The job of ASML’s new CEO is more difficult than it seems Opinion

ASML
ASML logo and chip.NurPhoto (NurPhoto via Getty Images)

ASML is a monopoly in the truest sense of the word. The Dutch company, valued at 340 billion euros, has little competition for the machines that make the world’s most advanced semiconductors. But as new CEO Christophe Fouquet takes over, his predecessor Peter Wennink leaves behind challenges and strengths.

ASML plays an important role in the semiconductor supply chain, which in turn is key to the growth of data centers that support the expansion of artificial intelligence. The Veldhoven-based company is the only supplier of lithography machines that use extreme ultraviolet (EUV). Thanks to them, microcircuit manufacturers can draw more complex designs of transistors with a width of only a few nanometers on microchip plates, which allows Apple’s iPhones to become more and more perfect.

When Venink took over in 2013, two major developments helped him fend off rivals like Japan’s Nikon and Canon. ASML just got the big funding it needs to harvest enough EUV light: In 2012, Intel, TSMC and Samsung, the world’s three biggest chipmakers, together poured €3.9 billion in cash into the Dutch group in exchange for a combined stake of 23 %. Second, ASML was a good buy. Wennink paid $3.1 billion in 2016 to acquire Hermes Microvision, a Taiwanese company that makes equipment that uses electrons to identify microscopic defects. This has played a key role in increasing the efficiency of EUV machines.

As a result, in 2024, ASML became the only company in the world that can produce machines capable of cutting chips reliably, economically and more accurately. Thus, its market capitalization has increased ninefold from less than 40 billion euros in 2013. Revenues increased fivefold, from 5.2 billion in 2013 to 27.6 billion last year. Wennink has also been able to increase profits from the latest generation of EUV machines. ASML’s gross profit margin increased from 41% in 2013 to 51% in 2023.

Fouquet, who joined ASML in 2008, appears to have done so. A third of ASML’s sales in 2023 will come from EUV machines, with a total order book of €38 billion in March. Analysts polled by Visible Alpha expect this segment to account for half of the group’s revenue in 2030, more than doubling from 2023 to reach €57 billion. The more EUVs Fouquet sells, the more the company’s profitability will improve, with ASML forecasting a gross margin of 54%-56% by 2025. Last year, the group also delivered the first of its new “large aperture ( NA )” digital EUV machines, which reduce production time and cost 350 million each.

But there are also headaches. One of them is the growing tension between China and the United States. Joe Biden’s administration has tried hard to prevent Beijing from gaining access to mid-range and advanced chips. It also prevents Chinese customers from getting the hardware or software needed to make these chips, which is why ASML has never been able to sell its most advanced EUV machines to China.

The US is trying to screw up the nuts. Washington wants the Dutch to impose controls on a wider range of hardware, which could include less advanced deep ultraviolet (DUV) machines, and even ban ASML from servicing Chinese customers who have already purchased DUV machines. Given that ASML has about 1,600 local employees in China, it is unclear how any government could prevent this from happening. But Foucault has a special reason to please the United States.

One of the main reasons ASML is able to produce advanced machines on a large scale is its ability to manage its supply chain adeptly. For example, only 15% of lithography machines are made with in-house components: the vast majority come from other companies. Although 80% of its 5,100 suppliers are located in Europe, ASML has 13% from North America and the rest from Asia. Any supplier issues, political or otherwise, could slow down ASML’s ability to deliver machines to customers.

Another problem for Fouquet is the increasing difficulty of attracting sufficiently qualified people. McKinsey researchers estimate that by 2030, the number of engineers entering the semiconductor sector will have to quadruple just to meet Europe’s workforce needs. It’s true that the Dutch government is spending €2.5 billion to improve infrastructure in the Eindhoven region, where ASML is headquartered, in part to help the company attract and retain talent. But the rise of AI has led to an increase in demand for engineers who write and develop AI models. The possibility of more prestige and possibly better pay means that big tech companies like Meta, Apple, Alphabet and Microsoft can easily steal new talent from under Fuqua’s nose.

The ultimate risk is that ASML will rest on its laurels as paradigm shifts like artificial intelligence take over the technology sector. Fouquet now has a comforting moat around his business: if companies like Nikon or Canon want to build a machine better than ASML’s EUV, they’ll need a huge capital investment, plus years to train a sales force to use a new team, in addition to a quorum of customers , ready to bet on a new option in the long term. But it’s far from impossible that an as-yet-unidentified way to shut this process down, creating a cheaper and faster way to kill ASML.

The net result of all these headaches for Fouquet may be something relatively prosaic: marginal gains. Analysts polled by Visible Alpha forecast revenues from state-of-the-art high-resolution EUV machines to reach just €2.6 billion in 2030, just 4.5% of the group’s total. And estimates compiled by the same source predict that low-tech DUV revenue growth will slow to 4% in 2026 and remain below 10% for the next four years. But even then, the segment would still account for a quarter of the group’s sales, and Chinese tensions could worsen the situation. Consulting firm Bain, meanwhile, pointed to the risk that chip makers will gobble up EUV in the coming years, creating a boom followed by several years of low orders.

ASML shares have risen more than 40% in the past year, in part because US subsidies are encouraging TSMC and Intel to expand their EUV-dependent semiconductor production. However, Q1 results gave an indication of potential future volatility, with ASML down 7% on April 17 due to disappointing EUV order numbers. At nearly 30 times this year’s expected EBITDA, its shares could tumble if unsustainable revenue growth becomes the norm. Fouquet may command a monopoly, but that also means investors can demand more from him.

Authors columnists for Reuters Breakingviews. Opinions are yours. Translation, Af Carlos Gomez Belowit is a responsibility Five days

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