In addition to procuring embedded microelectronics, the US Department of Defense (DOD) has earmarked billions of dollars for microelectronics R&D over the next five years, at a time when domestic semiconductor capabilities to support both defense and commercial applications are urgently needed. In response, foundry operators and integrated device manufacturers (IDMs) need to think carefully about how and where they can support the DOD in its critical mission to protect the nation. In addition to adapting to the government’s shifting priorities, the best companies should provide the products and services required to support new investments in manufacturing infrastructure.
For dual-use (commercial and defense) technology research, the DOD budget for microelectronics devices, processes, and supporting infrastructure is set to jump to about $1.1 billion in 2023, from $531 million in 2022 (Exhibit 1). For custom technology (defense applications primarily), the budget will rise more modestly, to $914 million, from $864 million. Across both use cases, the DOD’s planned investment is set to rise again in 2024 and to remain elevated, though at a slightly reduced rate, through 2027.1
Since the DOD seeks to expand its use of dual-use technology, a significant proportion of the new funding is assigned to this end. These investments are led by a boost of about $330 million for the Trusted Foundry Program (for example, Rapid Assured Microelectronics Prototypes—Commercial, or RAMP-C) and a $380 million investment in dual-use integration and packaging technology. In parallel, stable investment levels in the development of new custom microelectronics reflect the ongoing imperative to support the DOD’s unique operational requirements and capabilities.
RAMP-C and many other programs have already been fully or partially awarded, so companies will best be served by assessing the DOD’s priorities beyond 2023. For instance, manufacturers and designers might position themselves as key partners to support the DOD’s infrastructure priorities. Public information indicates that there will be large continuing DOD investments in three areas (Exhibit 2):
- Trusted microelectronics. Funding for this maturing use case is designed to ensure that the DOD can access secure, cutting-edge dual-use microelectronics infrastructure at commercial scale. While funding for trusted microelectronics is still high, it is projected to fall over time.
- Custom assured devices. There will be sustained investment in research and development for new custom and assured devices (such as logic and memory) for defense-specific operating environments.
- Packaging and integration technology. A key dual-use focus area will be the creation of infrastructure for packaging and integration ecosystems, which will help the DOD in developing the capabilities needed to integrate both custom and dual-use electronics domestically.
Within the above categories, companies could consider three key areas for investment.
The dual-use appropriations—about $1.1 billion in 2023—include about $670 million for trusted microelectronics. The goal is to ensure that the DOD can securely access state-of-the-art commercial microelectronics through partnerships with domestic commercial foundries. These partnerships will be formed primarily through the Trusted Foundry Program, which will receive approximately $330 million in additional appropriations for 2023 through new initiatives such as RAMP-C. Passage of the CHIPS and Science Act could provide additional funds, drawing from the $2 billion newly appropriated for the DOD up to 2027.
For commercial players, the new funding may create incentives for the creation, expansion, or modernization of domestic microelectronics infrastructure. This would be in addition to the funding provided by other agencies to build infrastructure.
Custom assured devices
More than $900 million in funding will be divided among spending categories for defense-specific requirements that commercial offerings do not cover. These will address domestic technology gaps—for example, the one in radiation-hardened by design—that exist because private foundries and integrated device manufacturers lack the incentives or scale to develop solutions independently. More than $450 million of the funding is dedicated to net-new devices, such as Programmable Logic for Applications in Defense (PLAID), and to process and transistor designs, like ferroelectric computing. It will also help to ensure that the DOD can access facilities compliant with the international traffic in arms regulations (ITAR), including activities involving accredited defense microelectronics (DMEA) application-specific integrated circuits (ASIC). Slightly lower levels of funding for custom radio frequency (RF) R&D reflect the maturity of gallium nitride (GaN) technology. Emerging funding for next-generation ultra-wide-bandgap (UWBG) materials to power next-generation communications, sensors, and nonkinetic effects remains comparatively modest.
Packaging and integration technology
The DOD has allocated about $560 million to custom and dual-use packaging and integration technology. This funding is designed to foster a viable domestic alternative to existing packaging technologies and to support new solutions. These will be primarily focused on integrating traditional silicon logic with novel RF, photonics, or compound semiconductors—that is, three-dimensional heterogeneous integration (3DHI). With $380 million devoted to creating an onshore ecosystem of dual-use public–private partnerships, this area is budgeted to grow at the fastest rate of all applications. Another funding objective is to set up an accessible process design kit (PDK) for both public and commercial developers. Nearly all dual-use funding will be net new in 2023, reflecting the need to close a domestic gap in next-generation technology.
Implications for operators and IDMs
For foundry operators and IDMs, this R&D investment provides a chance to leverage existing dual-use funding to scale capacity and make themselves the logical choice to produce chip volumes for dual-use and, potentially, new portfolios of custom devices as technology transitions into production. Some of the funding is already known and awarded. But other programs, such as the Next-Generation Microelectronics Manufacturing (NGMM) program of the Defense Advanced Research Projects Agency, may offer fresh opportunities to access new investment. There is some potential for follow-on programmatic on-ramps in future phases, as well. The current dynamic could also uniquely position companies to access DOD follow-on funding for next-generation radar and communications systems and to develop new-product portfolios—for example, through 3DHI of GaN power amplifiers and Si CMOS logic.
Defense-specific appropriations from the CHIPS for America Defense Fund will reach $2 billion through 2027. They may present further opportunities to support the DOD’s mission, since there are direct incentives for domestic operations, including capacity expansion and workforce development. These incentives will be amplified by broader CHIPS initiatives that other federal agencies roll out.
Fabless or traditional aerospace players with captive foundries also have much to gain. The design and development of custom microelectronics is a logical focus area, but establishing a resilient and assured supply will require collaboration across the value chain. R&D stage programs such as NGMM, which will establish public–private partnerships and consortia, could ensure that dual-use investments reflect national-security needs for all parties (for example, through process design kit and PDK elements). That benefit may be lost in purely commercial arrangements. The CHIPS for America Defense Fund also provides incentives for migrating designs to new onshore facilities, creating an opportunity for companies to align and collaborate with a growing DOD ecosystem of state-of-the-art foundries.
As DOD funding rises and remains elevated over the coming period, suppliers have a rare opportunity to align their capabilities with emerging priorities for national security. Forward-looking companies will think carefully about how they can best support the DOD and how new funding could catalyze accelerated growth.