise the subject of "support programme for the microcircuit industry", his main argument, as I expected, has been directed towards integrated circuits, because this is where the major problem lies. The House will, therefore, forgive me if at this hour I concentrate on integrated circuits. In any case, as my hon. Friend will realise, integrated circuits are the major part of the microcircuit industry, the other being the micro-assemblies.

This subject of integrated circuits is clearly important. It is important to all those who have been engaged in the development and production of integrated circuits in the United Kingdom, important to the companies in this business, important to all the companies in the electronics industry which use integrated circuits in the equipment which they make, and important to all those other industries which are the ultimate customers for such equipment.

I wish to say straight away that, like my hon. Friend, I have sincere sympathy for those who have recently been made redundant. The fact that the problem is immensely difficult, as I shall endeavour to demonstrate to the House, in no way detracts from my concern for the personal difficulties of the men and women affected.

The current difficulties facing our own manufacturers of integrated circuits are not peculiar to companies in the United Kingdom. Indeed, manufacturers of integrated circuits in all parts of the world are facing these same difficulties. This includes the United States of America. In the U.S.A. a number of big companies have even withdrawn from this business because of the fierceness of the competition. These include two such famous companies as Philco-Ford and Sylvania.

Although I agree with many of the points put forward by my hon. Friend, in face of the evidence of what is happening in the United States, I cannot agree with his suggestion about an American bid to try to undermine the commercial viability of our companies in order that they can take over, because, as he indicated, some of the prices prevailing in America are even lower than they are here.

In my judgment, these difficulties stem from over-production in the world, brought about by increased efficiency in methods of production coinciding with cutbacks in the aerospace programmes of the United States and with the temporary flattening off of demand in other countries, including the United Kingdom.

The large output of certain types of integrated circuits now flowing from the assembly plants set up by United States companies in low labour cost areas, such as Singapore and Portugal, has forced prices down sharply throughout the world.

I will add to the information which my hon. Friend gave to the House by giving some examples of the extent of this price-cutting. In December, 1969, a dual lead flip flop, made on a 50,000 production run, sold at 96p a unit; today the price for the same unit is 12.5 new pence. A. simple quad gate, to which my hon. Friend referred, on a similar production run was 40 new pence a unit in December, 1969; today it is 5 new pence. To give the House an idea of the scale of activities which we are discussing, let me say that the domestic market in 1970 for integrated circuits from all sources was of the order of £17 million and about half of this was supplied by indigenous manufacture. In the United Kingdom the manufacturers of integrated circuits fall into 3 groups, first, the three U.K.-owned companies—Plessey, G.E.C. and Ferranti; second, a number of subsidiaries of American companies, a few of which merely import assembled circuits; and, third, two subsidiaries of European-owned companies, S.G.S. and Mullard.

The entry of the United Kingdom into the E.E.C. will provide opportunities for closer links between U.K.-owned and European-owned companies. I am confident that our companies have this in mind, but they all are faced with strong import competition now. Despite extensive investment by the companies operating in the United Kingdom, about half of the market here for integrated circuits is supplied from overseas sources. The bulk of these imports comes from American companies, although by no means all the imports arrive from the United States. Large quantities arrive from assembly plants in low labour cost areas. I should also point out that last year 43 per cent. of total imports came into the U.K. duty-free, from Singapore and E.F.T.A., where the manufacturing units were almost entirely American-owned companies.

All this indicates the dominant position of the United States companies. This is not surprising, as the market in the U.S.A. has been so large. As my hon. Friend knows, U.S. military and space requirements have been the original pacesetter and remain the major factor in the main advances in this technology and in production techniques. The foreign-owned subsidiary companies have been welcomed to this country. They play a useful part. They have provided employment and assist in providing a spur to the U.K.-owned companies in technology, marketing and management. They are especially welcomed when they set up plants here to perform the important processes and, more so, if they undertake R. and D.

It is disappointing to the Government, and serious for the workers, when, in times of reduced demand, these companies have to reduce the volume of their activities in the United Kingdom. The effects of this can be particularly acute in areas such as Scotland where several of the companies established their U.K. bases.

We expect that these foreign-owned companies will continue to form an important part of the micro-electronics industry in this country, but we must pay close attention to the interests of U.K.-owned companies. The U.K.-owned companies have been in this business from the start. As my hon. Friend pointed out they are not behind on technology. They are well able to provide the important service for the equipment makers' requirements for special circuits custom-designed to meet particular needs. But neither they nor any of the other indigenous manufacturers in the United Kingdom or on the Continent of Europe have been able to match the low prices of the imported standard circuits without incurring losses which, I understand, have been substantial.

This is the position despite the injection of public funds. In addition to some support by the Ministry of Defence and through the Advanced Computer Technology Project, the previous Administration arranged for an investment by the National Research Development Corporation of £5 million in the three U.K.-owned companies. That investment is recoverable by levy on the sales of integrated circuits. The Government are committed to meet the shortfall between the receipts from those levies and the minimum recovery which the Corporation could accept in each year until 1980.

Negotiations will take place with G.E.C. on the arrangements to be made to safeguard the Corporation's investment in the light of the decision now reached by G.E.C. to rationalise its micro-electronics activities and to close the factories at Glenrothes and Witham. This recent decision has been reached against the background of the ferocious competition on standard circuits. I understand that the rationalisation announced by the company is a result of G.E.C.'s conclusion that it can see no prospect of competing in the low-priced circuits. The company will, therefore, concentrate its efforts on special circuits, mainly, but not entirely, for its own equipment requirements. My hon. Friend's suggestion was that the basic cause has been the dumping of standard circuits. The prices of circuits of that type offered in the United Kingdom from overseas sources have been very low. I understand that prices for the same devices have fallen steeply in other parts of the world, including the United States. When the allegation of dumping was made in the debate on the Adjournment on 27th May, the Lord President replied that no evidence had been produced to us that the circuits were being dumped into the U.K. market and this still remains the position as my right hon. Friend the Minister of Aerospace made clear in questions on Monday.

But we remain ready to consider a formal application by this sector of the industry in the U.K. for anti-dumping action. But we shall need prime facie evidence from the industry that the circumstances appear to satisfy the requirements of U.K. legislation. I am glad my hon. Friend recognises the criteria necessary to constitute dumping. It has also been suggested that imports of circuits should be controlled through quotas or a higher tariff. This is one of a number of suggestions also put to us by the trade association for the electronic components industry. We are considering these suggestions, but there are several aspects that need to be taken into account.

Integrated circuits are of no value on their own. Their value is realised when they are incorporated in equipment, making that equipment more reliable, smaller, lighter and cheaper than it would be with discrete components. Some equipments embody large numbers of integrated circuits, and therefore the interests of competitiveness of the equipment manufacturers must not be overlooked in considering action which would tend to increase the price of circuits they need.

The tariff of 20 per cent. ad valorem is a high rate and is significant in relation to special circuits. The bulk of the low-priced standard circuits are imported duty free from Singapore and E.F.T.A. We must also take into account our policy towards under-developed Commonwealth countries and our obligations under trade agreements, especially to G.A.T.T. and the E.F.T.A. Convention. There is also the U.N.C.T.A.D. generalised preference scheme.

It is not possible for me to say anything further tonight. The matter is still being given careful consideration and I have simply given my hon. Friend an indication of some of the difficulties involved. He has also raised the possibility of further direct financial support and we shall consider this. We could not aspire, however, to provide support approaching the scale of the massive support enjoyed by the United States companies. The market sizes are so different, with the United States market of the order of £180 millions in 1970—ten times greater than our own, and the scale of public procurement here, although important, is nowhere near that of the United States.

In conclusion, Mr. Speaker, I am grateful to my hon. Friend for raising the points he has.

In our continuing examination we shall take into account everything that my hon. Friend has said tonight on this important subject and I can assure him we have not got closed minds.