Armed with $52 billion, a team of experts drawn from the worlds of finance, science and technology, national security, economic policy, trade and the environment have assembled at the Commerce Department to attempt to reverse a decades-long decline in U.S. semiconductor manufacturing. 

The experts at the CHIPS program office are charged with enticing the world’s largest chipmakers to the U.S. to fashion cutting-edge semiconductors used in weapons and supercomputers, as well as in more ordinary devices like thermostats. The goal is to break the dependence that many American manufacturers of missiles, spy satellites, telecom gear and medical devices have on suppliers primarily based in Taiwan and South Korea. 

In the event of a war or a blockade by China, the worry is that U.S. companies may not get the needed chips.

Congress appropriated funding for the effort last year, setting aside about $39 billion for grants and subsidies for chip makers and their suppliers, plus another $11 billion to set up research centers on chip design. To handle the task, the Commerce Department last year launched the new CHIPS office, which also would provide loan guarantees for as much as $75 billion. 

Morgan Dwyer, the chief strategy officer at the CHIPS office and a former Pentagon official with degrees from Yale, Stanford and the Massachusetts Institute of Technology, sees the complexity of the challenge in the ubiquity of semiconductors in modern life. 

“The unique nature of the CHIPS program and semiconductors themselves is that they are inherently dual use, and some chips are not only used for military systems, but they also power our economy,” Dwyer said in an interview. “We really have to focus on sort of the two core objectives of how we’re going to judge our success in 10 years, and that is, did we strengthen national security? And did we also get a good deal for the American taxpayer?” 

The CHIPS program “is unlike really any other program that the federal government is undertaking right now,” Peggy Gustafson, the Commerce Department’s inspector general, told lawmakers in March. 

Deploying taxpayer funds and the federal government’s power puts the department and the CHIPS office in a unique position of executing a novel industrial policy: one focused on both national security as well as economic well-being, and one that is expected to back manufacturing plants as well research and development efforts. 

A study of U.S. industrial policy interventions since the 1970s by the Peterson Institute for International Economics found that the most successful ones were cases in which the government funded high-risk, high-reward research and development efforts. 

“Our research showed that the real strength of the United States is in R&D as an industrial policy tool,” said Gary Clyde Hufbauer, one of the authors of the November 2021 report. In contrast to broad funding, efforts involving trade measures and subsidies to specific firms had failed to produce the desired results, the study found.

Two key lawmakers already have urged the department to make sure recipients of federal dollars are chosen carefully and the result is not a “bailout” for the semiconductor industry. 

Sens. Mark Warner, D-Va., and John Cornyn, R-Texas, the Senate authors of the law to revitalize U.S. semiconductor manufacturing, urged Commerce Secretary Gina M. Raimondo in May to make sure that applications for grants and subsidies that are “most worthy based on national security concerns” get funded. 

“We want to make sure that this is done with national security foremost in everybody’s mind,” Cornyn said in an interview. “This is not an economic proposition. … It’s obviously important from an economic standpoint, but national security is the main reason why Sen. Warner and I undertook the legislation.” 

Warner said he was also concerned that if most of the federal funds went only to large semiconductor fabricators, or “fabs,” it wouldn’t spark a resilient domestic industry. 

“We have got to make sure that the whole supply chain” is supported, Warner said in an interview. “It’s not enough to simply have a fab without the right tool maker or the advanced packaging supplier. … That’s not going to meet our national security objectives.” 

The Commerce Department has said it will take applications for grants from key suppliers to chipmakers in addition to operators of fabs.

Strong manufacturing interest

The CHIPS office already has received more than 400 statements of interest from semiconductor manufacturers keen to get a share of the federal dollars. Preliminary applications for grants and subsidies will be accepted beginning in September, with final applications starting Oct. 23, according to the department. 

The world’s top chipmakers, including Intel, Micron, IBM, Samsung, Taiwan Semiconductor Manufacturing Co. and others, have indicated they may invest as much as $400 billion in the U.S. provided they get some support from the government.

Six teams, separately focused on national security, economic security, workforce, environmental issues, international relations and policy, will pore through the applications to decide who gets how much, Dwyer said. 

As outlined in a department notice, applications will be evaluated on how well they meet national security and economic security goals in combination with commercial viability and financial strength, Dwyer said. The department’s notice says meeting national and economic security objectives would receive “the greatest weight” in evaluations, with the five other categories receiving equal weight thereafter.

The CHIPS office’s national security experts will evaluate applications based on two broad criteria, said Benjamin Schwartz, director of the office’s national security team.

“The first is straightforward in a way, and that is to ensure that the companies that we will give funding to are protected from security threats,” he said in an interview. The evaluation will include their cybersecurity efforts, physical protection, protection from malign foreign influence as well as efforts to prevent counterfeiting or cloning of the products, Schwartz said. 

“The second bucket is about the resiliency of supply chains for critical semiconductor applications and end uses,” he said. “This is about how do you build a supply chain that can withstand any sort of disruptions in parts of the world where there could be a disruption.” 

The office also has to figure out how to ensure that chip manufacturers that “provide unique capabilities for things like the defense industrial base maintain a business” when the volume of demand for such specialized chips could be low, Schwartz said. “And how do you sustain these critical businesses, when maybe they would get a higher margin just serving purely commercial end users.” 

National security needs are not confined to the Pentagon’s requirements but also include what’s needed by intelligence agencies, as well as elements of the Energy and Commerce departments, he said. 

The effectiveness of the policy to draw more chipmakers to the country has become complicated by global events, said Rob Atkinson, president of the Information Technology and Innovation Foundation, a think tank that has supported the subsidy program. 

As Congress worked to pass legislation last year, other countries, including Japan, Canada and the European Union, created their own incentives to attract chip makers, “making it harder for the U.S. to compete for fab and related investment,” Atkinson said. 

Congress debated the legislation during a severe shortage driven by the COVID-19 pandemic. Since then, “we went from chip shortage to worries of industry sales slowdown” because of a glut, Atkinson said. “But we deal with the hand we are dealt, and hopefully the multinationals will make large capital investments here in the U.S.”