Business Breakdowns
· Tom Walsh
[00:00:00] S1: I would say there are probably 3 big things that I would worry about in terms of the key risks. The first one will be the ability of their supply chain to keep up with them and supply chain, they would describe as their biggest competitive advantage. But it's also a vulnerability because they need the supply chain to be able to keep up with the technology advances that they are trying to push. And over the years, some of the suppliers haven't been able to do that and ultimately, they've had to buy them in. So you saw that I mentioned previously in 2013 when they bought in Cymer, their light manufacturer. You saw that when they took a stake in ZEISS, their lens manufacturer. They don't own it, but they have a stake there. And that was just recognizing that the amount of capital investment required to bring the next generation of equipment to market was beyond the budget of ZEISS as an entirely standalone company. So there is that challenge. Each of their suppliers needs to keep up. It's not just about what ASML are doing within their own R&D facility. So that is always a challenge. But it's something they've managed, I think, very, very well over the years, and I think I would expect them to continue to manage it pretty well. The next thing would be disruptive technologies. Again, this is really -- comes then to the idea that ASML's competition is not really another company, but it's Moore's Law. So people keep buying ASML's machines as long as they're able to deliver the productivity improvements at a price that's acceptable. So as long as it enables next Apple chip to be produced at an acceptable price that makes it commercially viable product, then those machines will still be bought. If they struggle to do that, then the technology path might prove to be something different. And you saw that a few years ago, about a decade ago in NAND, one of the types of memory that exists. They could see that EUV was not happening. It was not going to happen anytime in the near future back in 2012, 2013. And the new approaches were developed and started to be adopted and that's specifically going 3-dimensional. So instead of scaling it two-dimensionally across the surface of the chip, they started to build upwards on the surface of the chip. So essentially they went three-dimensional.
· Tom Walsh
And by doing that, it meant they didn't need leading-edge lithography anymore in order to make more advanced memory chips at that time. They can simply build it up by layering more and more through etch and deposition. So the share of lithography's CapEx within that part of the market fell quite precipitously as a result and it doesn't disappear. You still need lithography there and it still grows as that market grows. But it was a really big hit. And I think it's a really good example when ASML can't deliver something quickly enough, the market has to keep moving. They're not going to wait around. So if that happens in another part of the market, if someone else comes up with a clever way of making transistors in a way that is cheaper and faster and more efficient than can be done using leading-edge lithography, then the semi industry will go down that path because that's the way it's got to be in order for Moore's Law to continue progressing. So I think that's the risk. Again, you've got to back ASML in the near future in terms of their ability to keep delivering and the relationships to have their customers to see what each of their roadmaps is, but that is one of these long-term challenges. And then the third one would be geopolitics. That's probably more of a near-term risk. But you can't ignore the fact that -- last year, they made nearly 40% of sales were to Taiwan, nearly 30% of sales were to South Korea, and give or take, 50% of sales were into China. And you don't need to be particularly imaginative to work out how things could become difficult given that customer base.
· Matt Reustle
[00:00:00] S0: A very interesting and diverse set of risks there. When we wrap up the conversations, we always talk about lessons that you can pull away from looking at this business and potentially apply to others, what do you think stands out in that category for ASML?
· Tom Walsh
[00:00:00] S1: I think there's probably 3 things in terms of takeaways that I've taken from looking at ASML. The first one is the importance of looking beyond the cycle. And I think a lot of people look at ASML, I confess when I first looked at is this feeling that I know this is a cyclical industry. I know things are going to go down at some point and you sort of worry about this, am I timing it right? Am I going to look silly if I decide to take a shareholding there? And of course, the industry doesn't look cyclical, and you can't ignore that, but that obsession on the perfect entry and exit point can blind you to the structural opportunity that's there to blind you to the excellence of the underlying business and the long-term prospects when you stretch it out of the 5, 10, 20 years. The other thing would be, I guess, this goes back to the very early days of ASML. But don't underestimate the role that luck can sometimes play in the company's early years, in terms of how it comes to be where it is. You look at the company's history before IPO, don't get me wrong, the history of ASML is one of extraordinary ingenuity, tenacity and innovation excellence. But it's early as there were certain things that play that pretty well for them in terms of in 1986, when they were still didn't really have a product to market, there was a massive recession and it killed a couple of their competitors. I mean the others couldn't spend much in R&D. So they were to catch up at a time when they were otherwise on their knees, their business with the technology transfer and EUV and the fact that they were the only other player versus the Japanese. If they've been a viable U.S. player, would they have been given such an easy road into that, I don't know. And then the third thing was, this is the really biggest part of thing about looking at ASML is not to underestimate the power of human ingenuity because I've looked at all the research we've written on ASML going back over decades. And there's always been a huge amount of uncertainty about what this company is going to look like and what the semiconductor industry might look like 5 or 10 years out. It's a great story back when Peter Wennink tells the story.
· Tom Walsh
When he joined the company back in 1999 before he did, he spoke to Martin van den Brink and asked him is Moore's Law still be running, how long is Moore's is going to run for? And Martin van den Brink said to him, I think, at least 15 years. And 15 years later, he goes back to Peter -- to Martin and says, that's still going, how long do you give it. Martin says, I think about another 15 years. And it's never been possible even for the guy who is probably the smartest guy in this industry. He knows more like than anything else. He's never been able to look forward. And we struggle to look forward 5 years, but what we don't appreciate is just how much is going on under the bonnet at ASML and just how much innovation is taking place at that business and the driver is to keep breathing through innovations that have kept advancing Moore's Law many years beyond when people thought it would die.
· Matt Reustle, Tom Walsh
[00:00:00] S0: One of the things that I enjoy talking to you and your colleagues the most about is that deep history of notes and the deep history that you have with these businesses where you could reflect not just on what's happened in the past 3 years or 5 years, but often in the past 20 years, and it shines a light on how things often feel the same as they feel today. And if you look at the path that the business took 20 years ago when it was very much the same feeling, it might just provide a little bit of extra perspective on today. This was an excellent conversation, Tom. I really enjoy learning and every bit of this conversation was me learning about this business and this industry some more. So thank you very much for joining us. [00:00:00] S1: Thank you.