Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle and for today's breakdown, we are back covering the semiconductor value chain. ASML was once a forgotten subsidiary of Philips. Today, it's one of the most important technology companies in the world. To break down ASML, I'm joined by Tom Walsh, a portfolio manager at Baillie Gifford. Tom helps explain what's happening inside an extreme ultraviolet lithography machine and how ASML came to pioneer this technology from the Netherlands. It was a nontraditional path to say the least. This breakdown pairs very well with our breakdowns on AMD, Qualcomm, and Cadence. And I'd also highlight the founder's podcast episode #8 on the Intel Trinity. Please enjoy this breakdown of ASML. All right, Tom. Thanks for joining us on Business Breakdowns here. I'm excited to get into ASML. We've covered some other names in the semiconductor value chain. But ASML for my research has a really interesting story in terms of how they become the giant that they are today. Maybe you can just start us off with a little bit of the back story and how they came through as this scrappy outsider in this major industry?
· Tom Walsh
[00:00:00] S1: Yes. I think one of the really interesting things about ASML is how it came to be so dominant in this industry. And often you think of the dominant players having sort of started with some massive competitive advantage. And that just isn't the case with ASML. It started back in 1984 when it was spun out by Philips. And some spin outs are so destined to be great companies. They're clearly ready to fly the coupe and take on. I mean companies like PayPal as they emerge from eBay. They clearly got the strong position and they're ready to capitalize on that. And ASML absolutely wasn't that thing. It was problem child of Philips. They'd been battering away for over a decade trying to get into the photolithography business and they just hadn't succeeded. In fact, the joke within Philips when it was spun out was that ASML being created was essentially a sort of delayed layoff process for the workers that were being transferred into it. So it emerged into the industry as #10 of 10 lithography players in the early 1980s. It had no revenue, it had no commercially credible product, it had no offices. In fact, its first offices were some wooden barracks that they built in the grounds of the Philips facility in Eindhoven and a good proportion of the workers didn't want to be there. They'd been shunted there out of Philips, and they thought the business was going to die and they just weren't interested in being involved. So these aren't really heartening beginnings for any company. But what they did have were, I think, two quite specific but industry-leading technologies that had been developed within Philips and could be incorporated into future products. They had a handful of really tenacious and quite brilliant engineers that were determined to make this work and they had a window opportunity within the lithography industry which was going through a big technology transition around that time. And the CEO who came in to lead the company as it was spun out could see this opportunity in the technology transition for ASML to jump ahead because none of the incumbents actually had fully prepared for that transition. Now the early years of ASML were unbelievably challenging and it was really, the first decade just about survival for the company. They survived by scraping through some savage industry cycles during the 1980s.
· Tom Walsh, Matt Reustle
They were kept alive by further cash injections by their backers Philips and ASM. But ultimately they started to make progress. Their competition started to falter and fall away, their equipment started to get better and kept getting better. And by the 1990s, by the mid-90s, they'd emerged as one of three really clear leading players within the lithography industry. The leaders being Nikon, Canon and ASML. And they kept pushing. 2002, they finally overtook Nikon as industry #1. That's a goal they set themselves on spin out, took nearly 20 years to get there. But finally they overtook them. But they didn't rest in their laurels at that point. They put their foot on the accelerator even harder. They kept delivering market-leading innovation and investing in moonshot technologies that many believed would never actually work. And ultimately that led in 2019 to the first use in high volume production of extreme ultraviolet lithography equipment. The most advanced lithography equipment available in the market and the only equipment able to make the most leading-edge semiconductors in the world. And that's put ASML in this position where it has essentially 100% of the world's most advanced lithography equipment and a pretty dominant position, 90% plus of the next generation of lithography equipment as well. [00:00:00] S0: Can you try to explain in the simplest terms possible lithography equipment, what photolithography is just however you can break that down in layman's terms?
· Tom Walsh
[00:00:00] S1: If you take it all way back to semiconductor, it's one of the semiconductors, the way they work is basically having a series of really, really tiny electrical circuits embedded on the surface of a small piece of silicon. And the question is, how do you get those electrical circuits and bearing in mind these are microscopically small. They're so small, they make the width of a human hair look giant. And back in the beginning, they were going to do this with effectively having to touch the surface of the semiconductor. But that had its own problems. It had real problems in terms of defects that were introduced to the surface. In the 1970s, they finally struck upon the idea of essentially using lights projected through a mask. So it's actually projecting a light to create a pattern on the surface of the silicon chip. And that's done by essentially coating the silicon chip with special chemicals, something called photoresists and then projecting the pattern of electrical circuits onto that such that you can then embed those circuits onto the surface of the chip. And that in itself sounds relatively simple in concept is really some, in practicalities unbelievably difficult because the dimensions that they are doing this at are so small, they're measured in handfuls of atoms rather than in millimeters or centimeters. So in concept, very simple, it's much the same as if you go to the old-fashioned cinema projector, you shine light through an image, use a lens to focus it and you get an image projected onto the screen. The difference between this, the old-fashioned cinema projector and a photolithography machine is the image is obviously not Spider-Man, this is the circuits of a semiconductor and the lenses are being used to concentrate and make that image even smaller than its outside, rather than blow it up big onto the screen.
· Matt Reustle
[00:00:00] S0: And I guess this explains when you mentioned competitors or other peers in the space, Nikon and Canon I think of cameras and associated lenses with those businesses. Was there a camera angle to this at the early stages? Or was it always with the end goal being related to the semiconductor space?
· Tom Walsh
[00:00:00] S1: So the first person to think of using photolithography was actually back in the 1940s. And it was an American who commented onto the idea that if you used a microscope, you could make things look large. If you turned the microscope upside down and projected light through it, you could take something quite large and make it much, much smaller on the surface of another object. So that idea had been kicking around for a while. And the first companies to really master projection photolithography, ASML does today, were actually American companies. And they merged in the 1970s and they built very successful businesses on the back of that over the next decade. But the Japanese saw what was happening and thought this was an interesting business to get into. They could see that the semiconductor industry was going somewhere. And obviously they started from position with expertise in-house in the manufacture of lenses, which was one of the key challenges of photolithography. And they were able to come through, starting initially, really essentially by copying American machines that were on the market, but rapidly, iterating to the point that their machines were simply better. And that's how they managed to end up dominating the industry. But in terms of did they start in photos with a view of getting to semiconductors? I suppose not, but they could see some transferable skills, they saw some transferable IP, and they really made the most of that.