Report: Pentagon backs out of Intel funding deal

The U.S. Department of Defense has reportedly backed out of funding a $2.5 billion grant for Intel to produce advanced military and intelligence semiconductors. The DOD’s decision could leave the U.S. Department of Commerce responsible to fund a $3.5 billion funding package for Intel approved in a $460 billion government spending package signed by President Joe Biden days ago.

The Pentagon scrapped plans to fund the chipmaker grant in the days leading up to the passage of the giant spending package, according to anonymous sources cited by Bloomberg.

The Commerce Department may need to dip into funding provided by the 2022 CHIPS and Science Act to pay for the grant, Bloomberg reported. The DOD and the Commerce Department didn’t immediately respond to requests for comment.

The CHIPS Act includes $39 billion in subsidies for chipmakers to manufacture chips in the U.S. and another $13 billion for semiconductor R&D. The legislation also includes $200 billion for other scientific R&D. If more of the funding for the Intel grant is moved into the CHIPS budget, that could mean less funding for commercial chips and more funding for specialized military chips.

Intel has applied for about $10 billion in funding through the CHIPS Act, not including the $3.5 billion from the government spending bill. It’s unclear if the DOD’s reported decision to back out of funding will mean Intel will get less money from the government through the CHIPS Act or if other chipmakers will take the hit, with less money potentially available in the CHIPS Act.

In the past three years, Intel has been trying to reinvent itself as a chipmaker for other tech companies, and it recently inked a $15 billion deal with Microsoft to design chips for the “AI era.”

However, the apparent decision by the DOD to pull funding shouldn’t have a major effect on Intel, said Alvin Nguyen, senior analyst at Forrester. “In terms of Intel’s ability to reinvent itself as a chipmaker for hire, it should not have any impact unless the reason for pulling the funding is due to a scandal,” Nguyen said. “Getting customers to use [Intel’s] existing and future fabrication services is based on whether or not they fit client needs.”

Nguyen noted that $2.5 billion is a fraction of the cost of a new fabrication plant. “The amount of funding should not materially impact how many plants they are able to update.”

The U.S. government hasn’t yet made a final decision on CHIP Act funding, suggesting the DOD is working with other government agencies to avoid redundant allocations, added Mario Morales, group vice president for enabling technologies and semiconductors at IDC.

Intel submitted four applications for U.S. government funding last year, and it wasn’t guaranteed to win all four, Morales said. Companies filed more than 400 applications for CHIPS Act funding.

The cut in funding from the DOD could create a minimal delay to Intel’s plans, given the five- to seven-year timeframe for building chip factories, Morales added. “A lack of funding by DOD means less focus by Intel on government- or military-related projects, or maybe a delay in the start of production of nodes suited for military grade process.”

Working with the DOD is more about “visibility than volume” for Intel, he added.