Intel reaches deal to produce chips for the US military

The secret program, called Secure Enclave, aims to establish the production of advanced chips with military and intelligence applications. It spans several states, including a manufacturing facility in Arizona, Bloomberg reported.

While Intel has always been the front-runner for the award, there has been pushback from other chipmakers, concern in Washington about the wisdom of relying on a single firm, and a funding battle between multiple agencies and Capitol Hill that threatens to reduce Intel’s total award.

The funding could be announced as early as next week, said the people, who asked not to be identified because the discussions are private. It would add to the possible $8.5 billion in grants and $11 billion in loans that Intel awarded in March under the Chips and Science Act, a law that President Joe Biden signed into law in 2022 to revitalize US semiconductor manufacturing and reduce dependence on Asia.

Intel is still negotiating the terms of that broader incentive package, which is intended to support facilities in Arizona, Ohio, New Mexico and Oregon. Like other Chips Act winners, Intel has yet to receive any money, and its award is considered preliminary. Funding for the Secure Enclave also comes from the Chips Act grant program administered by the Commerce Department — following a dispute earlier this year over which agency would be responsible — but was handled outside of the standard application process.

Intel, the Commerce Department and the Pentagon declined to comment. The White House did not immediately respond to a request for comment.

Intel shares gained less than 1 percent in late trading Friday after Bloomberg reported on the deal. Shares have fallen 61% this year to $19.66 by the close.

The Secure Enclave deal signals that the US government has confidence in Intel to carry out the Pentagon’s plans, despite the company’s latest troubles. Last month, Intel released a devastating earnings report and revenue forecast that sent shares tumbling and shattered confidence in Chief Executive Pat Gelsinger’s ambitious turnaround plan, which relies on investments in factories around the world.

The chipmaker is now actively reassessing its manufacturing ambitions, Bloomberg reported. No final decisions have been made, but Intel is more likely to delay or halt projects outside the U.S. than its flagship sites in Arizona and Ohio, people familiar with the matter said earlier.

The deal also reflects the lack of other options for the Biden administration: Pentagon officials have insisted on sourcing state-of-the-art semiconductors from an American company, and Intel is the only American maker of advanced processors. Other manufacturers include Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. of South Korea, both building factories on American soil with Chips Act support.

Some officials in Washington have had early conversations about buying tokens from US units of foreign manufacturers, Bloomberg reported, but those discussions are focused on broader procurement guidelines and are separate from the Secure Enclave program.

It’s not clear exactly which chip designs Intel would produce for the Pentagon. The Santa Clara, California-based company, which operates both a design and manufacturing business, still relies on TSMC to produce some of its most advanced processors.

Intel struggled to convince potential customers such as Nvidia Corp. and Advanced Micro Devices Inc. of its product capabilities. Commerce Secretary Gina Raimondo has encouraged both firms to consider manufacturing at the facility Intel is building in Ohio, Bloomberg reported, but neither plans to do so.

Intel has announced that other companies, including Microsoft Corp., are exploring the idea of ​​using it to make their chip designs. These efforts have yet to result in large orders or significant revenue.

For chipmakers, the Pentagon can be a tough customer. A recent report by the National Academies of Sciences, Engineering, and Medicine found that companies involved in a so-called trusted foundry program—a long-running effort that is similar to Secure Enclave but focuses on older-generation chips – often struggle to meet DoD requirements or generate a return on investment from those orders.

The Pentagon was originally supposed to fund most of the Secure Enclave program, but withdrew its $2.5 billion commitment in February. Lawmakers then saddled Commerce, which had been responsible for the remaining $1 billion share, with the full burden. At one point, the agency planned to convert its new Secure Enclave obligations into money already earmarked for Intel, Bloomberg reported, but officials ultimately chose to treat the program as entirely separate from commercial manufacturing incentives.

The drama spread to other companies. In response to the funding dispute, Commerce scrapped a planned program for commercial research and development, forcing officials to reject a funding request from Applied Materials Inc. for a $4 billion Silicon Valley project. Efforts to boost the CHIPS Act by $3 billion, which would allow Commerce to restore the initiative, have stalled in Congress.

(Updates with Intel shares in the seventh paragraph.)

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