GUEST BLOG: What the CHIPS Act means for the defense and aerospace industry
BlogOctober 17, 2022
Frank Cavallaro
A2 Global
The newly enacted CHIPS Act (signed into law August 9, 2022) represents a potential boost in U.S. semiconductor fabrication by providing subsidies to U.S. chip manufacturers and funding for technology and research development. At a high level, the CHIPS Act is set to revitalize domestic manufacturing, lower sourcing costs, and increase job creation, all while strengthening the overall global supply chain.
However, some industries will fare better from the CHIPS Act than others. The defense and aerospace industry, specifically, will be left noticeably behind. Why? They suffer from DMSMS – Diminishing Manufacturing Sources and Material Shortage – where a specific part is designed out, or a supplier’s specific technology type is replaced with the next generation. Defense and aerospace systems are critically lagging in comparison to other industries because they do not have the resources needed to upgrade their systems to meet current technological advancements – advancements that the CHIPS Act prioritizes.
In short, defense and aerospace will not reap the benefits of the CHIPS Act for two main reasons:
1) the Act primarily addresses next-generation technology needs and not current or legacy technology needed by those sectors, and
2) the Act focuses on the more competitive and high-volume, low-mix-related technology sectors, whereas the defense and aerospace sector is more aligned with high mix but lower volumes.
Rapid technological advances
To increase effectiveness and longevity of their technology, the military relies on systems that are field-proven after many years of deployment. Unfortunately, these legacy-type systems are far and away laggards in terms of technology advancement. That reality makes finding/sourcing/manufacturing these replacement parts difficult. Because of this lag, defense systems run counterintuitive to the current technological market in terms of component life cycles. Commercial industries have a vested interest in shortening component life cycles and regularly upgrading their systems to maintain a competitive advantage and encourage consumers to buy new products regularly. Meanwhile, the defense and aerospace industries seek to extend the life cycle of their components due to the compatibility and testing needs necessary when updating systems to the latest technology.
The CHIPS Act does not specifically address the defense and aerospace arena’s unique manufacturing position; rather, it benefits those with the resources to onshore production and develop their own fabrication plants (fabs). By building their own fabs, manufacturers have full control over the components they produce, which will ideally be built to the latest and more profitable technology. Defense companies could still be left struggling to source the components they need.
Competitive market forces
The CHIPS Act can also yield tremendous profit potential for those developing their own fabs, another competitive force the defense and aerospace industry is up against. First, fabs are expensive a single fab can cost between $10 billion and $20 billion and take as many as five years to build. With that level of investment in time and money, manufacturers need a strong ROI to make it worth their while. That ROI is most efficiently found in products with the highest cost and higher volumes, which caters to companies with the best purchasing power (think commercial-sector products like smartphones and smart cars).
The defense and aerospace industry cannot keep up with the buying power of large consumer original equipment manufacturers (OEMs), such as Apple and Tesla, even before the shortage. For decades, defense and aerospace industry buying power lagged after moving to commercial off-the-shelf (COTS) sourcing in the 1980s and 1990s, which put them in competition with bigger players, who quickly dominated market share. During the chip shortage and in the aftermath, the market will continue to favor larger players, leaving scant room for defense and aerospace to make up ground in their production and sourcing strategies.
What’s next?
Between advancements in cutting-edge tech and low purchasing power, companies in the defense and aerospace industry remain in a constant struggle to secure adequate supply, and their long-standing constraints will persist.
Efforts to shore up the high-reliability supply chain that fuels U.S. defense and aerospace verticals are more critical than ever before, but the industry must get creative in how it sources components and where they are willing to substitute or compromise, because relief will not be coming from the CHIPS Act.
Frank Cavallaro is CEO of A2 Global Electronics.
A2 Global Electronics https://a2globalelectronics.com/
