Large Investments by Aerospace and Defense Industries in Microelectronics Are the New Normal

Domestic semiconductor manufacturing resiliency isn’t solely an economic concern. Over the past several decades, access to microelectronics for military and aerospace applications has become a national priority. The ability to process and transmit vast amounts of data quickly and efficiently by enabling advanced radar systems, communication devices, navigation systems, and more has made semiconductors necessary for most modern-day equipment.  

All major defense systems and platforms within the U.S., Europe, China, and others rely on semiconductors for their performance. Likewise, the civilian economy depends on semiconductor-based platforms for daily operations. The erosion of a nation’s domestic semiconductor manufacturing capabilities is a massive national security risk.  

A stable and secure line of critical microelectronics is necessary for various high-reliability markets, including defense and aerospace. Increasing accessibility by boosting domestic production capacity is imperative to both economic and national security, as it boosts supply chain stability by decreasing the risk of disruptions and reducing the chances for counterfeit components to enter the supply chain.  

Counterfeits Are Becoming More Sophisticated to Avoid Detection

Unfortunately, securing a safe supply chain requires more than just a little diversification among suppliers. Counterfeiters can find access points anywhere, and when counterfeits slip into high-reliability industries, human lives are on the line.  

The University of Florida’s study concluded that counterfeit components create security and reliability risks for critical systems or infrastructure. Their sale threatens safety and integrity within modern society by aiding crime groups and reducing the incentive to develop new products and ideas.  

In 2011, a major investigation by the Senate Armed Services Committee (SASC) into counterfeit microelectronics in the military revealed startling results. Counterfeit electronics cost the semiconductor industry an estimated $7.5 billion annually, with 15% of spare or replacement semiconductors purchased by the U.S. Pentagon discovered to be counterfeit. A year prior, in 2010, “Stephanie McCloskey, an administrator for VisionTech Components, was sentenced for helping sell thousands of counterfeit components between 2007 and 2009 to major U.S. defense contractors.”

Another SASC investigation in 2012 found that over one million counterfeit electronic components had been used in equipment designed for the U.S. Air Force, Navy, and Special Operations. Even now, DARPA officials say that “used and counterfeit electronic components are widespread throughout the defense supply chain.”

Most still abide by a common and incorrect mindset to avoid counterfeiting, believing that purchasing new, active components means they are less likely to be counterfeited. Likewise, many also believe that buying outside of China means an organization is less likely to encounter counterfeits. Both are untrue.

According to the ERAI's 2022 annual report of reported counterfeits, 62.2% were active components, while 32.5% were obsolete. This goes against the notion that “if you don’t acquire old parts, you’re less likely to come across counterfeits.”  

In the same study, “45.4% of reported suspect parts originated from Asian suppliers, 37.3% from North America, and 17.3% from Europe.” The ERAI did note that reporting organizations were less likely to report if the parts originated from China. Still, in the past, most of the counterfeit suppliers were located within the United States, only recently shifting to half-and-half. Again, this information goes against the notion that simply procuring parts from outside China ensures part authenticity.  

Counterfeits are becoming more sophisticated, making them harder to detect without proper equipment. High-reliability industries must take extra steps to ensure the parts they procure are from secure and certified suppliers. This means even when procuring microelectronics from U.S. suppliers, high-reliability manufacturers must ensure these suppliers have appropriate certifications to prevent counterfeit risks.

That can become difficult during significant disruptions such as the global semiconductor shortage.  

The Global Semiconductor Shortage Solidified the Necessity of Domestic Semiconductors

The effects of the global semiconductor shortage across most industries were extreme. Inflated prices, double ordering, and lead times years long merely scratch the surface of the shortage’s effects.  

The automotive industry made headlines during the shortage as automakers removed features from new models due to the lack of chips. One of Ford's lots sat littered with unfinished cars, waiting for its next shipment of semiconductors to arrive. For consumers who ordered more popular models, the lead times for the vehicles themselves were months long.  

Automakers desperately needed chips, but their much louder cries buried the high-reliability industries that needed the same kind of scarce, mature semiconductors. The global semiconductor shortage directly impeded defense contractors in their attempt to send supplies to aid efforts in Ukraine during the early days of Russia’s invasion.

Further complicating matters, according to the EE Times, is the DoD’s overreliance on Asian chip manufacturers since the decreased investment in U.S. semiconductor manufacturing capabilities.  

Bryan Clark, a senior fellow with the Hudson Institute, told the EE Times that “the U.S. military relies on legacy, or older, chip architectures that aren’t widely available and often must be made in small, dedicated batches.”

“When chip shortages occur, companies that make these chips can make more money building chips for appliances and cars,” he said. “If the DoD used more state-of-the-art chips with commercial architectures and adapted them through packaging or software, the U.S. military would be able to tap into the scale of commercial production and be less vulnerable to chip supply disruptions.”

The challenge with complete redesigns to use new advanced chips is that the original knowledge for the in-use designs might be lost. Rob Picken, SVP of Digital Transformation, said in a call discussing obsolescence in late 2023 that some aerospace systems in the UK were approved in the late 70s. The engineers who designed these systems are now gone. Redesigning these systems can take millions of dollars and years of review before receiving approval or ever going to market.  

It’s more viable for high-reliability organizations to obtain legacy components and ensure production capacity. This can be difficult when the U.S. excels in sophisticated semiconductors over legacy ones. Many semiconductor manufacturing firms do not prioritize mature chips for numerous financial reasons.  

Simply put, the investment in maintaining mature semiconductor production lines is not financially feasible. The sales cost is lower than the price to produce the chips. To ease the financial strain on OCMs, maintain production capacity in mature chips, and fortify secure domestic supply, aerospace and defense original equipment manufacturers (OEMs), contract manufacturers (CMs), and electronic manufacturing service (EMS) providers need to work together.  

Recent Investments by the DoD Help Boost Domestic Manufacturing Efforts

Investments on behalf of defense organizations in microelectronics development aren’t new but are rising in frequency and dollar amount. Early in January, the DoD announced it had allocated $49 billion to revitalize advanced semiconductor packaging capabilities and capacity. This is the process of combining components before forming an integrated circuit, the final stage of semiconductor fabrication.  

Doing so allows numerous devices, including electrical, mechanical, or semiconductor, to be merged and packaged as a single electronic device.  

These awards are part of the DoD’s Re-Shore Ecosystem for Secure Heterogeneous Advanced Packaged Electronics (RESHAPE) effort. It will directly support the National Defense Industrial Strategy’s strategic priority of building resilient supply chains. The awards were made to Micross Components and the government of Osceola County, Florida, through the Industrial Base Analysis and Sustainment (IBAS) program.

“Revitalizing a semiconductor advanced packaging manufacturing ecosystem in the US is critical,” said Dr. Laura Taylor-Kale, Assistant Secretary of Defense for Industrial Base Policy. “It will also enable lower volume manufacturing commercial markets across the US to advance their products and to assist in sustaining these critical manufacturing capabilities.”

The effort focuses on multi-supplier ‘back-end-of-line’ processes for 300-millimeter wafer diameter capabilities. This ensures access and availability to a secure, comprehensive microelectronics ecosystem within the U.S for mature components.

It’s also expected that the DoD or other high-reliability bodies will continue to make significant investments to address the importance of procuring embedded microelectronics. Highlighted by the disastrous effects of the global semiconductor shortage and overreliance on foreign manufacturers, all eyes are on domestic resiliency.

McKinsey reports that DoD’s microelectronics research, development, testing, and evaluation budget will increase in the next four years. Public information suggests that the DoD will invest heavily in three areas.  

• Trusted Microelectronics: Defense and aerospace industries need access to secure, cutting-edge microelectronics infrastructure at commercial scale without high counterfeit risk. The DoD will work alongside domestic commercial foundries to achieve this goal.
• Custom Assured Devices: This will help lift the financial brunt off OCMs and other device manufacturers by funding them to help net new devices and allow the DoD access to facilities that comply with international traffic in arms regulation.  
• Packaging and Integration Technology: This area will likely grow the fastest due to the dual-use public-private partnerships and the DoD’s recent $49 million investment.

McKinsey expects other CHIPS initiatives to give fabless and traditional aerospace players with captive foundries new opportunities. Establishing a resilient and assured domestic supply will require collaboration across the value chain. New partnerships between the public and private sector could ensure that “dual-use investments reflect national-security needs for all parties,” benefits that could be lost if purely commercial.  

Now is the most suitable time to collaborate.  

Electrification of the Defense Industry to Continue

In early January, Edgewater Research announced its outlook on the semiconductor market for 2024. After a year of revenue loss and dwindling demand, the market is expected to turn around and see growth by 2H24. Edgewater Research analysts are tentative about the market growth for most industries, citing tepid expectations with muted sales. The forecast for most industries is that 2024 will act as a transitional year with more opportunities in 2025.

The defense and aerospace industry, on the other hand, will see a much more positive 2024.  

Continued efforts to push for electrification in military applications with hybrid vehicles to meet climate goals and ongoing geopolitical conflicts have increased demand for defense appliances. With more customer demand, military and aerospace OEMs, CMs, and EMS providers are ordering more stock. To ensure access to secure domestic semiconductor production capacity, the DoD and other aerospace OEMs, CMs, and EMS providers will likely continue to invest in facilities that meet the stringent criteria to provide components.

It will take time for this new domestic value chain to be constructed. Ongoing efforts to build more semiconductor manufacturing facilities within the U.S. are still a few years out, and the skilled talent to operate these plants is still insufficient. For defense and aerospace OEMs, CMs, and EMS providers that need supply today, procuring components from organizations with the proper certifications for high-reliability industries is the best route. Likewise, using market intelligence to track market trends and upcoming disruptions can help companies make their supply chains more resilient to forthcoming disruptions.  

Sourceability’s digital tool suite, including market intelligence tool Datalynq and e-commerce site Sourcengine, can help do just that.