How ASML became chipmaking’s biggest monopoly

economist.com/business/2020/02/29/how-asml-became-chipmakings-biggest-monopoly

29 February 2020

Feb 27th 2020 edition

A low-key Dutch company has cornered a critical link in the global

electronics supply chain

ASK PEOPLE to pinpoint the centre of the digital economy and many will finger Silicon
Valley, populated by Apple, Google, Facebook and too many sexy startups to count.
Others may nod at the area around Seattle, where Amazon and Microsoft are based. Some
could suggest Shenzhen, China’s technology hub. Few would point to a nondescript
suburb of Eindhoven, the Netherlands’ fifth-biggest city. Yet on closer inspection, the case
for Veldhoven looks compelling. It is home to ASML, the world’s sole manufacturer of the
most advanced equipment critical to modern chipmaking. If chips make the world go
round, ASML may be the closest the multi-trillion-dollar global tech industry has to a
linchpin.

ASML is not the only maker of photolithographic machines, which use light to etch
integrated circuits onto silicon wafers. It competes with Canon and Nikon of Japan. But
the Dutch firm’s market share has nearly doubled, to 62%, since 2005. And it alone has
harnessed “extreme ultraviolet” (EUV) light, with wavelengths of just 13.5 nanometres
(billionths of a metre). Shorter wavelengths allow the etching of smaller components—
vital for chipmakers striving to keep pace with Moore’s Law, which posits that the number
of components that can be squeezed into a given area of silicon doubles roughly every two
years. The world’s three leading chipmakers—Intel in America, Samsung in South Korea
and the Taiwan Semiconductor Manufacturing Company (TSMC)—have become as reliant
on ASML’s wares as the rest of the technology industry is on theirs.

The company’s performance reflects this increased dependence. Its revenues grew by 8%
in 2019, to €11.8bn ($13.2bn), despite a slump in the highly cyclical semiconductor
business. Although EUV devices accounted for only 26 of the 229 lithography machines the

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firm sold in 2019, they made up a third of sales by revenue. The firm expects this to rise to
three-quarters by 2025, as other chipmakers upgrade from existing “deep ultraviolet”
technology.

With neither Canon nor Nikon pursuing EUV technology, investors have concluded that
ASML will enjoy its nanoscopic monopoly for a while. Since 2010 its market capitalisation
has grown tenfold, to around €114bn (see chart). It has nearly doubled in the past year
alone. ASML is worth more than Airbus, Siemens or Volkswagen. Its share price has
suffered along with others as covid-19 rattles global markets, but its longer-term outlook
appears as bright as the white-walled cleanrooms where its machines take shape. Its
shares trade at a mouthwatering 32 times forward earnings, double or more those of its
biggest customers.

Times were not always so good. The firm

started life in 1984 as a joint venture
between Philips, a Dutch electronics
giant, and ASM International, which made
semiconductor equipment. Early on it
occupied a few wooden huts on Philips’s
Eindhoven campus. Jos Benschop,
ASML’s technology chief, is candid about
its early troubles. Its first products were
obsolete as soon as they were released, he
says, and the firm struggled to find
customers. It was kept alive by Philips,
itself facing financial difficulties, and by
subsidies from the Dutch government
and the EU’s predecessor.

In 1995 it listed its shares in New York

and Amsterdam. Shortly afterwards the
firm bet that EUV lithography would be the future of chipmaking. Big chipmakers planned
to be using its machines by around 2007. They were to be disappointed—repeatedly. So
were ASML’s shareholders, as the company discovered that EUV light is frustratingly
difficult to work with. Working out the kinks took much longer than expected, admits Mr
Benschop. The firm’s first prototype machines were sent to IMEC, a research institute in
Belgium, in 2006. Commercial clients did not start using the technology until 2018.

Earlier generations of kit employ lasers to produce light directly. But as wavelengths
shrink, things get trickier. Inside a cutting-edge EUV machine 50,000 droplets of molten
tin fall through a chamber at its base each second. A pair of lasers zap every drop, creating
a plasma that in turn releases light of the desired wavelength. The mirrors guiding this
light, made of sandwiched layers of silicon and molybdenum, are ground so precisely that,
if scaled to the size of Germany, they would have no bumps bigger than a millimetre.
Because EUV light is absorbed by almost anything, including air, the process must take
place in a vacuum. To get into the production facilities, your correspondent had to don a
special suit and leave his notebook behind, lest it shed unwanted fibres.

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The machines, weighing 180 tonnes and
the size of a double-decker bus, are
themselves a testament to the electronics
industry’s tangled supply chains. ASML
has around 5,000 suppliers. Carl Zeiss, a
German optics firm, fashions its lenses.
VDL, a Dutch company, makes the robotic
arms that feed wafers into the machine.
The light source comes from Cymer, an
American company bought by ASML in
2013. ASML is, in turn, one of hundreds of
firms that supply the chipmakers
themselves. But it is so vital that Intel,
Samsung and TSMC have all chipped in to
finance its research and development in
return for stakes in the firm.

Appreciation of ASML’s dominant position

has not been confined to customers or investors. Politicians share it, too. EUV lithography
is on the Wassenaar list of “dual-use” technologies that have military as well as civilian
applications. China is keen to foster advanced chipmaking firms of its own, an ambition
that America is trying to thwart. In 2018 ASML received an order for an EUV machine from
a Chinese customer, widely thought to be the Semiconductor Manufacturing International
Corporation, China’s biggest chipmaker, whose factories are currently a couple of
generations behind the state of the art. Under American pressure, the Dutch government
has yet to grant ASML an export licence.

ASML would hate to surrender access to the Chinese market, which is bigger than most and
as captive. Being kept out of China may, in the long run, endanger ASML’s dominance—if it
leads a Chinese rival unable to secure ASML kit to build its own, and sell it to others. Last
April ASML said that six employees, including some Chinese nationals, were involved in
pilfering trade secrets from its American office in 2015. The firm disputes the suggestion
that the theft was linked to the Chinese government.

Right now, though, China needs ASML more than ASML needs it. Of all the suppliers
required for an advanced chip factory of the sort its authorities want built, “ASML’s
technology is the most difficult to replicate”, says Pierre Ferragu, a technology analyst at
New Street Research. Malcolm Penn of Future Horizons, another consultancy, thinks that
it would take a Chinese rival a decade or more to catch up—and by then the cutting edge
would have moved on again. The Dutch are already working on new EUV machines with
better optics, which can process more silicon wafers per hour. These are due to ship in
2023—this time, ASML hopes, with no delays. ■

This article appeared in the Business section of the print edition under the headline
"Industrial light and magic"

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