On the podcast, we've been doing a number of episodes about semiconductors. It's a fascinating area, that obviously touches on a number of things right now, including supply chain bottlenecks, national security, and our increasingly digitized economy. While many of the big players — Intel, TSMC, NVidia, etc. — are well known to the public, some of the most crucial players in the space have almost zero public visibility. One of those is the Dutch giant ASML, which is the only company capable of producing the world's most advanced lithography equipment. On this episode, we spoke with Chris Miller, an assistant professor at the Fletcher School at Tufts, who is writing a book about the future of chips. Transcripts have been lightly-edited for clarity.
Joe Weisenthal:
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway:
And I'm Tracy Alloway.
Joe:
So Tracy, obviously we've done a lot of episodes about the semiconductor industry. About chips. There's one specific subcomponent of the story that people are like, oh, you guys have got to do that. You guys got to do that, which we have yet to hit so far.
Tracy:
You say there's one thing that we have yet to do, but I've got a feeling like this is the endless semiconductor series. And that as soon as we finish this episode, we're going to discover some other hidden component of the semiconductor supply chain. And that's going to lead to another episode, but yes, you're right. There is one sort of big elephant, big semiconductor thing in the room. And that is a company called ASML, not to be confused with ASMR which I always seem to do.
Joe:
But hopefully for like a certain kind of person listening to an hour of people talking about chips is a type of ASMR. So maybe we kill two birds with one stone, but yes as you know, one of the things that we’ve established in thinking about how the chip ecosystem works, maybe part of our characterization is we talk about Taiwan Semiconductor as the biggest contract fabrication company in the world. I think we sort of think of it as the final boss in chips, like in the end, they're like the central bank of chips, their capacity almost dictates chip capacity overall. There's some other companies that make chips, including Intel and Global Foundries, but TSMC is the big one. But TSMC has to buy equipment from others too. Nobody is completely self-sufficient in this industry. And TSMC is a huge client or a huge purchaser of equipment made by this company. It's a Dutch company. ASML.
Tracy:
Yeah. So you mentioned that it's Dutch and this is the other thing, I mean, in addition to not really understanding what this company does or the type of equipment it's actually making for semiconductor manufacturers like TSMC, the other thing I don't really get about it is why is it a Dutch company?
Because the one thing I know about it is it has its origins in the U.S. I think in the 1980s, it sort of came out of the collapse of a bunch of U.S. lithography firms or something like that. And yet now it's a Dutch company that has this enormous role in the global supply chain. It's sort of like a king maker for semiconductor technology or expertise. And I don't know, I just have so many questions already. I know we haven't even started.
Joe:
Yeah, I know I have the same questions too. But you mentioned the oddity of it being Dutch. There's another element here and I, you know, I feel reluctant to talk in cliches or stereotypes, but I don't really think typically of Northern Europe or Europe in general as being like this, like cutting edge high tech hotbed for anything. When I think about tech, I think about Silicon Valley, maybe more on the consumer end, but also like obviously a long history. I mean, it's Silicon Valley for a reason.
And I think about various parts of East Asia. And when I think about the engineering prowess in Europe, I don't think about tech in Europe that much. When I do think about engineering prowess in Europe, I'm thinking more on the sort of like a bigger industrial engineering. So a company like Siemens or companies that are really good at public works or trains or whatever. And I don't think of Europe as being a hotbed of say semiconductor innovation. I know there's probably countless like counterexamples. I'm just sort of thinking that it doesn't fit into my mental models of this stuff. So it is interesting that it's Dutch.
Tracy:
So just when you think about the European market, like you start thinking about the biggest companies there and yeah, sure. Stuff like Siemens, LVMH, luxury good makers, but yeah. ASML is absolutely massive. And like just looking at the share price chart, it has had a huge, huge run-up over the past year or so. I mean, basically since the global pandemic much like a lot of other semiconductor stocks, but I mean, amazing run-up, huge market cap. And yet it's sort of this company that outside of the semiconductor sphere, it doesn't seem to get that much attention.
Joe:
Yeah it’s over $300 billion market cap. It is, one of the biggest companies in the world. But not many people know about it. It’s far from a household name. Okay. So we have a million questions. So we got to get right into this discussion and we have the perfect guest to tell us about this company. We're going to be speaking with Chris Miller. He's an assistant professor of international history at the Fletcher School at Tufts university. And he is the author of a forthcoming book that'll be out next year, entitled Chip War: The Struggle For The World's Most Critical Technology. And he can answer all of our questions about ASML. Chris, thank you so much for joining us.
Chris Miller:
Thanks for having me.
Joe:
Chris, what is lithography? You know the word gets it's probably come up on like every episode. And I pride myself on never being too embarrassed to ask a question. But I think I actually was too embarrassed to ask this on some of the other episodes.
Chris:
So if you want to make a semiconductor device, you take a slab of silicon. You cover it with chemicals called photo resists, which are chemicals that react with light. And then you shoot a light. Rays are now extreme ultraviolet light rays at the silicon wafer and the shapes that you shoot at it will form the transistors.
So that's, that's the simplest version. Now today, if you buy a new iPhone, the most advanced process around it will have 10 billion transistors. So you've got to shoot extraordinarily narrow wavelengths of light through masks that create these shapes on the silicon wafer and the masks, need to be able to project all of these shapes onto the wafer. So making this possible at the scale of 10 billion transistors per chip is, is ASML does...
Joe:
Wait, how many per chip, sorry, what did you say? 10 billion per chip,
Chris:
Right. A new Apple processor in your iPhone will have 10 billion transistors per chip. Some chips that go into data centers we'll have more than that. But the scale of transistors that we produce at any given year is, is more than the scale of all goods produced by all companies and all other industries and all of world history. It's a tremendous number.
Tracy:
So could you maybe describe where ASML sits in the sort of ecosystem of the semiconductor industry? So I gather it doesn't seem to have much competition, but like who does it actually supply? And also who does it not supply? Like, are there people out there who try to do this on their own
Chris:
In the early days of the chip industry companies built lithography machines in-house, so Texas instruments would have had its own lithography machine division. IBM. But today the machines are so complex and expensive, that there's just a couple of companies that make lithography machines in general. And just one company ASML that's able to make EUV Lithography machines, which are the most advanced type. Anyone who operates a chip fab facility, where chips are made, has to buy lithography equipment. And so for the most cutting edge chips, you've got no choice but to buy from ASML.
Joe:
This is fascinating. So whether we're talking about Intel doing its own chips or TSMC or anyone else, and we've talked with other people who talked to Stacy Rasgon of Bernstein and about the nanometer wars and all of them, if you're doing cutting edge manufacturing, you are a customer of ASML’s.
Chris:
That's right. That's right. For the most cutting edge with lithography machines. ASML isn’t the only supplier for slightly less cutting edge machinery. Nikon of Japan is also a competitor of ASML’s, or they have a duopoly for anything that's not the most cutting edge.
Tracy:
So what is it about the technology that makes it, I guess, so proprietary to ASML? Like how did they get into a position where they basically control it and what is it that they've been able to do that others haven't?
Chris:
So the challenge with EUV lithography in particular, in lithography in general is that you've got to manage a supply chain that is extraordinarily complex. ASML has got around 4,000 suppliers, and many of the suppliers are producing equipment that only they can produce. So just to give you a couple of examples, the mirrors within ASML’s lithography machines, the EUV machines, are the flattest structure that humans have ever made the flattest man-made structure in the universe.
And when you go through the list of materials and components that you need to produce an EUV lithography machine, there are multiple parts of the system that are the ‘most this’ or the ‘most that’, and managing that is an extraordinary complex business. If you talk to people at ASML, they'll say ‘our biggest engineering challenge is not actually engineering any particular part, but engineering the supply chain, making sure that all of our suppliers are producing things so that they all fit together.’ They all work together. They arrive on time, and it's hard enough to do that with a basic machinery, but when you're trying to manipulate individual atoms, which is what ASML is able to do, it's even more complex.
Joe:
Tracy, I already loved this episode so much. I don't know, like how many things, like I've learned already in five minutes. And then the fact that like, it's also a supply, like, okay, obviously there's a chip supply chain, but then the idea that the most advanced technology within the chip is actually itself a supply chain. I'm just like, I'm already obsessed with this, but where do they, so, okay. You mentioned that for sort of like, okay, for the very cutting edge, there's just ASL for slightly less cutting edge Nikon in Japan, they're also in the game. Do other players aspire to be cutting edge or is there some barrier that just basically makes it so that no one else has really trying to get it, uh, be at that level?
Chris:
In the 1990s, which is when investment in EUV began, Nikon made a choice not to try to commercialize EUV technology. The first physics papers on a EUV actually came out of a Japanese university. So the there's plenty of optics expertise in Japan. But ASML was the only company that was willing to bet on AUV from the 1990s forward end capable of raising the funds and assembling the expertise. So right now, if someone wanted to replicate, ASML has done with EUVs, it would take them a decade and billions and billions of dollars in investment. And because the suppliers that work with ASML have exclusivity agreements with ASML, ASML has invested in some of his key suppliers. It's just basically impossible for anyone to break into this without replicating their entire separate supply chain. It would take a decade to do
Tracy:
So maybe this is a good place to start about the history of the company and where it actually came from. And I think that'll help us like understand some of these dynamics and how it built up a competitive edge versus it's, you know, non-existent or very few competitors. But my understanding is this sort of like sprung up out of U.S. military technology of some sort, can you start, like at the beginning. I guess this goes back to Joe's question, what is lithography? Why is the U.S. army interested in it? And how did it play into ASML’s creation story?
Chris:
When the transistor was first invented in the late 1940s in Bell Labs in New Jersey, it was predominantly used in military devices for its first commercialization. And there was a scientist in a US army lab named Jay Lathrop in the 1950s, who was trying to find out how to miniaturize transistors, produce them smaller and smaller. So they could be put in a smaller devices.
One day, he and his assistant, realized that they could use photoresist chemicals, these chemicals that react with lights to create shapes on, uh, on the Silicon germanium that they were working with. And they turned their microscope that they were using the lab upside down. So normally a microscope lets you see something small and it expands the image for your eye. They did the opposite. They uh, had a, a shape that was large and we're able to project that in a smaller version by using an upside down microscope.
Chris:
And with that, they filed the first patent or photolithography and coined the phrase. And the 1950s over the next couple of decades photolithography was used both by chip makers who were making their own machines in house. And then eventually a couple of specialized photolithography companies emerged in Connecticut and Massachusetts. They were defense contractors primarily, but realized they could use their specialized optics things that they'd honed in spy satellites and military equipment like that for the semiconductor industry.
And so until the mid 1980s, the center of the photolithography industry was in new England, but those companies faced hard times in the 1980s, they were poorly managed and the 1980s were a time when the Japanese chip industry in general was rising at Nikon as well as Canon. The two camera companies began investing in photolithography for a time in the 80s and 90s, they were the dominant companies in the industry, which the US was quite worried about — worried about being too reliant on Japan at a time of commercial and also a geopolitical tension. And so US chip makers began turning to ASML both to diversify their supplier base, but also because ASML was able to produce a very high quality equipment as well in the 1990s in the mid 1990s, it's always the only company willing to take the gamble on EUV. And since that point it's become the dominant firm in the industry.
Joe:
I just realized I want to establish what EUV stands for.
Tracy:
Yeah, and can you explain again, what's the difference between extreme ultraviolet and I guess non-extreme ultraviolet?
Chris:
So over the past couple of decades, as we've tried to make ever smaller devices and ever smaller features on Silicon wafers, we've begun to use a different and smaller wavelengths of light. And so extreme viral violet has a wavelength of 13.5 nanometers. It's the smallest wavelength of light that we've been able to use in, in mass production. So if you rewind several decades ago, we were using larger wavelengths of light that were on capable of producing the, the small feature sizes on Silicon wafers that we demand today.
Joe:
One of those reasons why I think the chip episodes, why we've done so many chip episodes and why they're, why they keep resonating. I think there's a few things, I mean, one is there's the chip shortage and it should be noted that the shortage is actually, or at the, is not really at the advanced level. It's a lot of cheap chips, et cetera, but we're starting to re th the, uh, the chip shortage that, uh, related to automobiles, et cetera, has sort of brought people a lot of awareness about lack of domestic us manufacturing capacity. I think another reason people care about chips is obviously just the general like explosion of chip demand, even where there isn't an acute shortage there's chips, uh, and everything. And then I think the other thing that makes it sort of an interesting story right now is that at least in the U S and probably elsewhere around the world, there is a rethinking about the role of state capacity in, and, um, state investment into a certain space.
And of course, as we all know the chip industry, and as you just talked about, the chip industry overall really was sort of born out of defense. So like sort of the ultimate in state investing and government spending. And at various times throughout us history, at least we seem to go in waves of how much the government wants to get in, to protect the chip sector, to invest in the chip sector, to build and bolster a homegrown chip sector. You mentioned this sort of stress intention with the Japanese or reliance on Japanese companies in the eighties and nineties that seemed to, uh, produce a wave of, um, sort of a defensive investment. Perhaps it could be characterized talk to us about how AML fits into that in terms of, you know, when we talk about, say the history of TSMC, that was clearly in part, it was a very like public sort of private venture. There was a, the government backed it up under the condition that it could raise private foreign money as well. Talk to us about the role of like public money in the creation of ASML.
Chris:
So ASML emerged first as a division of Philips, the Dutch electronic company and it was spun out in 1984 at a time when the European chip industry was relatively small as a player on the world stage. It was the U.S. in Japan at the time that were the biggest players. And there were a variety of Dutch and European union programs to support R&D at ASML, but for ASML in particular, actually the most important government support was from the U.S. government because in the 1990s, when the investments and UV were being made, Intel, which at the time was the industry leader in chip making, decided to take a big bet on UV being the next lithography technology and established a consortium of a number of private chip firms and a number of us national labs, the Lawrence Livermore, for example, that would work together to produce prototype UV machines.
And so the, the technology that we use today in ASML systems really comes from this work with U.S. national labs. It was largely funded by industry, but using the scientists there. And at the time, there was some interest in trying to turn the technology over to a U.S. company to produce and commercialized on the grounds that it came largely out of U.S. national labs, but there was no U.S. lithography firm at the time that was seen as a credible candidate to commercialize it.
The options were Nikon or ASML. And given the tensions with Japan, ASML was seen as the least risky option. And also they'd had a long track record of producing quality machines. And so we've got this strange situation now where a lot of the core technology in this machinery that's assembled in the Netherlands actually comes out of California. And indeed, ASML has actually bought a number of companies over the course of the past couple of decades in California as well. So there's a lot of U.S. technology in ASML systems, partially funded by the U.S. government.
Tracy:
Could you imagine something like that happening today? Like I just think the environment is so different and the idea of like the U S government funding a technology, and then deciding like, well, okay. I guess the, the best company to actually make this stuff is over in the Netherlands. So we'll just let them do it and give up like a key component of a highly competitive supply chain. It just seems so, so unlikely in the current environment.
Chris:
Yeah. It's an interesting question. On the one hand, you do hear a lot of conversation in Washington, DC about joint R&D project with allied countries. And, and in some ways this is a perfect example of this. I think the other thing is that ASML is a Dutch company, but if you look at the components of their EUV machines, for example, they're sourcing from all around Europe or on the U.S. and really worldwide. So to describe them as a Dutch company misses the fact that you can't produce EUV system without, for example, the light source which is produced by an ASML subsidiary in San Diego. So that they're a Dutch company us, but they're really a global supply chain. That's focused on the U.S. and Europe.
Joe:
This is interesting because it you mentioned that okay, at the time that the technology was sort of, it decided ASML would be the most credible entity to commercialize this sort of U.S.-funded technology, there was this view that, okay, it was better them than a Japanese player in part, because we already had anxiety about our reliance on Japanese chips at the time for other chips, including DRAM, how much of the same dynamics essentially in play. When people think about the geopolitics of chips, obviously one of the things that, you know, we talk about anxiety, about how much we rely on Taiwan. There's perhaps some anxiety about the domestic homegrown chip industry. Although China seems to be several years behind in terms of mainland chip technology, how much does it still sort of benefit everyone? This idea that this crucial component player is not part of either in U S or Asia.
Chris:
That's interesting question. I think certainly if you're a Chinese customer of ASML, you're pleased that it's not a U.S. company, but the reality is that if the US wanted to use export controls to constrict ASML sales to China, that wouldn't be very difficult to do already. ASML doesn’t send its EUV machines to China. In theory, that's because of Dutch restrictions, but in reality, it's because of U.S. pressure on another lens to impose these restrictions and there's discussion in Washington and Japan elsewhere about whether there ought to be stricter limits on the type of lithography machines you can sell to China and legally there's, there's nothing that would really stop the U S from imposing those restrictions. Unilaterally
Joe:
Is it is the concern that if those machines were shipped to China, that they would be able to,that would accelerate China's semiconductor capabilities, or that literally having them in Chinese hands would then maybe allow them to be more easily sort of deconstructed and reverse engineered. And that would be a big knowledge transfer.
Chris:
No, it's the former, I think if you just receive an ASML machine, you have no idea how to produce it. It's that the more advanced photography machines you have, the more advanced ship making you have, the stronger the Chinese ecosystem is.
Tracy:
So how big of an impediment is not having access to ASML’s EUV technology to Beijing's overall semiconductor development drive? Is it such an essential piece of technology that it basically means they're on a completely different footing to something like TSMC?
Chris:
That's right for now there's no viable way of producing the most advanced chips with the smallest features without using EUV. There are some, some scientists who think there might theoretically be ways to get around it, but for the next decade there's just no choice, but to use ASML’s machinery, if you want to produce the smallest ships.
Joe:
So let's talk a little bit more about ASML’s own constraints. Everyone this year is becoming aware of constraints, and there's only so much foundry capacity in the world at any given time. The entities that wanted to buy cheap chips that go into cars, sort of got shut out because they canceled their orders for a while, and now they're scrambling and it might be years before they could catch up again. So we know that that's constraints, how strained is ASMLs own capacity to grow?
Chris:
It's mostly in the supply chain complexity. So ASML last year shipped 31 EUV machines. So we're talking, getting one or two more machines out of their production process is something that's hard to do because each of their suppliers is similarly constrained. And the ability to ramp up manufacturing, you know — this isn't high volume manufacturing when you're producing 31 machines a year. And because their supply chain has so many specialized parts solely for their machines, their suppliers are producing 31 or so of the components needed each year. And so there's just no way around
Joe:
How many $300 billion companies in the world make 31 units a year.
Chris:
Well, there's 31 of the EUV machines. They also sell some of the older equipment, but they sold 395 units in total last year. So it's still small.
Joe:
At any number of units, it's still not very much, how much is it if you are, I wanted to pull together and buy a EUV machine? Like, what are they, what are they retail for
Chris:
The average revenue per EUV machine last year, it was around 140 million euros.
Joe:
Got it. Okay.
Tracy:
So this is something that comes up a lot in our supply chain discussions, but how does ordering actually work? And is there a preference given to certain customers over others? Like, you know, if one company wants to buy an EUV machine, I imagine there, there are plenty of other companies that want to do the same thing for a limited supply. How does ASML actually make the decisions about who gets allocated? What also, how long does it take? What's the waiting time to actually get one of these things?
Chris:
Yeah. Yeah. We don't really know the details as to how ASML decides to allocate the number of potential customers for $150 million machine is, is limited. I mean, it's a half dozen potential customers in the world who would be realistically looking to buy one. But if you look at the main customers, it's TSMC, which has around half of operating EUV machines and its own fabs, Samsung, Intel, a handful of others. And there's almost certainly a premium that TSMC has paid for getting so many machines. If a new company came online and wanted to buy machines, they'd face a weight of at least a couple of years, because capacity has been purchased in advance, and Intel has said it's going to be the first customer of the next generation EUV machine, which will be online around 2025. Presumably it's paid something for the right to get the first iteration, but we don't know any of the details.
Joe:
Yeah. Speaking of intention, I want to back up to something we talked about earlier, why was this never a part of Intel's own ambitions? Because, over the years, I guess the degree to which Intel has wanted to be an IP-first company or a manufacturing company waxes and wanes. So at one point it was a manufacturing powerhouse, then it sort of scaled back that it was more of an IP company and that's sort of the anxiety these days. Now they seem to want to get back into being a manufacturing. And a new CEO has made a point of like, ‘we are not going to give up on being a manufacturing powerhouse.’ Why was lithography or advanced lithography never part of the Intel strategy?
Chris:
Well when Intel was founded. It was founded at a time where you could already buy lithography equipment on the open market. So they always decided they were going to produce chips, but by lithography machines from suppliers over there 50 years, they've been one of the biggest buyers of lithography equipment in the industry.
And the development of EUV actually wouldn't have happened without Intel. When Andy Grove was still the Intel CEO in the early 1990s he made the first big bet on the development of EUV lithography, putting up $200 million in the early 1990s to begin to develop this on the grounds. Not that Intel was ever going to produce lithography equipment, but that it would eventually need EUV to produce the most advanced chips. And even as recently as 2012, when ASML needed to raise more capital to fund its development of EUV, it went to Intel, TSMC and Samsung, and Intel was the biggest investor in ASML at the time putting in several billion dollars to help fund ASMLs development.
So until quite recently, it seemed like Intel would be the biggest user of EUV lithography machines. It's only in the past couple of years that Intel decided in what looks to be a mistake in hindsight that EUV wouldn't be ready by around now where TSMC made the opposite of that bet, that EUV would be ready for high volume manufacturing and TSMC was proven right. Which is why it's done so well. The past couple of years and Intel was proven wrong, which I think most observers think, explain some of the manufacturing problems I've had in recent years by not using a UV and trying to use older versions of lithography to produce its most advanced chips. Now, Intel is changing its plans. It's investing very heavily in UV, but it's going to take a couple of years for them to learn how to actually use UV in high volume manufacturing.
Tracy:
So I have a slightly related question, although maybe it's sort of reversed I guess, but like given ASML’s competitive edge in producing a key technological component for semiconductors, could they ever have just gone into making semiconductors themselves? Like if they have a monopoly on this technology, no one can do it as well as them. Like why not just start making the finished product yourself
Chris:
To make a chip. You not only need lithography, which is one of the key steps, but there are other steps as well. You need to be able to deposit films of materials with atomic level precision, there are different companies Applied Materials, for example, in California that make that type of equipment.
You need measurement equipment that can measure individual atomic level in your final chips to make sure you understand what areas you have. That's a different set of companies that makes that equipment. So there's a lot of different specialized equipment that you need to make chips the cost of a new fab that for example, TSMC will build more than half of that cost as the equipment that goes in it and AML and as lithography machines are a critical part of that, but that's far from enough to make chips and ASML specialty is really solely in lithography and not at all in deposition or packaging, or the other types of equipment that you need to actually make finished chips.
Joe:
At this point. It is so fascinating to me, like to think about like, okay, ASML among the many extraordinary things. They also lay claim to having the flattest service in the world. And presumably in order to get the flat of service in the world, there’s some technology, as you sorta just mentioned, it has to be able to measure flatness and actually measure if the service is not flat. And it sort of speaks to this question in the US these days, there is a, there's a bill in DC that's designed to bolster U.S. capacity. And again, that's part of why you keep having these discussions because there's this effort underway. It's kind of bipartisan, the bill might pass. It might not pass.
But there's this sort of bipartisan interest to bolster domestic capacity. But I don't even know what that means sometimes because obviously as you described, the internationalization and complexity of the chip supply chain is so extreme. And as we've talked about with other guests chipped cross borders a million times before they arrive in your Xbox or your iPhone or whatever it is, like, what does it even mean in your view? Just to think about like this question of like expanding domestic capacity in an industry that that just is so extremely fragmented and international.
Chris:
Yeah. I think the first thing is you gotta be specific as to what type of capacity you wanted to span expand domestically. Certainly the US could expand production of chips domestically if we want to do. But that wouldn't have any effect on the reality that there's no way to buy lithography equipment, for example, except from foreign suppliers, either Nikon or, or ASML. I think domestic production is, is, is a great thing to support.
But the thesis that we're going to have a entirely domestically produced supply chain is a fantasy. The only reason that we're able to produce ships with such small features is because we're able to take advantage of expertise from companies in many different countries around the world. And there's no one in the industry who thinks there's any conceivable future. Even if you were to spend a trillion dollars over a decade where you'd get a domestically produced supply chain, that's anywhere near as efficient as what we've got now, you know, I think that supply chain risk discussion is often takes place at a 30,000 foot level. And what you really need to look at is what are the specific components you're worried about? Are there specific suppliers you're worried about and how can you mitigate those specific risks? But just talking about domestic versus foreign production is not nearly specific enough to have any sort of real meaning.
Tracy:
So we kind of mentioned this in the intro, but again, one of the themes that comes up repeatedly on these episodes is the idea of supply chains all the way down. So if there's a bottleneck in one thing, there's probably a bottleneck in a component and even smaller component that leads into that one thing. So if there's a bottleneck in lithography equipment, that's impacting semiconductors. I guess my question is, is there a bottleneck in something that goes into the lithography machines or the EEV machines that is preventing ASL from expanding production?
Chris:
It certainly could be there's not enough public information about ASML supply chain to know. And it's very plausible that ASML, despite being real experts at managing the supply chain, doesn't always know that they report having around 4,000 suppliers and all of their suppliers who you speak to will say, they ask lots of questions about their suppliers’ suppliers. But the reality is that there are multiple orders of magnitude, more suppliers of their suppliers. And so tracing them all down the chain is, is basically impossible. So what ASML tries to do is understand what other biggest risks they've even gone so far as to purchase some of their suppliers to gain more detailed control over managing those risks. But they simply can't know, every ultimate component that goes into all of, all of their suppliers systems. And so that's, that's where the supply chain management just becomes extraordinarily difficult.
Now, what they've been really good at, I think better than their competitors have over the past couple of decades is managing that. So it hasn't, generally caused any sort of serious delays. And one of the things that they're known for with their customers is, is being able to deliver mostly on time when they promise a machine and, and managing this was just something that no one else has been able to manage. I think the other thing to note is that, you know, when you've got this equipment that is, is, is manipulating individual atoms or trying to control the movement of light with extraordinary precision. It's one thing to have a machine that will do this once or twice or sporadically. It's another thing to have a machine that will do this day in, day out operating 24 hours a day.
And, and that's, that's the other thing that ASML has done very successfully over the past couple of years, it was clear as early as the 1990s, that it was possible to make a chip with EUV lithography. What's been difficult is making millions of chips with EUV lithography and doing it in a cost effective way. And, and that's what it sells, what really really stood out is that their machines are rarely broken, always functioning. They, they need less less tuning, less cleaning than their competitors. That's what ASML has done quite well. So it was not simply managing the physics, which is very hard, but it's also making sure that you've got this extraordinary precise physics that's always operating in these act way you expected to operate.
Joe:
Yeah. I'm thinking back to one of our discussions with HBS professor Willy Shih and I don't remember the math exactly. But if chip making is a 7,000 step process, then even, you know, 99.9% execution at each step is insufficient in many cases, because by the time you're down to the 7000th step, you've basically lost all your chips. I don't remember the exact math, but it is interesting to think about like building up that competence now just in can the machine that makes the chip, but can it make it over and over and over again without many errors,
Chris:
You look at ASMLs revenue statements. What you'll find is they've got a growing share of their revenue coming from services, which is servicing the machines that they operate. They've got staff in TSMC facilities in, in Samsung, etc, making sure that not only their machines are operating, but they're operating, exactly according to plan. They're not breaking down.
The other thing that ASML is doing more of is, is managing the software for their machines and the way that lithography works at the scale that we're talking about is that if you want to print a certain picture, say you want to print an X. You don't reflect a shape of the X on your Silicon, because the way that light reflects, if you printing an X gets something different. So you actually learn over time, all of the unexpected errors and light refraction and the errors and the way that chemicals react and you print the error version, then it will give you an accident. So there's extraordinary complex software that now tries to understand how all of these different effects work. And you can actually look at the images that ASML is producing to produce a straight line. And it looks nothing like a straight line. And so that software, as well is something that ASML has been focusing on.
Joe:
So one of the things that we've talked about, you know, was like the, sort of the nanometer wars and people talk about Moore's law and whether it's TSMC or Intel or anyone else, and they're always, or AMD maybe. And they're always bragging about like making smaller and smaller chips. And one of the things that we learned is that actually the chip companies all defined these measures a little bit differently.
So to some extent it's made up, but how much are the chip manufacturers themselves… How much are their timelines dependent on ASML? I guess I would say dependent on ASML’s own learning curve. And as a sole provider of the most cutting technology, what are the forces that drive technological gains for AML itself?
Chris:
Yeah. If you look at how ASML has begun to roll out EUV machines and into high volume manufacturing, which has mostly been at TSMC, the learning has happened collectively with ASML and TSMC. So there's been lots of ASML personnel that spends tons of time in Taiwan and vice versa. So you really wouldn't have the rollout of EUV over the past couple of years, had you not had this collective effort between TSMC and ASML and that puts other companies at a disadvantage because TSMC knows better than anyone how ASML’s machines actually work in practice.
And the high volume manufacturing is really crucial to understanding how, how these machines work, because you don't really know until you've got them in production. And once you got them in production, you've got thousands and thousands and thousands of iterations every single day where you can understand what the errors are and what the idiosyncrasies are of a given machine and begin to correct for them. We talked about technological progress and that that's important, but in, in some ways the, the real challenge here is actually manufacturing progress, understanding what the idiosyncrasies are at the manufacturing stage, and then learning to correct for them. And that's, that's what TSMC has done extraordinarily well at. And it's been hand in hand with ASML.
Tracy:
So I have a sort of markets oriented question, but, you know, we think of semiconductors as this highly cyclical industry that usually moves in line with whatever's going on with GDP and economic growth. And that hasn't really been the case since the pandemic, because we've had, you know, this big boom in demand for electronic goods. And it's been a struggle to keep up. But I imagine for a company like ASML, it has also traditionally been considered cyclical and its fortunes are sort of tied to what's going on with the actual semiconductor manufacturers, but just looking at ASMLs most recent results, they're forecasting basically like a boom in revenue for the next decade, something they expect to last for 10 years. Is there anything that could sort of knock that revenue cycle at this point in time? Or is this business like, is there such a steep moat around the UV technology that is just going to be impossible for anything to, um, to hit it?
Chris:
There's, there's definitely a steep moat around the technology and they won't be overtaken in EUV in a decade. It’s an impossible to overcome moat. There's no real competition that ASML faces when it comes to EUV. That the question is what is going to be demand for EUV machines.
And that's the question and ultimately of final demand for the most advanced chips out of ASMLs projections are based on the assumption that we've reached a point where there's a secular increase in demand for ships, as we have more demand for data center capacity, um, as we have the 5g rollout and new devices that are taking advantage of 5g networks, they're bad does that, we're going to have more chips per GDP and therefore more demand for AML. That's a bat that no, it's not clear what that's going to play out. What is clear is that anyone who's producing it as chips will have no choice, but to turn to SML. And so in some ways they're perfectly exposed to the fluctuations in the semiconductor industry. The more chips that are produced, the more machines you need, but the opposite is also true.
Joe:
You kind of hinted at this early on, but the idea that at seven nanometers and below at cutting edge, maybe EUV in theory, isn't the only technology. Are there other theoretical approaches for accomplishing the same thing?
Chris:
There are, it's really not a question of science, but of manufacturing efficiency. So if you take the previous generation of lithography machines, it was possible over time to produce ever smaller feature sizes on Silicon wafers by using a number of tricks. So for example, you can shoot the light through water. And if you think back to high school physics when light refracts differently through water that same principle lets you shoot lithography machines through water and carve more specific shapes. You can also use multiple steps of lithography to carves specific shapes that are more detailed. The challenge is just, can you do this efficiently?
So every step of lithography you need adds to the time it takes to produce a wafer adds to your costs. And so there's no doubt that if you want it to produce an equivalent of one of Apple's new iPhone chips using older generation lithography, you could do it in a lab and do one of them. The question is, can you do a million of them at scale? And that seems pretty implausible right now. And there's no really credible pathway of how you could do that efficiently today. And especially when you project forward 5 or 10 years, we're expecting to be making ever smaller transistors with more complex shapes on them. And it seems really implausible that you'll be able to do that using anything besides UV
Joe:
Chris. Is there anything, any other sort of last key things you think we've missed and that, I mean, I'm sure there's a million things, but other key ideas that I think we need to get across.
Chris:
I think if you're interested in U.S.-China dynamics, obviously it's bug, one of the key reasons why TSMC cut off Huawei in 2020, was because the U.S. could restrict TSMC is access to machinery of which lithography machinery was a key example of, so when the Chinese chip industry looks out and says, ‘where are we gonna get the tools that we need?’ the impact of US export controls on companies like ASML, even foreign companies that nevertheless use U.S. technology and their systems is a pretty fundamental roadblock that China faces and that the big concern that ASML has right now is that the U.S. is going to expand as restrictions on what you can send to China in terms of lithography machinery. And China's been a big growth market the past couple of years for older generation lithography machines. And so ASML does face a risk that the US expands these restrictions.
Tracy:
What inspired you to write a book all about ASML? Because it's not something that comes up necessarily in daily conversation. So I'm just wondering how it sort of came on your radar and what is it that piqued your interest?
Chris:
Like the two of you, I spent the past couple of years realizing that semiconductors were vastly more important than the average person, including myself realized, and also far cooler. The technology needed to make them as extraordinary. The fact that we're able to manipulate individual atoms in some cases is extraordinary. And to do it at the scale of, of trillions and trillions of transistors, I thought was really just wild in terms of what, what, what was possible.
And it seemed to me that I took my iPhone for granted. I took my computer for granted. I took the cloud, which is just a bunch of silicon and big data centers. I took all that for granted without thinking through how complex it was to actually make these tools work. And I think for a long time, we thought of the internet as something out there, we thought of data processing is something that happens somewhere else, but it's all actually very physical.
It's all things being carved onto silicon by shooting light at them and depositing layers of atoms and using different chemicals. And the reality that our entire digital world is in fact, existing on millions and millions of Silicon wafers is something I don't think we think enough about. And we're just having to come to reckon with that with the semiconductor shortage right now that you can't just imagine an increase in computing power and increase in memory. You've actually got to carve it, under Silicon in billions and billions of tiny transistors.
Joe:
You know, it's interesting. I mean, you're an assistant professor at the Fletcher school, which I associate with a diplomacy and government, and that seems like another sort of like fascinating dynamic here, which is like, maybe it feels again, or maybe it goes in cycles, but there's appreciation. And you sort of said it for your last point about you. I was trying to like that this particular industry is sort of inseparable from thinking about how governments relate to each other.
Chris:
That's right. It's crucial for military systems. For example, it's crucial for controlling computing power in the future. And it's been a prominent tool of, of, of geopolitics for the past three quarters of a century. And I think we're, we're seeing that more to the fore today. But in fact, when you look at the history of lithography and of semiconductors, more generally, you find that it's constantly been something that governments have thought about in political terms, as well as in economic terms and constantly been, uh, an area of dispute between different governments as they tried to vie for a bigger chunk of semiconductor ecosystem.
Joe:
Chris Miller, thank you so much for coming on. That was the ASML episode we needed to do it, and you're the perfect guys for it. And I just learned a lot. So thank you so much for coming on Odd Lots.
Chris:
Thanks for the invitation.
Tracy:
Thanks, Chris. That was interesting.
Joe:
Obviously I loved that conversation and, you know, I sort of interrupted like seven minutes in because like this idea of like, thinking of like a component as in itself, a supply chain story, like the idea that really the breakthrough is how do you coordinate 4,000 different suppliers of them, of highly specific raw materials and machines into one thing that forms a cohesive whole, the idea that that is what the thing is, is a pretty fascinating to me.
Tracy:
Here's the important question, which is what idea did you get out of that conversation for the next semiconductor episode? Because I'm sure there is one,
Joe:
What is the next one? No, we, we got to the end now. In all seriousness, like I would like to learn more about that process. Like the actual, like the coordination, it's almost like you think of like a conductor of an orchestra is sort of like the mental model I use for a company that has to like have 4,000 parts all coming together to form 31 units or 395 units or whatever it is like thinking about like, how do you do that from like a management perspective, even beyond the sort of tech perspective is like a super fascinating thing to explore, especially, especially right now.
Tracy:
And this is almost verging on state secrets, but we’ve got to get, you know, we have to try to get the ASML supply chain manager on Odd Lots. So, you know, ASML hit us up. We're interested in how you're doing it and we have to keep the semiconductors series going.
Joe:
Yeah, no, that, that was fascinating. And Chris was the perfect guest for that one.
Tracy:
Yeah, definitely. Should we leave it there?
Joe:
Let's leave it there.
You can follow Chris Miller on Twitter at @crmiller1.