By Shira Stein

Applied Materials, the largest U.S. maker of semiconductor equipment, may scale back or cancel plans to open a $4 billion research and development facility in the heart of Silicon Valley because of a lack of government investment, according to sources familiar with the discussions.

The Biden administration announced March 29 that it would no longer be funding the construction or renovation of facilities for semiconductor research and development.

Semiconductor materials are used to make the chips that power computers, phones and televisions. A worldwide shortage of chips during the pandemic led to major supply chain problems for cars, video game consoles, computers and household appliances.

President Joe Biden signed a bill in late 2022 that appropriated $52.7 billion in new funding for domestic research and manufacturing of semiconductors. The Commerce Department plans to spend $11 billion on domestic semiconductor research and development and $39 billion on facilities and equipment. But the fiscal year 2024 appropriations bill, passed March 23, reallocated $3.5 billion of that program’s funding to build secure facilities that produce microchips for the military.

That change could have a major impact on Bay Area companies that don’t manufacture semiconductors directly.

“Without robust support for commercial R&D we risk our global leadership and ability to outpace our foreign competitors in the semiconductor industry,” Gov. Gavin Newsom and Sen. Alex Padilla said in a statement. “Key investments to spur and scale private R&D activities … will ensure that California’s semiconductor industry remains the global leader of innovation.”

Padilla expected several California companies to apply for the research and development funding because many semiconductor companies in the state are primarily focused on it, his communications director Tess Oswald told the Chronicle. The lack of funding will disproportionately impact California.

California has provided billions in tax credits to semiconductor companies doing research and development, including Applied Materials, Santa Clara-based NVIDIA and Fremont-based Lam Research.

“We must not only build more domestic chip manufacturing capacity, but also maintain and extend R&D leadership in the foundational technologies that define how future chips will be made,” Ricky Gradwohl, a spokesperson for Applied Materials, said in a statement. “Applied Materials encourages the Administration and Congress to find a path forward to fund commercial semiconductor R&D and fulfill the promise of the CHIPS Act.”

The Santa Clara-based Applied Materials announced plans in May 2023 to build a new facility for semiconductor research and development that would create up to 2,000 new engineering jobs and potentially 11,000 jobs in other industries. The facility’s purpose is to reduce the time to bring a new semiconductor technology to market and increase the success of new innovations, Applied Materials said.

Vice President Kamala Harris visited one of the company’s facilities on the day that announcement was made and attributed the new facility to financial incentives from the federal government. “To build a better future, we must continue that leadership to make sure America’s innovators have the support they need to design and build better semiconductors,” she said in remarks during the visit.

The company said the scale of its investment, however, was “contingent upon receiving support from the U.S. government through provisions of the CHIPS and Science Act.”

A source familiar with the project, to whom the Chronicle granted anonymity because of the sensitivity of the subject, said the lack of federal funding for Applied Material’s planned facility puts that investment at risk. Another source familiar with the project said the company is considering moving the facility out of California because of the lack of funding.

The Commerce Department still plans to spend $11 billion to directly fund manufacturing of semiconductors, but companies that don’t plan to make the devices, like Applied Materials, will no longer be eligible for grants or loans. Companies that manufacture semiconductors can use the funding for facilities that will conduct research and development at the same location.

The Commerce Department considered distributing the cuts across the programs rather than cutting only the research program, a move Padilla urged them to take, Oswald said.

The federal semiconductor program has received more requests for funding than it has available, according to the Commerce Department. The agency said it’s confident that its existing projects will support semiconductor research and development.

The amount of the planned research and development funding was never disclosed, but Reuters reported it could have been at least $2.5 billion.

Congress is currently working on fiscal year 2025 appropriations and Padilla is trying to return some of the money to the R&D program, but it’s uncertain whether that will happen.

In the meantime, Padilla and Rep. Zoe Lofgren, who chairs the California Democratic Congressional Delegation, plan to push the Biden administration to locate a planned public-private consortium for semiconductor research and development in the state.

Applied is currently under criminal investigation by the Justice Department and Securities and Exchange Commission for allegedly sending equipment to China’s top chipmaker SMIC without export licenses, according to Reuters.

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