ASML Business Profile & The Semi-Conductor Industry | Bloody Good Business
ASML. You’d be forgiven for not having heard of this little Dutch outfit before, because it is the case that they have only until recently, and especially considering their global significance, kept a distinctly low profile.
But a new and growing attention has been fixed upon the global semiconductor market amid supply chain concerns brought on by a myriad of 2020/2021 geopolitical issues. And such as, according to the aligned incentives of the financial analyst, tonnes of research on the industry has been turned over, sifted, and re-examined for parts. From all this, ASML has shone through as one of the most interesting, undervalued and important variables to what is proving to be a rather fragile semiconductor industry.
A calendar year reversed from today (20/11/2021), has seen the ASML stock price chart a 102.36% increase. This year in reverse also corresponds with no new products or significant innovation, and so therefore it’s safe to conclude that this newly accumulated value is simply the bi-product of more attention for ASML. From a value perspective, they were clearly trading at a very sizeable discount beforehand, with their EUV machine having already been priced in.
But what is this company? And what role do they play in the global market for microchips/semi-conductors?
ASML are so much more than a stock price and far more than an investment people might use to signal. ASML are in fact exceptional across several domains.
ASML and their technological innovations position them as one of the most fundamental companies to explain how modernity has evolved.
What To Expect In This Business Profile Of ASML
- How An Overabundance Of Technology Is Foundational To Our Manufactured Modernity.
- Moore’s Law & The Power Of Exponential.
- Profiling ASML & The Basics Of The Semiconductor.
- A Bit On The Geopolitics Of ASML & The Semiconductor.
I Visited ASML & Interviewed Jos Benchsop – VP Of Technology | Listen To The Podcast 🎙️
How These Dutch Contribute To The First Principles Of Modernity
What can the relationship between semi-conductors and the bedrock of modernity do to emphasise the significance of this unlikely Dutch behemoth, ASML?
You can hear the reverbs of Elon Musk, Naval Ravikant, Peter Thiel and more of these luminary types who encourage us to ‘think more about first principles‘. What is the ground floor of a concept, an issue? What obligatory levels must we pass through before we arrive at our destination?
In the spirit of first principles, here is a perplexing, if not altogether absurd question… what might be the first principles of modernity, our modern society?
Not so obvious. There are certainly contenders. Democratic values (boring), the flattening of both intra and cross-cultural hierarchies (perhaps). But are these the first principles? Or is it rather something deeper itself that is in fact driving these changes?
I think rather closer to the answer is our historically unprecedented, overabundance of connectivity. Too much connection. Everywhere.
Connection to each other, connection to the news, connection to random people in an algorithm. Connection to events outside of your life, superficial connections, connection to the most successful people in your field, connection to those you admire, connection to those you don’t… the realisation that you might never achieve what everyone seemingly already has…
This abundance of connectivity is, I think, a first principle of modernity. It is this ingredient, like the flour in bread, that mixes the texture of our modern world.
And without ASML, things would look a hell of a lot different.
But What About The First Principle Of Connectivity?
Whether you agree with my take or sit somewhere else on the spectrum, one thing for certain is that this abundant connectivity imprints an unmistakable indent on all of our lives.
And what makes this possible? Semiconductor enabled devices.
It is from the ever cheapening, and ever-improving availability of smart devices that the incentive to enable connectivity grows.
As Moore’s Law compounds, connectivity thrives. Every time a phone’s functionality supports the creation of the next Instagram(x), the overflowing cup of connectivity fills on.
But before I introduce ASML – this little slice of Dutch brilliance – I want to first preface their significance as a company by explaining both Moore’s Law and the power of exponential.
Forgive me if this seems tedious, if you are already across both of these, then please skip ahead a few paragraphs. An Introduction To ASML.
But First Moore’s Law… Isn’t That From Interstellar?
Thankfully no, we can hopefully avoid Murphy’s Law promise of disaster here.
Moore’s Law is another thing entirely. It is the promise that ‘computing power’ will double every 48 months or 2 years. Memory, processing speed, sophistication – everything internal that you prefer on your latest iPhone is the consequence of an exponentially improving microchip/semi-conductor. This in combination with better hardware (phones, computers, etc) is the end result ‘computing power’ that Moore’s Law promises.
It is not a law of physics or math, or anything of the natural world but rather a forward projection of a historical trend. There is nothing stopping the gods of randomness, or complexity, to throw a wall up to this progress – stopping everything in its tracks. But so far, every time 48 months elapse, and the transistors on a microchip double and so continues the prediction of Moore’s Law.
Also, just for good measure, it’s important to emphasise that the complexity to replicate this feat is not a 2% increase, but rather, an increase of 100%.
The process of improvement is non-linear, it’s exponential. This is a trick of mathematical language and reminds me of Nassim Taleb’s quote on percentage changes.
“The difference between 2% and 3% isn’t 1%, it’s 50%”Nassim Taleb
Similar to the language explaining how chip complexity doubles every 48 months. Complex systems operate on a scale not readily available to interpret through the language of letters.
And such is the nature of things that compound, they can get out of hand pre-tty quickly.
Understanding The Power Of Exponential
Paper To The Moon! An Exponential School Experiment
Supposedly, although as I look out my window I cannot fathom how this is true, it only takes 42 folds of your standard paper (presumably Dundler Mifflin stock), to reach the moon.
Each fold is 100% (double) more than the thickness of the previous. Apparently, 42 iterations will travel your standard piece of paper, 0.001cm thick, the entire 384,400km journey from Earth to the Moon.
We are all familiar with this ‘hockey stick’ graph below, especially since Covid-19 was branded onto our consciousness, but the key here is to notice just how quickly things escalated. For the majority of the iterations, change seemed insignificant at scale.
I wonder where we are along with Moore’s Law – is change still insignificant at scale? Or have we started going vertical?
The Wheat Swindler | A Classic Story Of Exponential
This is my favourite story that encapsulates the power of exponential.
The origins are up for debate, and although the details are simply aesthetic, across all renditions the lesson is unanimous.
Be extremely cautious of the exponential function.
Rather than cold hard cash and gold, the inventor of Chess requests that his ruler pays him for his brilliant board game with grains of wheat. He proposes that they start with 1 grain in the first square of the chessboard, 2 in the second, 4 in the third and continue to double along until the board is filled.
The ruler laughs at this request for such a low price and quickly agrees to pay. It is only when the ruler’s treasurer intervenes, however, that he realises he has agreed to pay more than all the value his kingdom could ever offer.
Because if you exponentially increase the grains of wheat 64 times along the squares of a chessboard, starting with 1 grain, buy square 64 you have 18,446,744,073,709,551,615 grains of wheat. Which is, needless to say, a shitonne of wheat.
This figure is so large in fact, that it is supposedly 2000 times the global, annual wheat production in 2020.
So, naturally, the inventor of Chess was executed. That’s one way to get out of debt.
The Implications Of Moore’s Law
As Moore’s law profligates, connectivity thrives. Between 1956 and 2015, computing power increased one trillion-fold. The power of exponential.
What are some of the downstream consequences of 48 months interluded exponential increase to computing output?
- The previous model get’s cheaper. When the 2020 model has (x) functionality, the 2018 model all of a sudden seems inferior. This is reflected by price. Cheaper price allows more entrants into the market. More devices, more users, the incentive compounds. We are left with the foundational principle to modernity… more connectivity.
- The developers who are making the applications and software are given permission to ‘think bigger’. Better apps lead to better developers. Better developers lead to serendipitous innovation. Serendipitous innovation leads to… who knows?
- AI, robotics, biotech, automation, all of these segments of the tech industry are served better by more computing power. The power of the 2021 model was a dream of the 2010. Your guess is as good as mine what a 2051 mobile phone chip will be able to achieve.
If the phone sitting next to me on the table has more processing power than the computers that landed a spacecraft on the moon… what limitation of the imagination frames our future?
It is all made possible by the chip computing power. And so, as I was quoted by an ASML employee…
“There are various ways to keep up Moore’s Law and we provide one of those”.ASML Employee
ASML At A Glance – From Rural Netherlands To Every Corner Of The Globe
All the major chip makers use ASML technology. They are integral to this first principle of connectivity I am playing around with.
ASML manufacture complex lithography systems critical to the production of microchips. What is lithography? Quite simply an act of complexity that can be defined by this author, but so far not understood.
It is using light to print tiny patterns on silicon. Allow me to briefly cheapen what ASML have created – they have engineered a very fancy printer. But rather than ink on paper, they print light onto silicon.
Who ASML are in the semiconductor supply chain is the supplier to chipmakers (TSMC, Samsung, etc) with everything they need – the hardware, software and services – to mass-produce billions of microchips. And it is crucial to note that last part, ‘mass produce‘ that makes ASML the behemoth it is. Because although the engineering feat to print light onto silicon is remarkable, it is not applicable unless it can be achieved at scale. Price determines everything. The more chips you can produce per hour, the cheaper they ultimately become. The cheaper the chip, the more incentive there is to innovate the hardware that supports it. In a cycle of production that co-mingles, a cheap microchip is the core of it all functioning.
ASML ($ASML), boast 30,000 employees and in 2020 earned €14,000,000,000,000 in sales. That’s billion. They are situated in the sleepy outskirts of Eindhoven in a small town called Veldhoven, but more on Veldhoven at the end…
The Basics Of The Microchip – What Is It?
Microchips are everywhere. In 2019, more than 634 billion chips were manufactured around the world, feeding a €412 billion industry. By delivering new functionalities, better performance and lower cost with each generation, advances in chips have spawned new products and transformed industries.
ASML describe a microchip as a set of electronic circuits on a small flat piece of silicon. On the chip, transistors act as miniature electrical switches that can turn a current on or off. The pattern of tiny switches is created on the silicon wafer by adding and removing materials to form a multilayered latticework of interconnected shapes.
If your anything like me, that started off making sense and then trailed off into disillusionment.
Silicon is the molecule of choice because it is a ‘semiconductor’, meaning that its conductive properties can be increased by mixing it with other materials such as phosphorus or boron. This makes it possible to turn an electrical current on or off.
It is a race of scale. A microchip the size of your fingernail contains billions of transistors, so it’s easy to understand just how small the features on a chip need to be. Chip features are measured in nanometers. A nanometer is one billionth of a meter, or if you’re like me, and that’s impossible to conceptualise – look at your fingernail for three seconds… it just grew 10 nanometers.
For comparison, a human red blood cell is 7,000 nanometers in diameter, and the average virus is 14 nanometers. The smallest structures on the most advanced chips are currently 10 nanometers. ASML’s EUV technology enables the scale of the smallest feature to be reduced even further. The smaller the features in the patterns that our systems can create, the more transistors manufacturers can fit on a chip, and the more the chip can do.
This is the forcing function of Moore’s Law – but how small can it get? Presumably, you get down to the size of an atom and then we call it quits there, but who’s to say that should be the limitation?
The Two Types Of Chips
Logic chips are the ‘brains’ of electronic devices – they process information to complete a task. Among Logic chips, Central Processing Units, (CPU) are the ‘original’ chips, first designed in the 1960s. But there are also processors with specific functionality in mind, such as Graphical Processing Units, (GPU) and Neural Processing Units (NPU).
Memory chips store information. There are two types of Memory chips: Dynamic Random Access Memory (DRAM), which are the ‘working memory’ chips that only save data while the device’s power is turned on, and NAND Flash, which save data even after the device is turned off.
What The Increases To Computing Power Looks Like
It is in the improvements to the microchip/semi-conductor that the incredible increase in computing power has allowed technology to develop to where it is today. Between 1956 and 2015, computing power increased one trillion-fold, thanks to chips.
The Apollo mission operated on the power of about two Nintendo N64’s. It had 32.768 bits of RAM and 589.824 bits of ROM. A modern smartphone has around 100,000 times as much processing power, with about a million times more RAM and seven million times more ROM! And just imagine how much further this is going to go!
How Geopolitics Ripples The Semiconductor Industry
The geopolitics of the semiconductor market has heated to a boil in 2021 because of the inevitable convergence of two unrelated variables.
1 – There are significant barriers to entering the market as a producer of semiconductors. High capital requirements upfront compounded by an extreme lack of competition means there are no cost-effective ways to compete with the big dogs.
2 – Given these impassable barriers to entry, production of these microchips is restricted to a small handful of legacy companies, most significantly in Asia. Therefore, should there be some inevitable disruption to just one of these companies, supply chains become affected, and then millions of companies around the world who rely on a myriad of chips for all types of product functionality are thrown headfirst from their product-to-market roadmap.
Barriers To Entering The Industry
Semiconductors are not plug and play operations. They require the acquisition of extremely rare and high demand talent, billions and billions of dollars of sunk cost investment and adept management of one of the most sophisticated supply chains in the world.
This is largely because the historic Samsung, TSMC duopoly has driven the economies of scale to the point where incumbents cannot feasibly add enough value to justify the razor-thin margins. There is not a wide enough range of competition to offer potential incumbents optionality. They must go with ASML products, and then they must invest billions of dollars in time and energy to getting production to the market’s ever rising standards.
These are the barriers at the manufacturing end, but what about barriers to entry as a competitor to ASML?
The high end of lithography is an even less likely space for new market incumbents. Jos and his team have cornered the market to the point of monopoly at the highest end of lithography manufacturing. To simply build on top of, or even replicate the EUV machine would mean you would have to equal the construction of what is one of the most complex machines ever designed by humans. There are just some industries that are too difficult to disrupt. Disruption will only come at the hands of an exceptional outlier, and of this, it is yet to be seen who is capable.
Supply Chain Fragility
TSMC are the worlds premier chip manufacturer. They famously boast clients the likes of Apple, Intel, Qualcomm, Nvidia and more. They also, famously, are the economic lifeblood of a small, and sovereign according to this author, island nation called Taiwan.
Samsung on the other hand, playing second fiddle, are the cornerstone to the South Korean thriving hub of technology.
Both these companies and nations rely on the predictably steady trade flows that has been the story of international trade for the past 30 years, or Peter Ziehan’s ‘global order’, as he has referred it. Recent years have seen copious chat of the ‘trade war’ taking place between the US and China. The repercussions of which, as well as Covid-19 calling into question a continued reliance on the Chinese supply chain, has brought disorder to the manufacturing reliability of both TSMC and Samsung. Who are, whether they like it or not, far too reliant on Chinese inputs across many steps of the process.
Furthermore, TSMC is technically the sovereign of China, which therefore clearly has far flung implications considering the context of China-US, China-Europe, China-The Rest trade considerations.
And this is not even to mention a potential silicon shortage (although Jos vehemently disagreed with me on this point).
Ultimately, millions of companies are relying on their most valuable input component coming from two key manufacturers. Our economy relies on the steady flow of exponentially improving microchips. The significance of this fragile reality weighs down heavy on the semiconductor supply chain.
ASML & Veldhoven
To describe Veldhoven as a ‘sleepy town’ would overemphasise just how quiet this small village is. Jos said it so himself, joking how it’s not a good sign when the best thing you can say to some prospecting a move is just how, ‘good to raise a family’, the town might be.
Eindhoven and the surrounding area was completely blown to smithereens by the Nazi’s in WWII and so consequently left this levelled area to be rebuilt in the years following by the extremely functional, but not so inspiring hands of a number of Dutch architects.
But it is from Eindhoven that Phillips was born and then from Phillips where ASML was inseminated. Therefore rather than moving north to the international Amsterdam, they kept it Dutch and started to build facilities just down the road.
Today, Veldhoven is ASML. The various buildings that makeup the ASML facility gives you the sense you are on a university campus. It all happens there. Thousands of employees flock in and out every day. There is a nostalgic family vibe to the entire experience. I shared lunch with some ASML employees in a mess hall packed with hundreds of other voices. People from all over the world too. I saw plenty of Indians, Pakistanis, presumably Sri Lankans and Bangladeshis as well, Europeans of every flavour, Latinos, Asians from top to bottom, but a distinct lack of Australians. I suppose we aren’t brainy enough to rub shoulders with these lot, since after all to work at ASML puts you at the tail end distribution for smarts.
ASML Call To Action
These distinguished ladies and gentlemen are working on the hardest engineering problems in the world. From the science of manipulating light down to predictive analytics at the cutting edge of software. I suppose when you are given a chance to leave your mark on the world – everything else outside of that pursuit is just details.
Community pulsates through the town, and although it’s not the magic of Silicon Valley, the fun of London or the thrill of New York, Veldhoven might be one of the most interesting places to be in the world right now.
ASML are working on exponential shrink. They are enveloped in some of the hardest scientific and engineering problems in the world. From supply chain management, to mechanics, to software and a hundred areas in between. They are working on the hardest problems.
If ASML can continue to jam more transistors onto a microchip the type of applications that can bare out on the real world for you and me is boundless. Better computing power = more technical innovations.
ASML and their customers might have enabled the smartphone revolution, which brought us the overabundance connectivity, but who’s to say what’s next?
As Jos said…
We cannot say what the chips of the future will enable, all we can do is continue to build the field of dreams.Jos Benschop
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