New ASML CEO’s job is harder than it might look
09/05/2024 12:00
(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Karen Kwok
LONDON, May 9 (Reuters Breakingviews) - ASML ASML.AS
is a monopoly in the true sense of the word. The $360 billion
Dutch company faces no meaningful competition selling machines
that manufacture the world’s most advanced semiconductors. But
as new Chief Executive Christophe Fouquet takes over, his
predecessor Peter Wennink leaves behind challenges as well as
strengths.
ASML plays a critical role in the semiconductor supply
chain, which itself is key to the data centre boom underpinning
the expansion of artificial intelligence. The
Veldhoven-headquartered company is the sole provider of
lithography machines using extreme ultraviolet (EUV) light.
These enable chipmakers to draw more intricate transistor
designs a few nanometres wide on microchip wafers, allowing the
likes of Apple’s AAPL.O iPhone to become ever more
sophisticated.
When Wennink took over in 2013, two major developments
helped him see off competitors like Japan’s Nikon 7731.T and
Canon 7751.T . ASML had just received the chunky funding it
needed to harvest sufficient quantities of EUV light: in 2012
U.S. group Intel INTC.O , Taiwan’s TSMC 2330.TW and South
Korea’s Samsung, the world’s top three chipmakers, collectively
pumped 3.9 billion euros of cash into the Dutch group in return
for an aggregate 23% stake. Second, ASML bought well. Wennink
paid $3.1 billion in 2016 to acquire Hermes Microvision, a
Taiwanese company that builds equipment using electrons to
identify microscopic defects. That played a key role in boosting
EUV machine efficiency.
The upshot, in 2024, is that ASML is the only company
globally that can manufacture machines capable of reliably
carving cost-effective and more precise chips. Accordingly, the
Dutch firm’s market capitalisation has risen ninefold from under
$40 billion in 2013. Revenue jumped five times from 5.2 billion
euros in 2013 to 27.6 billion euros last year. Wennink also
managed to churn out more profit from its cutting-edge EUV
machines. ASML’s gross profit margin grew from 41% in 2013 to
51% in 2023.
Fouquet, who joined ASML in 2008, therefore seems to have it
made. A third of ASML’s 2023 sales came from EUVs, on which the
group has a total order book of 38 billion euros as of
March. Analysts polled by Visible Alpha expect the segment to
contribute half the group’s revenue by 2030, which will have
more than doubled from 2023 to 57 billion euros. The more EUVs
Fouquet sells, the more the company’s profitability improves:
ASML guided a 54% to 56% gross profit margin for 2025. Last year
the group also shipped the first of its new “high numerical
aperture (NA)” EUV machines, which cut production times and
cost 350 million euros apiece.
But there are also headaches. One live one is rising
tensions between China and the United States. The Biden
administration has aggressively tried to stop Beijing accessing
cutting-edge and mid-range chips. It also prevents Chinese
customers from receiving the equipment or software necessary to
make such chips, which is why ASML has never been able to sell
its most advanced EUV machines to China.
The U.S. is trying to tighten the screw. Washington wants
the Dutch to impose controls on a broader set of hardware which
could include its less advanced deep ultraviolet (DUV) machines,
and even prevent ASML from serving Chinese customers who have
already acquired DUV machines. Given ASML has around 1,600 staff
locally in China it’s unclear how either government can stop the
company from doing so. But Fouquet has a special reason to keep
the U.S. happy.
One of the core reasons ASML can churn out advanced machines
at scale is because of its capacity to adeptly handle its supply
chain. Just 15% of its lithography machines, for example, are
built from components built in-house: the vast majority come
from other firms. But while 80% of its 5,100 suppliers are based
in Europe, ASML still counts 13% from North America, with the
remainder in Asia. Any supplier snafu – politically motivated or
otherwise – could slow down ASML’s ability to ship machines to
its customers.
Another issue for Fouquet is the increasing difficulty of
attracting sufficiently qualified people. By 2030, the number of
engineering graduates entering the semiconductor industry would
need to quadruple to fill the headcount required in Europe
alone, McKinsey researchers reckon. The Dutch government is
admittedly spending $2.7 billion on improving infrastructure in
the Eindhoven region, where ASML is based, partly to help the
company attract and retain talent. But the AI boom has prompted
a rise in demand for engineers who write and build AI models.
The scope for greater prestige, and possibly better
compensation, mean that Big Tech groups like Meta Platforms
META.O , Apple, Alphabet GOOGL.O and Microsoft MSFT.O could
easily steal new talent from under Fouquet’s nose.
The final risk is that ASML rests on its laurels, as
game-changers like AI sweep the technology sector. Right now,
Fouquet has a comforting moat around his business – if the likes
of Nikon or Canon wanted to build a better machine than ASML’s
EUV they’d need epic capital investment, plus years to train up
a sales force to use the new kit, plus a quorum of customers
willing to take a long-term bet on a new option. But it’s far
from impossible an as-yet-unidentified way to short-circuit that
process emerges, creating a cheaper and speedier path to an
ASML-killer.
The net effect of all these headaches for Fouquet may be
something relatively prosaic: a bumpy top line. Analysts polled
by Visible Alpha expect revenue from the most cutting-edge high
NA EUV machines to only amount to 2.6 billion euros by 2030,
just 4.5% of the group total. And estimates compiled by the same
source anticipate revenue growth from the lower-tech DUV
machines to slow to 4% in 2026 and to remain under 10% in the
following four years. But even then the segment will still make
up a quarter of group sales, and Chinese tensions could make
things worse. Meanwhile consultant Bain has flagged the risk
that chipmakers gorge on EUVs in the next few years, creating a
boom that’s then followed by a few years of meagre orders.
ASML shares are still up over 40% from a year ago, partly
because U.S. subsidies are encouraging TSMC and Intel to ramp up
EUV-dependent semiconductor facilities. Yet first-quarter
results gave a flavour of its potential future volatility – ASML
dropped 7% on April 17 on underwhelming EUV order numbers. At
nearly 30 times expected EBITDA this year, its shares might
slump if stuttering revenue growth becomes a pattern. Fouquet
may preside over a monopoly, but that also means investors may
hold him to a higher standard.
Follow @karenkkwok on X
CONTEXT NEWS
Christophe Fouquet started his new role as ASML’s president
and chief executive on April 25.
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Graphic: EUV will become a bigger part of ASML revenue https://reut.rs/4b8TVK7
Graphic: Half of ASML’s machines shipped to China last quarter
https://reut.rs/3UReOnp
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(Editing by George Hay and Oliver Taslic)
((For previous columns by the author, Reuters customers can
click on KWOK/
karen.kwok@thomsonreuters.com; Reuters Messaging:
karen.kwok.thomsonreuters.com@reuters.net))