Europe’s role in the US-China semiconductor showdown

ASML Holding NV, where Van den Brink is now the chief technology officer, practically owns the market for a critical piece of equipment needed to produce the brains of everything that makes modern life possible — from cars and smartphones to computers, microwaves and airplanes. With the company’s high-end machines churning out chips that can also go into state-of-the-art weapons and artificial intelligence devices, ASML is effectively being treated as critical infrastructure for US national security and has become a target of industrial espionage for China.

“I never expected to be where we are today,” said Van den Brink.

Over his nearly four decades at the company, ASML has gone from a bit player competing with the likes of Nikon, Canon and Ultratech to the world’s only maker of very high-end semiconductor lithography equipment. Its ascent has made it Europe’s most valuable technology company, with a market capitalization of over $247 billion—more than twice that of its customer Intel Corp. In an industry where devices typically cost $10 million, ASML commands about $180 million for its current top-end machine. And although the chip market has softened recently, ASML is still growing and its long-term outlook seems intact, thanks to the insatiable demand for computing power.

“This is a company that the world can’t exist without,” said Jon Bathgate, a fund manager at NZS Capital LLC in Denver, which has about $2 billion under management, with ASML as one of its biggest holdings. “They’ve got a 20-year head start… Investors have clearly realized how important ASML is as a company and how difficult it would be to replicate. It’s a natural monopoly with secular growth winds. That’s unique.”

As chips become for geopolitics in the 21st century what oil was in the last one, ASML’s singular success has thrust it squarely in the crosshairs of the intensifying tensions between the US and China. With the US focused on the strategic importance of semiconductors, Presidents Donald Trump and Joe Biden have done everything to ensure that China is a couple of generations behind in chips. No company is more critical to that effort than ASML.

“Most people in industry and government believe that lithography tools are the strongest of the choke points that Western governments have put in place,” said Chris Miller, an associate professor of international history at Tufts University and the author of Chip War. “Because of that, there’s been intense focus” on ASML.

Cementing the lead

Barred from selling many of its top-end machines in China, and a victim of data thefts, ASML is doing the only thing it can to preserve its almost insurmountable lead: building evermore sophisticated machines. Its next contraption, about the size of an Amsterdam studio apartment, is set to hit markets in 2025. With a price tag of more than $380 million—costlier than a Boeing 787 Dreamliner—it will be capable of etching delicate patterns on silicon wafers smaller than a virus. Already way ahead of rivals, ASML is making sure no one can do what it does for the foreseeable future. Its only real hurdle will be technological limits—building machines that are viable and economical for mass production.

“Even if someone is able to catch up with where we are today, we will make sure that in 10 years we are operating in a completely different paradigm,” Roger Dassen, the company’s chief financial officer, said in an interview. “That’s the best way we can protect our position… So you can catch up with where we are today, but we will be at a different place by then.”

In 2019, under pressure from the Trump administration, the Dutch government withheld an export license enabling ASML to sell its top-of-the-line extreme ultraviolet, or EUV, lithography machines to SMIC, China’s main semiconductor foundry. Then, pushed by the Biden administration, the Netherlands tightened the screws further. Its March plan for additional restrictions would rein in exports of more advanced versions of ASML’s older immersion deep ultraviolet, or DUV, lithography machines that can be used with other technologies to make powerful chips for dual civil and military use.

“The business risk for ASML strongly depends on two things: First, whether there will be a ban on a certain DUV equipment type, for example, the most advanced one, or if in the future, there will be a full DUV ban, which would have a much more severe impact,” said Julia Hess, project manager at Stiftung Neue Verantwortung, a German think tank. “Second, how the controls will be aligned with countries that have competing companies, such as Japan.”

The China blockade

China is working on building its own semiconductor industry, pouring billions into a chip-building initiative to catch up to the US. Its purchase of older technology has boosted earnings for much of the semiconductor equipment sector. The Asian giant, which a decade ago was a rounding error for ASML, was its third-biggest market behind Taiwan and South Korea in 2022, accounting for about 15% of revenue.

Not being able to sell more powerful equipment in China may become a drag on growth in the future, but for now ASML can barely keep up with its non-China demand, and says the bans have “no material effect.” Its backlog is almost twice its annual revenue, and its biggest customer Taiwan Semiconductor Manufacturing Corp. isn’t cutting capital expenditure. Also, the US and Europe have unveiled plans to invest about $100 billion in the chip industry.

But ASML chief executive officer Peter Wennink still believes the China blockade is a mistake, saying it will hasten that country’s efforts to develop its own chip equipment.

“If they cannot get those machines, they will develop them themselves,” he said in an interview. “That will take time, but ultimately they will get there… The more you put them under pressure, the more likely it is that they will double up their efforts.”

Some Chinese individuals and entities have resorted to stealing ASML technology. The company, with about 1,500 people in China, disclosed in February that a former employee had taken some technical information. Last year, it accused a Beijing-based firm, regarded by Chinese officials as one of the country’s most promising tech ventures, of potentially stealing its trade secrets.

ASML argued in a 2018 trial in California that Dongfang Jingyuan Electron Ltd. and defunct Silicon Valley firm Xtal were created a month apart in 2014 by a former employee named Zongchang Yu with the express purpose of stealing and transferring its technology to China. Yu now runs Dongfang in Beijing with ample support from the Chinese government, according to company statements and other Chinese documents.

Protecting IP

The case prompted ASML to protect its intellectual property more fiercely than even before. Its information security staff rose 20% from 2021 to 300. It created a “circle of trust” to train suppliers on cybersecurity risks and keeps tabs on any potential reverse engineering of its machines.

CFO Dassen also points to the futility of attempts to steal the company’s technology. With 5,000 suppliers of everything from software to tin and tungsten and strategic partnerships with companies like Carl Zeiss AG, which makes its critical multilayer mirrors, ASML runs a global ecosystem that would be difficult to match, he notes.

“A lot of ASML’s technology is not on blueprints,” he said. “It’s in the heads of people. And you don’t need just the blueprints; you need everything surrounding it and the entire supply chain. You have to build an alternative Zeiss, etc. That is a colossal task. You’re not talking about months or years. You’re talking about a decade or more before you could replicate something like this.”

A peek at how the company—based in a country better known for its canals, bicycles and cannabis-selling coffee shops—has cobbled together a vast, global ecosystem shows why there are no easy workarounds to ASML for China.

“You cannot do it all,” said Van den Brink in a written response to questions, alluding to the company’s targeted acquisitions and partnerships. “You have to do the things that you’re good at. And work with other parties that are better in something than you could ever be. And then you can bring the best from yourself and the best from those around you together.”

The technology

Headquartered in the tidy small town of Veldhoven in the Netherlands’s industrial heartland, ASML was all but written off a few decades ago as a bottomless pit for Philips, the Dutch conglomerate from which it was spun off. It struggled in the 1980s to find buyers for its equipment. Its 1995 initial public offering gave it the funds it needed for research, and a breakthrough in DUV lithography machines boosted its market share to nearly 50% in the early 2000s. Then, a moonshot development took it to a whole new level: EUV lithography.

A US government-led EUV consortium had roped in ASML to see how marketable the technology was. Making a huge bet on EUV, something its rivals balked at, the company focused efforts over the next two decades on bringing it out of the lab and into saleable machines. It worked with scientists from three US labs, got equity investments from Intel, TSMC and Samsung Electronics Co. in an unprecedented market collaboration, acquired some key US companies like Cymer and HMI, and signed up hundreds of suppliers across the globe. By 2018, it was ready to mass-produce EUV machines, and by 2021, it owned more than 90% of the $17.1 billion global market for lithography equipment.

EUV lithography uses light of a shorter wavelength to allow chipmakers to cram exponentially higher numbers of transistors into integrated circuits to make powerful chips. The gigantic EUV machine, about the size of a school bus when fully assembled at a customer’s site, takes three to four Boeing 747s to deliver. Weighing 180 metric tonnes, it consists of more than 100,000 parts, 3,000 cables and 40,000 screws, and requires more than 2 kms of hoses.

The kingmaker

As the world’s only maker of such machines, ASML has left its rivals in the dust and shown how difficult it would be for a potential Chinese competitor to emerge.

“It’s not even remotely possible” for anyone to catch up with ASML anytime soon, said Douglas O’Laughlin, an analyst at Fabricated Knowledge, an industry newsletter. “There is the potential for some kind of inflection that we’re not privy to right now. But all the people who would know how to do it probably work for ASML.”

Access to ASML’s most advanced machines has dictated which companies succeed in the industry. Intel, which was slow to adopt EUV machines, fell off its perch as the world’s largest chipmaker last year after holding that spot for close to 30 years. TSMC, which took advantage of the new technology more quickly and is ASML’s biggest customer, is on course for that title this year, according to analysts’ projections, overtaking Samsung and relegating the US company to the third spot.

As of the end of 2022, ASML had delivered 180 EUV systems. It plans to ship 60 EUVs this year, and wants to boost manufacturing capacity so it can almost double the number of the older DUV systems it produces to 600 by 2026. It also wants to build by 2030 as many as 30 of its next machine, dubbed high-NA EUV, which are slated for high-volume chip manufacturing in about two years.

Semiconductor makers are keen to buy this newest machine because many emerging technologies require chips that are more powerful than the ones currently available, said Dylan Patel, chief analyst and founder of SemiAnalysis, an industry research and consulting firm. Features like Apple Inc.’s augmented reality headsets with high-density and long-lasting batteries or servers that could someday run the AI tool ChatGPT-7 are “just not possible with current technology,” he said. “high-NA EUV very well could be the thing that unlocks that.”

That said, not everyone is convinced the transition to these increasingly complex machines will be smooth. For all the “respect and admiration” he has for ASML, the difficulties chipmakers are likely to encounter are not evident in the company’s stellar share price increase, says Timm Schulze-Melander at Redburn in London, who is the only analyst tracked by Bloomberg with a “sell” rating on ASML shares.

“High-NA EUV has big technical as well as economic challenges that the consensus is not reflecting,” he said. “Even for existing EUV lithography, it’s worth remembering that the technology is difficult to run in high-volume manufacturing. Despite the hype, today only three chipmakers — TSMC, Samsung and SK Hynix—currently deliver chips made with EUV lithography.”

So how far can ASML economically take its miniaturizing technology? That’s the big question — more than the fear of a Chinese entity catching up with ASML. Even within the company, some worry that it is technology that will eventually limit the company.

“The big long-term risk is that new lithography systems are too costly and unwieldy to produce,” said Chip War author Miller. “ASML will bring its high-NA systems online, but the generation after that, hyper-NA, is still in development. Some ASML staff have speculated it may be too difficult to mass-produce.”