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ASML: Powering the semiconductor industry

With the tech sector steadily moving towards the 'Everything AI' kind of future, semiconductors will be in great demand in the coming years

Netherlands-based semiconductor company ASML hit the headlines in January 2024 for its lithography machine, which will project nanoscopic chip patterns onto silicon wafers.

Reporting on the development, The Economist reported, “Ten times a second an object shaped like a thick pizza box and holding a silicon wafer takes off three times faster than a manned rocket. For a few milliseconds, it moves at a constant speed before being halted abruptly with astonishing precision—within a single atom of its target. This is not a high-energy physics experiment.”

On January 5th, American semiconductor giant Intel became the first owner of ASML’s latest technical marvel, which it will use for assembling chips at its Oregon factory.

ASML hits a jackpot

As January 2024 passed by, ASML closed at a record high after its orders more than tripled. Order bookings rose to a record €9.19 billion ($9.98 billion) in the fourth quarter from €2.6 billion in July to September 2023, driven by demand for ASML’s most sophisticated chip making machines.

What makes ASML’s presence crucial for the semiconductor industry is that the company is the only one which produces the equipment needed to make the semiconductors.

ASML has also been witnessing record orders for its ultraviolet lithography machines as Intel, Samsung and Taiwan Semiconductor Manufacturing Co (TSMC) are all lining up to induct the tool in their production ranks.

“ASML also benefited from strong demand from China last year (in 2023) as chipmakers there rushed to get lithography machines ahead of Dutch export rules meant to hobble Beijing’s semiconductor ambitions. The rise in Chinese demand helped offset the effects of a global chip industry slowdown on ASML, which is the only producer of the equipment needed to produce most advanced semiconductors,” Bloomberg noted.

China accounted for 39% of ASML’s sales in the fourth quarter and became the Veldhoven-based company’s largest market in 2023.

However, ASML has been targeted by the United States in the latter’s effort to curb exports of cutting-edge technology to China. In 2023 itself, Joe Biden’s administration urged the Netherlands government to prevent ASML from shipping chip making devices to China without a license. US officials also reached out to ASML and gave similar directions to the venture, as per Bloomberg reports.

And as the West keeps on preventing companies from its shores from supplying cutting-edge tech to Beijing, ASML too has fallen in line by restricting its China exports. The venture now expects as much as 15% of its China sales in 2024 to be affected by the new export control measures.

Why ASML is so special?

Apart from its cutting-edge chip making products, the Dutch venture is also known for its market value being quadrupling since 2019, to €260 billion ($285 billion), thereby ensuring that the company stays as Europe’s most valuable technology firm. Between 2012 and 2022, ASML’s sales and net profit both rose roughly four-fold, to €21 billion and €6 billion respectively.

“In late 2023, ASML’s operating margin exceeded 34%, staggering for a hardware business and more than that of Apple, the world’s biggest maker of consumer electronics,” stated the Economist.

You can say that Silicon Valley still leads the innovation race, but none of its innovations will see the daylight if they don’t get powered by cutting-edge semiconductors. That’s where ASML comes in handy, by holding the monopoly over this critical supply chain. And the West needs to be thankful because ASML is a Netherlands-based venture, not a China-based one.

The global semiconductor sales are predicted to double to $1.3 trillion by 2032. However, the US-led Western Bloc will be looking to ensure that Beijing doesn’t get the cherry. So ASML’s business will depend to some extent on geopolitical developments, but to its credit, the company has created a network of suppliers and technology partners across Europe, that itself looks like a well-oiled lucrative industrial vertical.

“Its business model ingeniously combines hardware with software and data. These unsung elements of ASML’s success challenge the notion that the old continent is incapable of developing a successful digital platform,” the Economist commented further.

ASML’s complex machines project chip blueprints onto photosensitive silicon wafers. In 1986, when the Dutch venture delivered its first machinery model, individual transistors measured micrometres and its kit almost looked like a glorified photocopier, states Dutch journalist Marc Hijink.

Jump forward to 2024, with transistors being shrunk by a factor of a thousand, ASML lithography gear has emerged as the most sophisticated equipment ever sold commercially.

ASML and its partners pulled off the shrinking trick through some engineering manoeuvring. It involved powerful lasers incinerating droplets of molten tin, each no thicker than a fifth of a human hair and travelling at over 250kph. The process produces extremely short-wavelength light, which then smoothly gets reflected by a set of mirrors. ASML’s latest lithography gear costs over $300 million and exposes enough semiconductors. The object that holds the silicon wafer (known as a ‘table’) accelerates faster than a rocket and comes to a stop at exactly the right spot.

Entering ASML’s supply network

Economist paid a visit to ASML’s Berlin factory, where the venture makes the ‘mirror blocks’, which serve as the main part of a wafer table.

“These are sturdy pieces of a special ceramic material, a square 8cm thick and measuring about 50cm on each side. Some get polished, measured, repolished, remeasured and so on, for nearly a year—until they are exactly the right shape, including allowances for the fact that they will sag by a few nanometres once installed,” the media house noted further.

The factory’s owner, Berliner Glas, was acquired by ASML in 2020. Berliner Glas, along with 800 other firms (mostly European), helped put together ASML’s machines. ASML owns stakes in only a few of these businesses, meaning most of these ventures operate as independent units, while being part of ASML’s massive manufacturing ecosystem.

ASML outsources over 90% of its manufacturing workloads and directly employs less than half the estimated 100,000 people required for its operations.

This is due to the fact that ASML, during its spin-off in 1984 from the Dutch electronics giant Philips, did not possess its in-house production lines. Since then it has been relying upon specialist component suppliers.

Also, manufacturing the various parts of the lithography machine is cutting-edge in itself. Carrying out all these functions can easily overwhelm ASML. Also, semiconductor economics preaches the decentralisation of the production networks.

In this particular industry, demand moves up and down in the blink of an eye. With the tech sector steadily moving towards the ‘Everything AI’ kind of future, semiconductors will be in great demand in the coming years.

The sector is very much prone to supply chain gluts. So the industry stakeholders are now outsourcing some of the component manufacturing duties to its suppliers, which can limit the fallouts by catering to customers working in different business cycles.

The practice which ASML started in 1984, has now become a phenomenon called ‘Hyper-Specialisation’, which prevents the risk-reducing double sourcing (practice of using two suppliers for a given component, raw material, product or service).

“In the case of ASML, technical demands are so high and production volumes so low (it shipped 317 machines in 2022) that it would be uneconomical to manage several suppliers for a single part even if they could be found. For such crucial components as lasers and mirrors, which are made by Trumpf and Zeiss, two German firms, respectively, it is impossible,” Wayne Allan, who is in charge of sourcing on ASML’s board, told The Economist.

Approaching things smartly

ASML mostly limits itself to designing the architect of its cutting-edge semiconductor-making tools. After that, the venture decides who (suppliers) does what, apart from defining the interfaces between the main parts of its machines (modules) and carrying out the required research and development activities.

This simplified workload helps the venture to test the machine equipment, certify and assemble them, followed by the transportation of the finished products. The suppliers have also been encouraged to experiment with technologies. The whole thing works on two Ts: ‘Trust’ and ‘Transparency’.

Information flows freely throughout the supply chain. As engineering teams from different firms work together, ideas and patents get shared, along with financial data and profits. Also, suppliers engage in healthy competition with each other.

If a supplier runs into operational trouble, ASML proactively intervenes to ease things out. If the trouble is bigger in size, then the venture ends up buying the supplier, as it did with Berliner Glas.

Can anyone challenge ASML?

ASML’s manufacturing ecosystem is something to envy about. It is a loosely coupled structure that ensures the operational autonomy and financial well-being of all the component suppliers. The whole model is well-oiled enough to outperform an entire industrial vertical.

ASML is now trying to consolidate its market dominance by complementing its chip making hardware with software and data. The goal is to further refine the ‘Wafer Table’ in the lithography machines. The process will be performed through data mining and machine learning. In that way, ASML will make itself into some sort of AI venture too.

Of the 5,500 devices ASML has sold since 1984, 95% are still in operation and many even send data back to the venture’s Dutch headquarters. These data then get used to fine-tune the products further, which in turn leads to higher semiconductor production ratios and generates even more data to help digital services like the Internet and Internet of Things (IoTs) to perform stronger.

“If rivals cannot topple ASML, can anything? Maybe physics. Even with the best AI, you can’t shrink transistors forever (certainly not in a commercially viable way). If technical requirements become too otherworldly the supplier network may unravel. Or maybe economics. Chipmakers may recoil at ASML’s data hunger, which extends to other linked devices in their factories. Some are pushing back against its digital expansion, insiders say,” The Economist noted.

“Then there is geopolitics. ASML’s share price dipped after news broke about the cancelled deliveries to China. The worry is less over lower sales; ASML cannot build its machines fast enough anyway. Of greater concern is the risk that strict export controls could in time push China to build its own chipmaking-gear industry. That could one day threaten ASML’s position at the centre of the sector. For the time being, though, the company’s network and its network effects remain indomitable. Who said Europe couldn’t do tech?” it concluded.

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