Plenty of places claim they are Europe’s answer to Silicon Valley: Stockholm boasts the most unicorns per capita, and London is the continent’s VC hub. But only the small Dutch town of Veldhoven—whose population numbers 45,000—is home to the closest thing Europe has to a big tech giant.
From its unassuming base near the Belgian border, ASML, a company that builds the machines that make semiconductor chips, has mushroomed to become a critical cog in the global technology industry. At the end of 2021, it was named Europe’s largest public tech company by market cap, boosted by the pandemic demand for devices and the global chip shortage. Spun out from Dutch electronics giant Philips in 1984, ASML enables other companies to make semiconductor chips—the technological brains in phones, cars, computers, and smart homes. Experts describe ASML as a bottleneck: The company claims it has between 80 and 85 percent share of the total market for lithography systems that make semiconductors. When it comes to the most advanced type of chipmaking lithography machine, known as extreme ultraviolet lithography (EUV), that market share surges to 100 percent.
But despite ASML’s recent momentum, there is one area of uncertainty on the horizon. As a result of trade tensions between Washington and Beijing, the company has been blocked from selling its most advanced machines to China. Although the country currently only sells 7.6 percent of the world’s chips, according to the Semiconductor Industry Association, this number is growing fast and chips are one of seven technologies Beijing has targeted for development. Attempts to block China from the global supply chain has created concern that the country will rush to develop its own version of ASML, threatening the Dutch company’s outsized influence over the semiconductor market.
Thanks to the gamble ASML took in the 1990s to pursue the development of EUV technology, which uses tiny rays of light to carve patterns on the silicon pieces that form semiconductor chips, the company’s dominance in this area is currently unchallenged. ASML estimates its most advanced technology is so complex, it would take at least 15 years for others to replicate.
“Several of the companies that were competitive [in the 1990s] decided not to take the risk investing in EUV because it seemed like it would be so difficult, so expensive and possibly never work,” says Chris Miller, assistant professor of international history at Tufts University, who is writing a book on the geopolitical history of the computer chip. As a result of that bet, ASML’s valuation has swollen to over $300 billion and its share price has more than doubled since the start of 2020. Speculation is mounting that it could become Europe’s first company to be valued above $1 trillion.
The shift to EUV was long and expensive. The company had to persuade its customers — including Intel, Samsung and the Taiwan Semiconductor Manufacturing Company—to buy stakes in the company so there was enough money to fund the research. By the time it was able to launch its first commercial EUV machines in 2017, the process had cost $9 billion. But the payoff was huge. It is now the only company able to supply EUV machines, which make the most advanced type of chips found in newer phones and games consoles, to industry giants like TSMC or Intel. As of September 2021, the company had sold 125 EUV machines. That might not sound like much, but there aren’t a lot of companies that are capable of manufacturing the most advanced type of chips using these machines and ASML sells them for more than $100 million each.
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But a political maelstrom could hit ASML’s growth plans. The company’s breakthrough in EUVs coincided with another event: Donald Trump’s arrival in the White House. In 2018, when ASML received an order for an EUV machine from a Chinese customer, reported to be the Semiconductor Manufacturing International Corporation or SMIC, the Trump administration lobbied the Dutch government to block ASML from fulfilling it. According to The Wall Street Journal, Charles Kupperman, Trump’s national security advisor at the time, told Dutch diplomats in 2019 that ASML machines wouldn’t work without American components and the White House had the authority to restrict those parts being exported to the Netherlands. ASML’s EUV machines contain lasers made by San Diego based Cymer.
The Biden administration has shown no sign of changing tack and the Dutch government has yet to grant ASML the licence to sell its machinery to China. “Because we don't have that permit, we're not able to ship EUVs into China,” says ASML chief finance officer Roger Dassen, who says the company strongly supports a “global chip making ecosystem”. The company declined to comment on the potential value of the market in China if it was allowed to sell EUV machines there. However the country is still a major market for ASML’s older products and Dassen said at the Morgan Stanley TMT conference in November that it expects around €2 billion ($2.6 billion) in sales to China in both 2021 and 2022.
Whether restrictions on ASML’s exports to China will be expanded to cover more of the company’s products remains uncertain, says Paul Triolo, managing director for global technology policy at consultancy Eurasia Group. He believes the US is concerned that advanced chips could end up in Chinese military technology but he says there has never been an open discussion about the national security gain versus the impacts on the semiconductor industry. “The industry is frustrated,” he adds. “[They] want the justification to be clearly articulated so they understand what their obligations are.”
In April 2021, a report by the semiconductor industry association and Boston Consulting Group warned that export rules have encouraged China to develop its own alternative chip machinery manufacturers. Shanghai Micro Electronics Equipment is one company being positioned as Beijing’s alternative to ASML. This is a concern for ASML, according to CEO Peter Wenninck, who in an interview with Politico said that “in 15 years' time they'll be able to do it all by themselves — and their market [for European suppliers] will be gone.” But Dassen claims that if the company is locked out of one part of the world, the other part of the world would still need chips. “At ASML, we don't really care what chips are being made as long as they are being made,” he says.
The main concern is the risk of being dethroned—whether that’s by a Chinese competitor or one from elsewhere. In the case of ASML, it's “whether they really have focused on the right technology and if there might be some disruptive technologies which they haven't foreseen,” says Henk Volberda, professor of strategy and innovation at the University of Amsterdam’s business school, who believes a potential disruptor for the company could be photonics. “With this technology it is possible to produce chips that work on light (photonics) instead of electricity (electrons),” he says.
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To guard against future competitors, ASML says it is heavily investing in innovation. In 2021, the company said it spent 13.7 percent of sales on research and development, with that number expected to go up to 14 percent in 2022. But the critical nature of R&D in the industry is exactly what makes the US-China trade tensions such a threat, according to Triolo. “If the US tries to expand controls and target companies that are potential customers of ASML to a broader degree, that could really cut off the China market more seriously,” he says. ASML can’t sell its most advanced machines to China, but it can sell its other technology there. Around 30 percent of ASML’s sales came from China in 2020. An escalation of trade tensions could therefore hit revenues and undermine the company’s ability to carry out R&D in an industry where it is incredibly costly to play catch up, Triolo says.
“Is there enough of a market in other countries for them to continue to compete and derive that R&D benefit from the revenue?” he asks. “The jury's still out on that.”
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