Biden Administration Chooses Military Supplier for First Chips Act Grant

The Biden administration will announce on Monday that BAE Systems, a defense contractor, will receive the first federal grant from a new program aimed at shoring up American manufacturing of critical semiconductors.

The company is expected to receive a $35 million grant to quadruple its domestic production of a type of chip used in F-15 and F-35 fighter jets, administration officials said. The grant is intended to help ensure a more secure supply of a component that is critical for the United States and its allies.

The award is the first of several expected in the coming months, as the Commerce Department begins distributing the $39 billion in federal funding that Congress authorized under the 2022 CHIPS and Science Act. The money is intended to incentivize the construction of chip factories in the United States and lure back a key type of manufacturing that has slipped offshore in recent decades.

Gina Raimondo, the commerce secretary, said on Sunday that the decision to select a defense contractor for the first award, rather than a commercial semiconductor facility, was meant to emphasize the administration’s focus on national security.

“We can’t gamble with our national security by depending solely on one part of the world or even one country for crucial advanced technologies,” she said.

Semiconductors originated in the United States, but the country now manufactures only about one-tenth of chips made globally. While American chip companies still design the world’s most cutting-edge products, much of the world’s manufacturing has migrated to Asia in recent decades as companies sought lower costs.

Chips power not only computers and cars but also missiles, satellites and fighter jets, which has prompted officials in Washington to consider the lack of domestic manufacturing capacity a serious national security vulnerability.

A global shortage of chips during the pandemic shuttered car factories and dented the U.S. economy, highlighting the risks of supply chains that are outside of America’s control. The chip industry’s incredible reliance on Taiwan, a geopolitical flashpoint, is also considered an untenable security threat given that China sees the island as a breakaway part of its territory and has talked of reclaiming it.

The BAE chips that the program would help fund are produced in the United States, but administration officials said the money would allow the company to upgrade aging machinery that poses a risk to the facility’s continuing operations.

Like other grants under the program, the funding would be doled out to the company over time, after the Commerce Department carries out due diligence on the project and as the company reaches certain milestones.

“When we talk about supply chain resilience, this investment is about shoring up that resilience and ensuring that the chips are delivered when our military needs them,” said Jake Sullivan, President Biden’s national security adviser.

BAE, partly through operations purchased from Lockheed Martin, specializes in chips called monolithic microwave integrated circuits that generate high-frequency radio signals and are used in electronic warfare and aircraft-to-aircraft communications.

The award will be formally announced at the company’s Nashua, N.H., factory on Monday. The facility is part of the Pentagon’s “trusted foundry” program, which fabricates chips for defense-related needs under tight security restrictions.

In the coming months, the Biden administration is expected to announce much larger grants for major semiconductor manufacturing facilities run by companies like Intel, Samsung or Taiwan Semiconductor Manufacturing Company, known as TSMC.

Speaking to reporters on Sunday, Ms. Raimondo said the grant was “the first of many announcements” and that the pace of those awards would accelerate in the first half of next year.

The Biden administration is hoping to create a thriving chip industry in the United States, which would encompass the industry’s most cutting-edge manufacturing and research, as well as factories pumping out older types of chips and various types of suppliers to make the chemicals and other raw materials that chip facilities need.

Part of the program’s focus has been establishing a secure source of chips to feed into products needed by the American military. The supply chains that feed into weapons systems, fighter jets and other technology are opaque and complex. Chip industry executives say that some military contractors have surprisingly little understanding of where some of the semiconductors in their products come from. At least some of the chip supply chains that feed into American military goods run through China, where companies manufacture and test semiconductors.

Since Mr. Biden signed the CHIPS act into law, companies have announced plans to invest more than $160 billion in new U.S. manufacturing facilities in hopes of winning some portion of the federal money. The law also offers a 25 percent tax credit for funds that chip companies spend on new U.S. factories.

The funding will be a test of the Biden administration’s industrial policy and its ability to pick the most viable projects while ensuring that taxpayer money is not wasted. The Commerce Department has spun up a special team of roughly 200 people who are now reviewing company applications for the funds.

Tech experts expect the law to help reverse a three-decade-long decline in the U.S. share of global chip manufacturing, but it remains uncertain just how much of the industry the program can reclaim.

While the amount of money available under the new law is large in historical proportions, it could go fast. Chip factories are packed with some of the world’s most advanced machinery and are thus incredibly expensive, with the most advanced facilities costing tens of billions of dollars each.

Industry executives say the cost of operating a chip factory and paying workers in the United States is higher than many other parts of the world. East Asian countries are still offering lucrative subsidies for new chip facilities, as well as a large supply of skilled engineers and technicians.

Chris Miller, a professor of Tufts University who is the author of “Chip War,” a history of the industry, said there was “clear evidence” of a major increase in investment across the semiconductor supply chain in the United States as a result of the law.

“I think the huge question that remains is how enduring will these investments be over time,” he said. “Are they one-offs or will they be followed by second and third rounds for the companies involved?”

Don Clark contributed reporting.