Semiconductors that are used in military aircraft, drones, missiles, radar systems, artillery systems, and so on have to be more capable compared to COTS ( commercial off the shelf) microchips in different ways:

• They need to perform in a larger range of environments, meaning they have to withstand very high and very low temperatures well, they need to perform in a wide range of altitudes (at least for chips used in missiles, aircraft, and so on), they have to withstand radiation, pressure shocks, and many more. In short, they need to be way more reliable and have to be “hardened” relative to what a normal chip needs to handle. Environments for military use cases can be more extreme, and chips in military systems are more “mission-critical” — if they fail, that’s a much larger problem compared to a smartphone or TV chip failing.

• Chips for military purposes need to be especially secure, due to the same reasons as why they have to be especially reliable. If a smartphone or tablet chip is hacked, that’s a problem, but if chips aboard a military aircraft are hacked, that’s far riskier. Military chips need to be hardened against hacking attacks, and they also need to be secured against sabotage, tampering, and so on. Technologies to achieve these goals include hardware-level encryption, potential self-destruct measures to make sure a foe can’t take chips apart and reverse engineer them, and so on.

• Since military systems are oftentimes in place for many years or even decades, chips in military systems have to be very long-lived and remain reliable for long periods of time — unlike a consumer goods chip, as typical consumer goods are oftentimes thrown away a couple of years after production.

Lot sizes are much smaller compared to COTS chips, which increases costs. The good news is that governments value the properties of military-grade chips, which is why the companies that produce them can demand very high prices, especially since there aren’t many approved manufacturers. The market for chips in defense is worth around $25 billion today and is forecasted to grow continuously for many years.

Winners in the Chips-For-Defense Market

Typical defense companies, like Raytheon (NYSE:RTX), produce military-grade microchips among many other things, but they primarily manufacture defense equipment without a chip/tech focus.

International Business Machines (NASDAQ: IBM) is one of few approved suppliers of microchips for defense purposes (“Trusted Supplier” according to the Department of Defense) and is a tech company that’s active across many different AI-related markets. Its offerings in the defense chip space include mainframes and their chips, hardware security modules, and many more items that are classified.

Investors that are interested in broader exposure to the world of tech and Artificial Intelligence can take a look at our top picks that go beyond the more narrow market for chips in defense contexts.