Business Breakdowns
· 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.
· Matt Reustle, Tom Walsh
[00:00:00] S0: Yes. It's a really interesting area or product to be borrowing from with a completely different use case. You alluded to it in terms of them being the leader in the space today. Can you give us a sense of how big they actually are, whatever measurement you want to use, whether it's revenue or something else? [00:00:00] S1: In 2022, they generated revenues of about EUR 21 billion and operating profits of about EUR 6.5 billion. And they've got a market capitalization of, as of today, just over EUR 250 billion as well. So they're a fairly large company in terms of revenues, and in terms of market capitalization. But when you actually look at the company, it's not actually selling many machines. It only sold 345 photolithography machines last year. It's a mass-produced item, but it's a very low volume, very, very specialized item. The most expensive piece of equipment sells for north of EUR 150 million apiece. [00:00:00] S0: Yes, that's sticker shock. I was surprised when I was doing some research to see the number of units sold, and I was scratching my head in terms of adding up that versus the revenue number, but that explains it well. You mentioned they were somewhat of the orphaned company, the GoodCo, BadCo spin-out. They were the BadCo in this particular instance. What did the management team look like then versus today? Have there been major visionaries in terms of their history who really drove this business to go from being the forgotten child to the leader in the market?
· Tom Walsh
[00:00:00] S1: Right back at the very beginning, someone was actually, individuals brought in to lead the companies. It was spun out of there, somehow he stuck around for a few years and then there was a series of different CEOs over the history of the company. The current CEO, he's been there since 1999. He was CFO for a number of years before stepping up as CEO in 2013. And he's certainly got to take a lot of the credit for the success of the business in terms of steering the business through some pretty challenging times. If you think about how tough things were in the semi industry, in the aftermath of the tech bubble in 2000, he was the CFO there. You have to keep the ship afloat and he ensured that the money kept going into R&D, so the company kept extending his advantage. As he stepped up to CEO in 2013, it was by no means a given that EUV, their leading-edge products that are now the dominant part of their revenue base and their future revenue base. And there's no given that, that would happen, but he was able to steer the company through that. Again, keep it focused, not get distracted and try and branch and diversify into other activities. But back his engineers to eventually get that to work. So he's been key. But if there were one other person who really is associated with the success of ASML, then that would happen to be a man called Martin van den Brink. And he's the CTO and he's the president of ASML and he's been there from the very, very beginning. So he actually applied to join Philips from 1983, just towards the end of 1983. But by the time he arrived at Philips, he arrived in to the ASML division. As well as right at the time that it was essentially being spun off. And the funny thing is, when he joined, the story goes that the old hands that Philips who were working in this semiconductor part of the business were chuckling to themselves that he was joining a part of the business. That was being sent off to die and they were staying behind to continue to develop the EBeam lithography division that was going to be the future of semiconductor manufacturing. Nonetheless, he stuck with it and he think he had a pretty trying time in his first couple of years. And the company lurched towards the brink of disaster as it tried to bring its first commercial product to market. They were struggling.