High-end semiconductor manufacturing, the technology underlying AI development, is a closely connected industry. Engineering and design of advanced computer chips is dominated by American technology companies such as Nvidia and Intel. Taiwanese giant TSMC has a near monopoly on the actual manufacturing of chips developed in the United States, producing 92% of the world's advanced chips in its own factories.
And then there's ASML. Founded in 1984 in the Netherlands, this little-known company dominates a unique niche: manufacturing and selling high-end, highly specialized machinery used by TSMC and other foundries to manufacture and package semiconductors. It is true. ASML may not get as much buzz as other chip companies, but it's an important part of the semiconductor supply chain, and the $362 billion company stands to profit hugely from his AI boom.
“At a high level, ASML is in a very good position,” said Michelle Brophy, research director for technology, media and communications at research platform AlphaSense. luck. “I don't bet against ASML.”
However, the path is not without its challenges. ASML has been caught in the political crossfire of a semiconductor arms race between the United States and China, with its stock price falling after lower-than-expected sales numbers reported this week. But ASML is poised to benefit as new chip manufacturing facilities begin operating in the U.S. thanks to subsidies from the CHIPS Act.
Semiconductor manufacturing is a highly technical process that requires specialized equipment and a skilled workforce to design and build ever smaller and more powerful computer chips. From the 1950s to the 1990s, it was common for chipmakers such as Intel to control every step of the process, from design to manufacturing. But as engineers started inventing smaller, more powerful chips, the business model shifted to specialized companies focused on a single part of the process.
Currently, only a few niche companies dominate the global supply chain for advanced chips. Although Nvidia focuses only on design and not manufacturing, it currently designs more than 90% of the chips used for AI development. TSMC has almost a monopoly over the physical production of AI chips, as it does not design it in-house and only receives orders for manufacturing at its own factories.
And ASML probably has the deepest niche of them all. That is, TSMC has exclusive ownership of the highly specialized equipment used in its factories.
The most important tool in advanced chip manufacturing is the extreme ultraviolet (EUV) lithography machine. High-end, powerful chips used for AI are manufactured by using EUV lithography machines to etch microscopic designs onto ultra-thin silicon wafers, which are then stacked and bonded into chips.
“If you look at the gang box, when you walk in the door, you press one switch and the fan comes on, you press one switch and the light comes on, you press one switch and the other light comes on.The wall. There's a copper wire behind it. [the same principle as] Semiconductors,” said Mike Russo, president and CEO of the National Institute of Innovation and Technology. luck. “With ASML doing his EUV, we were able to get features down to 50,000 times smaller than a hair. Instead of copper wire on the wall, we were able to increase the amount of wire actually placed on one layer of the chip. Please think about it.”
EUV lithography machines cost hundreds of millions of dollars, and ASML is the only company on the planet that manufactures EUV lithography machines. Each machine contains over 100,000 parts and is so large that it requires three jumbo jets to transport. The cost and complexity of ASML's business helps protect it from competition.
“The tools are very expensive,” Russo said. “The cost of his new EUV tool at ASML is probably $250 million. One tool.”
Despite Chief Executive Officer Peter Wennink's assurances to investors that the decline in sales was temporary and that the company was expecting strong numbers for the second half of 2016, forecasts Investors gave ASML a setback on Wednesday after its stock price fell about 7% on lower order volume. Year. But Brophy said the exit was likely a factor of investors' astronomical expectations for companies in the AI space rather than a serious threat to ASML's business.
“In my opinion, this regime is not very good for AI companies because they are set up to strive for perfection, and if they are disappointed with the numbers it will cause a negative reaction,” Brophy said. said. “I really don't see any long-term problems with the business.”
One source of investor concern, and potential threat to ASML's business going forward, is that ASML is being placed in the middle of an ongoing competition between the United States, Europe, and China for semiconductor production supremacy. This is the position I am in.
In 2022, the Biden administration announced export controls that would prevent U.S. chip designers such as Nvidia from sharing their cutting-edge designs with Chinese manufacturers. As China seeks to develop domestic chip manufacturing capacity and move away from dependence on Western chip designers and Taiwanese foundries, U.S. authorities have also ordered the Dutch government and ASML to restrict sales to China. It is pressuring Chinese companies to stop providing maintenance services. China was ASML's biggest market last year, generating about a third of its revenue.
In January, Chinese Foreign Ministry spokesperson Wang Wenbin said, “China always opposes the United States overextending the concept of national security and using various excuses to force other countries to impose a technical blockade against China.'' ” he said.
Brophy said the potential for escalation between the US and China on semiconductor policy would impact not only ASML but the entire chip market.
“Overall, does it pose a risk? It does,” Brophy said. “This is not an ASML risk, this is an overall demand risk…I think a major escalation between the two countries will impact the demand situation in the long term.”
Despite China, ASML expects an upturn next year. CFO Roger Dersen predicted that “the industry will recover in 2024 and…2025 will be a stronger year.” Much of that optimism is driven by a number of new U.S. semiconductor manufacturing facilities, or fabs, being rolled out with the help of funding from CHIPS and the Science Act, which could offset revenue losses in China. there is a possibility.
In recent weeks, the Department of Commerce announced more than $20 billion in grants for new fabs from TSMC, Intel, and Samsung. This will likely mean a steady stream of orders for ASML's equipment, which is essential to manufacturing the advanced AI chips that the Biden administration is keen to bring domestically.
“If one customer were to drop out, which I don't think will happen, there are so many projects going on right now that another customer would be lined up to take their place.” said Brophy. “Her CHIPS Act in the United States has already given him $12 billion in subsidies. [TSMC] Another $6 billion was paid to Samsung alone, and Intel was included there.They're all building factories in the U.S. But remember: [other] Geography like Japan—[TSMC] It has already invested more than $20 billion in facilities there. ”
ASML enjoys a dominant position in a highly specialized niche market with almost complete protection from competition. Current chief business officer Christophe Fouquet will have a big task when he takes over as CEO later this month — his predecessor oversaw a 1,400% rise in the company's stock price. But overall, the outlook is good. AI's insatiable demand for advanced chips and ASML's near-insurmountable lead in the equipment space are huge tailwinds that show no signs of slowing down.
