The tight-knit business of high-end semiconductor fabrication provides the foundational technologies for the creation of AI. US IT giants like Nvidia and Intel dominate the creation and design of cutting-edge computer chips. The massive Taiwanese company TSMC produces 92% of the cutting-edge chips in the world at its plants, giving it a stranglehold on the actual manufacture of chips created in the United States.
Afterwards, there is ASML. The less well-known company was established in the Netherlands in 1984, and it has become a market leader in a particular sector by manufacturing and supplying the sophisticated, highly specialized equipment that TSMC and other foundries use to produce and package semiconductors. Though ASML may not receive as much attention as other chip makers, the $362 billion company is nonetheless a key player in the semiconductor supply chain and stands to gain significantly from the AI boom.
“On a high level, ASML is beyond well-positioned,” Michelle Brophy, director of research for tech, media and telecom at research platform AlphaSense, told Fortune. “I wouldn’t bet against ASML.”
That is not to say there are not challenges along the way: this week’s lower-than-expected sales figures caused a stock selloff, and ASML is entangled in the political crossfire of China and the United States’ semiconductor arms race. But ASML stands to gain when new CHIPS Act-subsidized chip manufacturing facilities open in the United States.
The highly complex process of producing semiconductors uses specialized tools and trained workers to develop and construct computer chips that are getting smaller and more powerful every time. Chipmakers like Intel were accustomed to having complete control over the process from design to manufacture from the 1950s through the 1990s. However, as engineers started to create chips that were more compact and potent, the economic model changed to favor specialized businesses that concentrated on only one step of the procedure.
The worldwide advanced chip supply chain is now dominated by a small number of specialty enterprises. More than 90% of the chips used in AI development are now designed by Nvidia, a company that conducts no manufacturing and just concentrates on design. In terms of physically manufacturing AI chips, TSMC has a monopoly thanks to its in-house design team and its ability to exclusively accept manufacturing orders for its plants.
The deepest niche of them all may belong to ASML since it is the only owner of the extremely sophisticated machinery that TSMC uses in its manufacturing.
The extreme ultraviolet (EUV) lithography machine is the most crucial piece of equipment in the modern chip fabrication process. High-end, high-performance chips for artificial intelligence are made by imprinting patterns on incredibly thin silicon wafers with an EUV lithography equipment. These wafers are subsequently stacked and assembled into chips.
“If you look at a gang box—where you walk into a door, you can flick one switch and turn on the fan, and one switch to turn on the light, and one switch turn on the other light—behind the wall, you have copper wires. It’s [the same principle as] semiconductors,” President and CEO of the National Institute for Innovation and Technology Mike Russo told Fortune. “With ASML doing EUV, they’ve been able to get features down to one fifty-thousandth of a hair. Think of the amount of wires, instead of the copper wire on your wall, that you actually put on one layer of a chip.”
The sole manufacturer of EUV lithography machines on Earth, ASML, charges hundreds of millions of dollars for each unit. Over 100,000 parts make up each machine, which must be shipped using three jumbo jets because to their size. The intricacy and expense of ASML’s operations have served to insulate the firm from rivalry.
“The tools are so expensive,” Russo said. “A new EUV tool from ASML is probably $250 million. One tool.”
Even though CEO Peter Wennink reassured investors that the decline in sales was temporary and that the business anticipated improved results in the second half of the year, investors dealt ASML a blow on Wednesday when lower-than-expected order volumes sparked a selloff that lowered share prices by about 7%. However, Brophy stated that rather than any more serious dangers to ASML’s operations, the retreat was probably more a result of investors’ enormous expectations for businesses in the AI space.
“In my view, the setup is not great for AI-related companies, just because they’re primed for perfection…any disappointment in the numbers was going to create a negative reaction,” Brophy said. “I really don’t see…an issue with the business longer-term.”
ASML’s position in the middle of the ongoing competition between the United States, Europe, and China for supremacy in semiconductor production is one factor contributing to investors’ concerns and a potential threat to ASML’s business moving forward.
In 2022, the Biden administration announced export regulations that prohibit American semiconductor designers, including Nvidia, from disclosing their most cutting-edge ideas to Chinese manufacturers. As China works to increase its capability for producing chips domestically and wean itself off of reliance on Western chip designers and Taiwanese foundries, American officials have also been applying pressure to the Dutch government and ASML to restrict sales to China and cease offering maintenance services to Chinese companies. About a third of ASML’s income came from its largest market, China, in the previous year.
“China always opposes the U.S. overstretching the concept of national security and making various excuses to coerce other countries into imposing a technological blockade against China,” Chinese foreign ministry spokesperson Wang Wenbin said in January.
According to Brophy, the entire chips market would be impacted if semiconductor policy between the United States and China escalated. This would not only impact ASML.
“Overall, does it pose a risk? It does,” Brophy said. “It’s not an ASML risk, it’s an overall demand risk…a big escalation between the two countries would affect that demand picture longer term, in my view.”
Despite China, ASML anticipates growth in the upcoming year: “Recovery for the industry in 2024 and…a stronger year in 2025,” CFO Roger Daasen forecast. A large portion of this optimism stems from the numerous new American semiconductor production facilities, or fabs, that are being established with funding from the Science Act and CHIPS, which may assist to make up for any revenue losses in China.
The Commerce Department has announced nearly $20 billion in grants for new fabs from TSMC, Intel, and Samsung in the last few weeks alone. This should result in a constant flow of orders for ASML’s machinery, which is necessary to produce the cutting-edge AI chips that the Biden administration is so eager to have produced domestically.
“If one customer were to drop out, and I don’t think that’s the case, there would be another one lined up to take their place because there are so many projects happening right now,” Brophy said. “The U.S. CHIPS Act has already awarded $12 billion dollars to [TSMC] and another $6 billion to Samsung alone, Intel is in there as well. They’re all building fabs in the U.S. But let’s not forget about [other] geographies, like Japan—[TSMC] has already invested north of $20 billion for facilities there.”
Almost totally insulated from competition, ASML has established a commanding position in a highly specialized market. When Christophe Fouquet assumes the role of CEO later this month, he will have enormous shoes to fill because his predecessor managed a 1,400% increase in the company’s share price. Overall, though, things are looking up: ASML’s commanding lead in the equipment market and AI’s seemingly endless need for cutting-edge chips are two strong tailwinds that are not going away.