Unexpected Intel military chip contract drained $3 billion from CHIPS Act, Senate mulls auction to restore funds

Global semiconductor trade group SEMI is applauding the U.S. Senate’s plans to solve the funding gap in the 2022 CHIPS Act. The shortfall stems from a $3 billion military chip contract with Intel, for which the U.S. Department of Defense was slated to pay $2.5 billion. However, the agency later reneged on its funding commitment, leaving the Commerce Department holding the bag. The additional funds will come through the Spectrum and National Security Act, currently at its second reading at the Upper House. This bill will allow the FCC to auction off licenses in the 12.7 to 13.25 GHz frequency bands, and the proceeds will then be used to fund various government tech programs, including the CHIPS and Science Act.

This is crucial for the CHIPS Act, as its $39 billion allocation for domestic manufacturing is already being stretched as it is. Intel will receive a $10 billion payout from the CHIPS Act, more than 25% of the fund’s manufacturing budget. In addition, the company was set to receive an additional $3.5 billion to build defense chips for the American military. This was supposed to be split between $1 billion from the Department of Commerce, with the Pentagon footing the remaining $2.5 billion.

However, the U.S. Department of Defense unexpectedly pulled out of its two-and-a-half billion-dollar commitment to Secure Enclave, meaning the Department of Commerce is left holding this massive bag. This adds to the strain on the CHIPS Act funding, especially as the requested grants and other monetary support for building fabs have already reached $70 billion — almost double the budget set by Washington.

If the Spectrum and National Security Act passes into law, it will cover the unexpected shortfall in the factory funding caused by the Pentagon’s pullout. Furthermore, it will add an extra $5 billion for research and development covered by the CHIPS Act. While these may look like a drop in the bucket with the CHIPS Act’s total budget of $280 billion, the White House feels that it’s not enough for the U.S. to retain global semiconductor leadership, with Commerce Secretary Gina Raimondo calling for CHIPS Act 2.

The U.S. needs to pour more effort and resources into chip development, especially as China pours money into its domestic chip production. While America’s bans and sanctions have negatively affected Chinese ambitions in semiconductor supremacy, history has taught us that these are not quite effective at curtailing progress. It may cause a temporary disruption, but human ingenuity and creativity could allow China to catch up nonetheless. So, if the White House wants America to maintain its leadership in the semiconductor space, it needs to pour billions (or even trillions) into it.