The brains behind the smartphones

Tax breaks and talent have made the UK semiconductor industry the secret success behind the latest gadgets

(GETTY IMAGES)

Christmas lists bound for Lapland this year are likely to include their fair share of gadgets, from the latest smartphones to tablet computers. But few of those who hope to unwrap a new iPhone or a Samsung Galaxy Tab on 25 December realise that these desirable devices depend on technology developed in Britain.

The UK semiconductor industry has enjoyed strong growth in recent years and yesterday one of the industry's leading lights, ARM Holdings, reported strong profit growth. The group, whose designs can be found in smartphones from Apple and HTC to BlackBerry and Nokia, saw its profits rise 86 per cent from £64.5m to £119.9m. Warren East, the chief executive, said expectations at the business were "continually rising" and added: "We are reporting record revenues and record volumes."

ARM, along with its rival Imagination Technologies, does not make the chips, but designs them for electronics companies. Mr East describes the microprocessors as the "brains" of the devices. Where ARM develops microprocessors, Imagination's specialises in graphics and video. These "brains" are being expanded to ever more devices. ARM's growth over the past two years – it is up 120 per cent this year alone – has propelled it into the FTSE 100. One analyst said: "The UK chip industry is in good shape. It is benefiting strongly from the growth of smartphones."

Mr East said: "Our story hasn't changed for a few years. There has been consistent execution after dozens of quarters. We've been talking about smartphones for a decade."

In the first nine months of the year 900 million ARM processor-based chips were shipped in mobile devices. Since the summer, more than 500 million consumers have bought a product with an ARM chip. The company said there was "positive momentum" going into the winter months, a crucial time for consumer electronics groups. Dan Ridsdale, a technology analyst at Edison Investment Research, said: "They are all performing quite well. Most seem to be better run than a few years ago. Being quite niche, most need to diversify their exposure, but if they can do this then there's no reason why they can't carry on doing well." Imagination Technologies is predicting 30 per cent growth this year.

Both companies are looking to expand the products its "cores" feature in. ARM has expanded to toys and televisions, cameras and cars. As the issue of energy consumption becomes more of a concern it is also designing chips for smart meters. Imagination Technologies is expanding to sat navs, televisions and set top boxes. British semiconductor intellectual property designers can certainly be thankful to Apple. They have struggled to crack the computing market, which is dominated by Intel and Microsoft, according to Mr Ridsdale, "the computer market has moved towards ARM" with the rise of the tablet. Apple is expected to sell more than 28 million iPads next year and it has spawned a host of rivals, from Samsung, Dell BlackBerry and others. Designs from the UK semiconductor companies will be found in most of these tablets and the companies believe the computing market has shifted towards them.

The companies are taking advantage of the shift, and the UK is benefitting. Mr East said: "There is a strong semiconductor industry in the UK. We have good designers here, with a good blend of skills. There are a surprising amount of semiconductor companies in the UK. A few of the big ones are listed, and there are a load more that aren't. Literally hundreds."

The industry currently enjoys research and development tax credits in the UK, which it argues are essential as other countries offer similar tax breaks. This week, ministers announced a £200m investment in a network of "elite technology and innovation centres to drive growth in the UK's most hi-tech industries". The move was designed to bridge the gap between universities and businesses. The Business Secretary, Vince Cable, said: "Hi-tech industries are the future of the British economy. Growing sectors that exploit these new and emerging technologies will help rebalance the economy and provide the highly skilled, well-paid jobs we need."

ARM's chief welcomed the move, before adding: "I would like to see more than £200m invested."

Hossein Yassaie, chief executive of Imagination Technologies, put the strength of Britain's industry down to its skilled workforce. "There is good engineering talent here, and the UK is learning how to use it." He believes the market will continue to grow next year, although at less than 10 per cent as smartphones and other devices become increasingly hungry for stronger and faster chips.

Yet there are fears about how business would be affected if consumer spending gets hit by a potential double-dip recession. ARM's shares closed down nearly 6 per cent after a significant customer, Texas Instruments, warned overnight that demand for electronic goods could be weakening. Vijay Anand, an analyst at Execution Noble, said the shares were "ultimately a play on the semiconductor market and dependent on the end-consumer demand".

UK semiconductor successes

* ARM's intellectual property (IP) can be found in 98 per cent of the world's smartphones. The Cambridge-based group was founded in 1990, a joint venture between Acorn Computers, Apple and VLSI Technology and listed in 1998. This year it joined the FTSE 100 and has a market cap of £4.4bn.

* Imagination Technologies was founded in 1985 as VideoLogic in Hertfordshire and focused on IP licensing of graphics and video chips in 1999. Intel has taken a 14 per cent stake in the group, which was counterbalanced by Apple with a holding of 9.5 per cent. Latest full-year revenues hit £80.9m

* Edinburgh-based Wolfson Microelectronics was set up a year before Imagination and floated in 2003. It sells chips – although manufacturing is outsourced – rather than licensing the IP, and specialises in signal processing.

* Similar to Wolfson, CSR sells chips and is particularly strong in Bluetooth, Wi-Fi and GPS. Another Cambridge company, CSR was founded in 1998 and merged with GPS chip supplier SiRF last year.