Yahoo Finance BAE Systems is the first winner of D.C.'s coming wave of semiconductor grants
The Biden administration is nearing an agreement to send its first slice of money from 2022’s CHIPS and Science Act to BAE Systems (BAESY) to try and supercharge the company's US manufacturing of semiconductors needed by the Pentagon.
The roughly $35 million award would mark the first grant from one of President Biden's signature laws and be focused on the firm’s national security efforts. Biden's team is aiming to spend about $50 billion in total in the years ahead to try and help kickstart a revival of America’s overall semiconductor sector.
"This is the first of many," said Commerce Secretary Gina Raimondo of this week's news, adding: "We expect the pace of these announcements to accelerate in the first half of next year." Raimondo will be traveling to BAE's New Hampshire manufacturing facility on Monday for the formal announcement.
The timing of the announcement is intended to highlight the administration's focus on the link between semiconductors and national security, with National Security Advisor Jake Sullivan also briefing reporters in advance of Monday’s news.
In his remarks, he said that the semiconductors inside many of America’s weapons systems — with a single shoulder-fired Javelin weapons system requiring about 200 chips to operate — are just as important as the weapons themselves.
Sullivan called this week’s announcement "especially meaningful from a national security perspective" with much of BAE's new expanded chipmaking capacity set to go towards quadrupling its capacity to make chips for things like the Pentagon's F-35 fighter jet program.
The money will be focused on microelectronics efforts at a company plant in Nashua, N.H., with BAE's US CEO Tom Arseneault adding in a statement that "this funding will help modernize our Microelectronics Center and fulfill the promise of the CHIPS and Science Act by increasing our capacity to serve national defense programs, growing our technical workforce, and helping to strengthen the nation’s onshore supply chain."
BAE’s parent company is based in the United Kingdom, but the company operates under the so-called "Trusted Foundry Program" that allows its American subsidiary to work on sensitive defense programs. The company’s US headquarters are in Falls Church, Va., just a short drive from Washington.
The company — now in agreement with the government on what is known as a preliminary memorandum of terms — still has some hurdles to jump through before any checks are cut. The agreement announced this week is not yet binding and a due diligence process remains in the offing.
Other companies still waiting in the wings
Monday’s announcement also marks a delay of sorts for other big-name chip companies that will be waiting in the wings to formalize their awards until at least early 2024.
It's been 16 months since Biden signed the landmark act into law, and it's been the subject of intense lobbying from companies from Intel (INTC) and Micron (MU) to IBM (IBM) and the Taiwan Semiconductor Manufacturing Company (TSMC) ever since.
The bill set aside about $50 billion for grants to the semiconductor sector divided between $39 billion earmarked for manufacturers with an additional $11 billion set for companies as well as universities and others for chip research and design purposes.
The coming awards still apparently have issues that need to be resolved, with a senior administration official saying that "the exact timing [of the coming awards] frankly comes down to the ability to come to terms with our applicants."
In February, the administration rolled out the application companies have been using to access the larger chunk of money. It revealed a process that surprised many in the industry for being exceedingly thorough, down to the level of asking companies to hand over detailed financial information to the government, a ban on stock buybacks, a need for plans around expanding childcare, and a pause on any expansion plans in countries like China.
"Each will be bespoke," added Secretary Raimondo this week on the ongoing negotiations with other companies.
The Biden administration’s challenge is to reverse what experts call a downward spiral for the industry in the US in recent decades. American semiconductor manufacturing’s share of the global market has fallen from nearly 40% in 1990 to only 12% in recent years, according to a recent report from the Semiconductor Industry Association.
The situation is even worse with the world’s most advanced semiconductors, 100% of which were manufactured overseas in 2019.
Biden officials hope that Monday’s announcement — at least in the national security context — will begin to help reverse that trend, with Raimondo and others saying the US has become “dangerously reliant” on chipmaker facilities that are largely clustered in Southeast Asia.
Ben Werschkul is Washington correspondent for Yahoo Finance.
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