Microelectronics Funding Surge Shows Onshoring Progress.

• Author: Heckmann, Lauba

A recent surge in microelectronics funding from the Defense Department includes a hefty sum directed to dual-use technology, expanding a pool of opportunity for both the department and its suppliers, a recent report said.

The report, "Government CHIPS On The Table: How Higher DoD Microelectronics Funding Is Here to Stay," recently published by McKinsey & Company, noted that the department's funding for dual-use technology research in 2023 jumped to $1.1 billion, more than double the $531 million in 2022.

Government investment in microelectronics is nothing new. The CHIPS Act, signed into law in August 2022, directed $280 billion over 10 years to scientific research and development, semiconductor manufacturing and chip production, among other investment areas.

Dale Swartz, a partner at McKinsey & Company and co-author of the report, said the percentage of semiconductor production unique to the defense world is "relatively small," with most now being dual-use, meaning the semiconductors can be utilized by the defense and commercial sectors.

Historically, the Defense Department drove much of the demand for semiconductors, dating back to the Apollo program, Swartz said.

"Silicon Valley was actually built on the back of... the incredibly advanced needs" generated by NASA and the Minuteman intercontinental ballistic missile, he said.

Not so much anymore. While semiconductors may power precision-guided munitions, artificial intelligence and the most advanced satellites and radio communications in the world, they also receive images and power radio waves in your smartphone.

"Anything that has any level of electronics in it in some way fundamentally [uses] semiconductors," Swartz said. "Some of the most advanced chips in the world are within the iPhone."

The commercial rise of the semiconductor has incentivized the Defense Department to invest in dual-use technology and the suppliers that make up its ecosystem.

The idea of dual-use is "that you can basically pull a certain chip off the line, tailor it in some way," and plug it in to any number of end markets, Swartz said. Many of the chips are "fairly basic in some ways," and can serve military or commercial needs, he added.

So why does the Defense Department care about tech that can also be used by the commercial sector? Because it gives the department more opportunity, said Christian Rodriguez, an associate partner at the firm and co-author of the report.

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