Implementation of CHIPS Financial Incentives

CHIPS and Science Act Background

On August 9, 2022, President Joe Biden signed into law the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022, or the CHIPS Act of 2022. The bipartisan legislation largely incorporates provisions from two earlier bills: the Senate’s U.S. Innovation and Competition Act (USICA) and the House’s America COMPETES (Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act) Act of 2022.

The CHIPS Act of 2022 evolved given high stakes politicking leading up to the midterm elections. While some progress was being made in the conference committee, negotiations fell apart after Senate Minority Leader Mitch McConnell (R-KY) threatened to tank the CHIPS Act if Democrats moved ahead with a reconciliation package. Shortly after Sen. Joe Manchin (D-WV) declared reconciliation negotiations dead, the Senate voted on what was coined “CHIPS Plus,” a slimmed down version of USICA more focused on semiconductor manufacturing grants and tax incentives supported by Republicans. The legislation passed by a vote of 64-33 with 17 Republicans joining all Democrats except for Sen. Bernie Sanders (I-VT), who opposed the bill arguing that subsidies for the semiconductor industry constituted corporate welfare.

While initially expected to sail through the House, the surprise announcement that Senate Majority Leader Chuck Schumer (D-NY) and Sen. Manchin had clinched a deal on a climate, taxes, and healthcare reconciliation package (the Inflation Reduction Act) threw off dynamics in the lower chamber. In a last-minute effort, House Republican leadership attempted to whip against the bill as part of a larger political fight over reconciliation. Ultimately, the House passed the bill by a vote of 243-187-1, with 24 Republicans voting alongside Democrats.

The CHIPS Act directs $280 billion in spending over the next ten years to boost U.S. competitiveness and innovation, domestic production of key critical technologies, and national security. Of the $280 billion, approximately $106 billion is allocated for semiconductor and telecommunications purposes. More specifically, the Commerce Department will oversee the roughly $52.7 billion that is available for semiconductors, including $39 billion for the development of domestic chip production and $11 billion for advanced semiconductor research and development (R&D) under the CHIPS for America Fund.

The CHIPS and Science Act of 2022 appropriates incentives programs authorized by the CHIPS for America Act of 2021, which was signed into law in December 2020 as part of the William M. (Mac) Thornberry National Defense Authorization Act (NDAA) for Fiscal Year 2021 (FY21). The programs in the CHIPS for America Act authorize the Department of Commerce, Department of Defense (DoD), and Department of State to develop domestic manufacturing of semiconductors critical to U.S competitiveness and national security.

CHIPS Act Executive Order

On August 25, President Biden signed an Executive Order (EO) to implement the incentives for semiconductor research, development, and manufacturing included in the CHIPS Act. The EO lays out six priorities for the federal agencies working to implement funding including protecting taxpayer resources; meeting economic, sustainability, and national security needs; ensuring long-term leadership in the microelectronics sector; catalyzing private-sector investment; generating benefits for a broad range of stakeholders and communities; and strengthening and expanding regional manufacturing and innovation ecosystems.

The EO also established an interagency steering council to coordinate and develop the policies needed to effectively implement CHIPS programs within the executive branch. The CHIPS Implementing Steering Council is co-chaired by National Economic Director Brian Deese, National Security Advisor Jake Sullivan, and Director of the Office of Science and Technology Policy (OTSP) Dr. Arati Prabhakar. Other key members of the council include Secretary of State Antony Blinken, Secretary of Commerce Gina Raimondo, and Secretary of Defense Lloyd Austin.

The Council’s first meeting was held on October 7. Members discussed how implementation of the CHIPS Act will strengthen American leadership in the semiconductor industry and boost U.S. economic competitiveness and protect U.S. national security. The council also received briefings from the Department of Commerce, Department of State, DoD, and the Director of the National Science Foundation (NSF) regarding the status of their respective implementation efforts.

CHIPS for America Fund Implementation Strategy

On September 6, the Commerce Department released its strategy outlining the initiatives, strategic goals, and guardrails it plans to take to implement the CHIPS for American Fund through the CHIPS Act. The four primary goals of include establishing and expanding domestic production of leading-edge semiconductors; building a sufficient and stable supply of mature node semiconductors; investing in American R&D; and creating manufacturing and construction jobs for historically marginalized communities including women, people of color, veterans, and people who live in rural areas.

The strategy’s three key initiatives are focused on: supporting large-scale investments in leading-edge logic and memory manufacturing clusters; expanding manufacturing capacity for mature and current-generation chips, new and specialty technologies, and suppliers to the industry; and launching initiatives to strengthen and advance U.S. leadership in semiconductor R&D.

The Commerce Department is expecting that proposals for the construction or expansion of manufacturing facilities to fabricate, package, assemble, and test these critical components will account for roughly $28 billion, or three quarters of the CHIPS incentives funding available under Section 9902 of the FY21 NDAA. For the second initiative focused on supporting manufacturing of chips at advanced nodes, new technologies, and upstream materials and equipment manufacturers, the Commerce Department is planning to award roughly $10 billion in funding, or approximately one quarter of funding available under Section 9902.

Notably, the CHIPS Act of 2022 authorizes the Commerce Department to award not only grants, but also to make loans and loan guarantees with the goal of stretching federal dollars. The Commerce Department has also acknowledged the Advanced Manufacturing Tax Credit (AMTC) created by the CHIPS Act of 2022 will generate additional project investment for participants and signaled that eligibility for this investment tax credit (ITC) could impact allocations for various stakeholders.

The third initiative on R&D includes programs like the National Semiconductor Technology Center (NSTC), the National Advanced Packaging Manufacturing Program (NAPMP), Manufacturing USA Institutes, and other National Institute of Standards and Technology (NIST) metrology investments. These efforts are expected to receive $11 billion in funding.

Commerce Department: CHIPS Webinars

Since September, the Commerce Department’s CHIPS Program Office (CPO) has hosted its CHIPS for America webinar series to engage with interested stakeholders on various aspects of CHIPS Act implementation. The webinars have been open to the public and have featured participants from the Semiconductor Industry Association (SIA) and Semiconductor Equipment Materials International (SEMI), an industry association comprised of companies involved in the electronics design and manufacturing supply chain.

The first webinar focused on the CHIPS for America Strategy Paper. Subsequent webinars have been used to outline the Commerce Department’s current thinking on major CHIPS Act programs, including the $39 billion CHIPS incentives program and the $11 billion for R&D programs.

Overall, during webinars on CHIPS incentives, Commerce Department officials have emphasized six areas where prospective applicants for incentives should be conducting their due diligence, including on increasing scale and attracting private capital; leveraging collaborations to build out ecosystems; securing additional state and local incentives and support to build clusters; establishing a secure and resilient supply chain; expanding the workforce pipeline; and creating inclusive opportunities for businesses and communities. Three webinars were also held on the Manufacturing USA Semiconductor Institutes.

Commerce Department Requests for Information (RFIs)

Since the start of 2022, NIST has solicited feedback from the public through requests for information (RFIs) on three separate occasions. In January, the Commerce Department sought input through the Incentives, Infrastructure, and Research and Development Needs to Support a Strong Domestic Semiconductor Industry RFI. This RFI posed questions related to the design of incentive, R&D, and advanced packaging programs. According to a NIST summary of the comments received, the solicitation, which closed on March 25, received responses from more than 250 sectors of the semiconductor supply chain, domestic and foreign, including semiconductor manufacturers; industries associated with or that support the semiconductor industry, such as materials providers, equipment suppliers, manufacturers, and designers; trade associations; educational institutions; government entities; original equipment manufacturers; semiconductor buyers; semiconductor industry investors; and other stakeholders.

NIST’s analysis of the RFI comments found that respondents largely agreed that all CHIPS programs should be closely coordinated for maximum impact, for example via collaboration and coordination between the NSTC, NAPMP, and with existing technology hubs and institutions. Another theme expressed in the comments was that projects awarded financial incentives should have state and local incentives to maximize their impact. Further, stakeholders identified intellectual property (IP) as an important factor in determining how they might apply for financial incentives as part of a consortium and participating in the R&D programs or collaborative hubs. The responses from the initial January 2022 RFI helped shape the six principles listed in the Commerce Department’s September implementation strategy.

In October, the Commerce Department announced it is again seeking input to inform the design and implementation of the two major components of the CHIPS for America initiative. First, the Commerce Department has issued an RFI on Implementation of the RFI on Implementation of the CHIPS Incentives Program to help inform the forthcoming funding opportunity announcement (FOA) for CHIPS incentives. Comments in response to this RFI are due November 14. Second, the CPO published an RFI on Manufacturing USA Semiconductor Institutes. This comment period closes on November 28.

To avoid any appearance of impropriety, especially with a program of this size that is expected to be oversubscribed, the Commerce Department has taken a cautious approach and is generally not meeting individually with semiconductor stakeholders, even those who are not eligible for CHIPS funding. This makes the open RFIs a critical opportunity for prospective applicants to attempt to influence what the FOA might look like.

Looking Ahead to 2023: Questions Still Remain

The Commerce Department is expected to release an FOA with specific application guidance for the CHIPS for America program in early February 2023. It is expected this FOA will be a call for pre-application proposals and that the Commerce Department will provide feedback on potential projects before asking applicants to complete an application for a grant, loan, or loan guarantee. Because parts of the statute were drafted with the intent of maximizing the Commerce Department’s flexibility to execute CHIPS programs, including the roll out of incentives, Commerce Department officials have publicly acknowledged that several program elements are still under consideration and for prospective applicants, there remain several unknowns.

For example, while there has been much talk about consortia and manufacturing clusters in strategy documents and CHIPS for America webinars, it remains unclear how the Commerce Department would expect such proposals to be structured. The idea might be that the Commerce Department is encouraging collaboration between fabricators, upstream suppliers, and downstream users, and potentially even academic institutions to strengthen project proposals and support the entities that may only have financially viable proposals when combined with larger investments in semiconductor manufacturing. However, it is unclear that a request for these types of proposals will work for every entity in the semiconductor supply chain. It is also uncertain whether consortia will be required to meet the same standards as individual businesses that apply for incentives.

Further, it is clear from CHIPS for America webinars that the Treasury Department and the Commerce Department are still working through issues related to the eligibility for the AMTC, which as noted above, could impacted how CHIPS incentives are allocated. The statute explicitly states that fabs and upstream equipment manufacturers are eligible for the AMTC but is silent on the eligibility of other entities, such as upstream materials manufacturers.

The Commerce Department also has yet to elaborate on new guardrail provisions included in the CHIPS Act of 2022. This language prohibits recipients of CHIPS incentives from engaging in activities that could be considered beneficial to foreign adversaries, especially China. The statue also dictates that recipients of incentives must refrain from knowingly expanding semiconductor manufacturing capacity in China for ten years after receiving an award. If found to have violated any guardrails, the Commerce Department has the right to claw back the entirety of the funding amount. The most recent RFI includes specific questions regarding how the Commerce Department might implement such requirements and Commerce Secretary Raimondo, Defense Secretary Austin, and Director of National Intelligence (DNI) Avril Haines are likely to coordinate to develop a plan for how these guardrails will be implemented.

More specifically, key terms within the legislation outlining the guardrails, such as “significant transaction” and “semiconductor manufacturing capacity” lack clear definitions in the Commerce Department’s implementation strategy. It is also unclear how the Commerce Department will enforce the distinction in commitments made by awardees who have existing business in China versus awardees who do not have existing ties to China. In other words, more guidance may be needed to for applicants with existing business in China to feel confident about applying for and accepting CHIPS incentives.

Similarly, there is a statutory requirement for applicants for federal funding to secure state and local incentives. It is expected that the Commerce Department will prioritize proposals that have already won support from local governments who view them as projects that will bolster local and regional competitiveness and the surrounding communities. However, it is unclear exactly how applications will be expected to fulfill this requirement, for example by obtaining state and local subsidies, tax breaks, permitting assistance, or other kinds of support.

Finally, it is clear the Biden Administration views CHIPS incentives as an opportunity to work with the business community to promote diversity, equity, and inclusion. It would not be unreasonable to expect the Commerce Department to prioritize project proposals that commit to ensuring that small, rural, minority-owned, veteran-owned, and women-owned businesses see opportunities generated by the CHIPS incentives program. However, the Commerce Department has yet to spell out with any specificity the types of commitments it will solicit from applicants.

Conclusion

As more guidance from the Commerce Department on financial incentives and implementation of the CHIPS Act becomes available, Plurus Strategies will continue to monitor these issues closely. We are working with our clients to ensure they will be competitive when the FOA for CHIPS incentives is released early next year, including by leveraging their relationships in Washington to shape the Commerce Department’s implementation plans.