The $53 Billion Chips Act Will Benefit The Pentagon

Using the $53 billion Chips Act, Commerce Secretary Gina Raimondo announced that the Pentagon will have secure access to leading-edge semiconductors manufactured at facilities that will receive funding from this law, ensuring that the industry will be able to provide the military with the advanced chips needed for modern weapons systems in the future.

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In the midst of intensifying rivalries with China and questions surrounding weakness in the supply chain exposed during the pandemic, there are concerns among policymakers that the United States has become too dependent on imported chips as a result of the increased involvement of the military and national security officials.

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It was stated by Ms. Raimondo in an interview that the Chips Act, which encourages the manufacture of chips in the United States, is an initiative aimed at protecting national security. More than 90% of the advanced chips the U.S. buys come from Taiwan, she pointed out, calling that a "vulnerability that is untenable to our national security." 

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“Semiconductor chips play a critical role in every advanced piece of military equipment, every drone, and every satellite,” said Ms. Raimondo. 

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When the Department of Commerce begins implementing the program this week, they will rely on the input provided by Defense Secretary Lloyd Austin and the intelligence and defense communities as they implement the program.

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Having Taiwan as a source of semiconductors especially concerns U.S. officials, as a military conflict over the island, which China seeks to reunify, could disrupt supplies of such semiconductors as well as the operations of manufacturers who rely on them.

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As a precaution to ensure that U.S. taxpayers share in the program's success, companies receiving more than $150 million in grants are required to pay the government a portion of their profits if their facilities turn out to be more profitable than expected, according to a Commerce Department official.

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The Commerce Department will also require subsidy recipients to provide childcare services for workers as part of the subsidy program, a measure that the administration has said is necessary in order to ensure that qualified workers are able to participate in the program.

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According to Ms. Raimondo, in order for the economy to grow, more people need to be in the workforce. “In the present day, we do not have affordable child care, which is the single most significant reason for which people do not work, especially women.” 

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It is also prohibited for recipients of program funds to engage in stock buybacks as part of the program.

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Ms. Raimondo's comments came ahead of Tuesday's rollout of the Chips Act application process, which was signed into law by President Biden in August and enacted by Congress in the following week. Among the incentives that will be provided to companies under the program are $39 billion worth of manufacturing incentives for them to invest in domestic semiconductor manufacturing. More than $13 billion will be spent on research and development, as well as on workforce development.

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The program will include a requirement that defense and national security officials will be able to see the chips manufactured at the new plants in a commercial manufacturing environment, according to a document that will be handed out with the application on Tuesday.

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“Currently, the U.S. military is unable to source leading-edge chips from an onshore facility for critical military systems, which leaves them vulnerable to disruptions in supply,” according to the document, which lays out the program’s vision and has been reviewed by Trade Algo. 

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By allocating funds to companies, whether American or foreign, that commit to building R&D facilities in the U.S. alongside their semiconductor plants, the Commerce Department signals that the government intends to assist the development of future generations of advanced semiconductors. The company will give priority to companies that commit to building these facilities. Ms. Raimondo said.

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Taiwan Semiconductor Manufacturing Co., which controls more than 90 percent of the world's semiconductor production and is located on the island at the center of geopolitical tension with China is a top candidate to receive Chips Act funding. The company is referred to as TSMC and is based on an island in the middle of geopolitical tension.

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In an effort to stay ahead of China, which is investing heavily in its semiconductor industry as well as its military, the Chips Act was passed last year amid increasing concerns about the need for the United States to remain competitive.

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As part of the Chips Act, the U.S. will require recipients of the money to ensure that they will not expand manufacturing capacity in China or other unspecified countries for 10 years in order to address concerns that the Chips Act could benefit Chinese competitors in the downstream supply chain.

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Earlier this year, Ms. Raimondo said that the government would use the funds to establish two manufacturing clusters by 2030 for cutting-edge chips. A chip-making facility is anchored by a manufacturing facility, surrounded by a research lab, a material and equipment supplier, and a packaging facility that will assemble semiconductors at the end of the manufacturing process. Arizona, Texas, and Ohio are some of the possible candidate locations.

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It is expected that through the Chips Act, 5% to 15% of the total cost of each of the big construction projects will be covered by grants, which will be supplemented by subsidies from the state and local governments, according to Raimondo.

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It is likely that companies will be able to cover up to 35% of their capital expenditures with the loan guarantees included in Chips Act funding.

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However, she went on to state that large portions of the costs will need to be borne by the private sector, including manufacturers as well as venture capitalists.

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As she explained, "We do not want to displace any private capital in the process.". "What we need to do is use this small bit of public capital to unlock a great deal of private capital," she added. 

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In the wake of the anticipation that more than $40 billion will be invested by U.S. and foreign manufacturers under the Chips Act, more than 40 projects have already been unveiled. There are three companies that have proposed projects, Intel Corp., Samsung Electronics Co. of South Korea, and Taiwan Semiconductor Manufacturing Co., all of which produce chips already.

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In order to apply for Chips Act funds, the application process will take several months to complete. Starting Tuesday, Commerce will accept applications for chip-making and packaging plants. Research and development projects will follow later in the spring and material and equipment facilities in the fall. 

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There have been a number of countries, including the European Union, Japan, and South Korea, that are all building up subsidy programs to increase domestic production of semiconductors in their own countries, in response to the U.S. Chips Act. As a result, some analysts have warned that in the future there may be global oversupplies as a result of this. 

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In a statement, Mrs. Raimondo said that in the coming months, Washington will accelerate its discussions with allies in Asia and Europe so that policies can be coordinated to avoid oversupply in the future.

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There will be a lot of discussion about semiconductor subsidies at a U.S.-EU Trade and Technology Council meeting in June, Ms. Raimondo said. The U.S. is hoping to reach an agreement on semiconductor supply chains among the Asian countries that are participating in the Indo-Pacific Economic Framework, a new economic cooperation pact under development by the United States.

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 "We must work together. Competition shouldn't exist between us. It's then that companies play us off one another and bid up the subsidy."