The Disguised Dutch Monopoly: ASML

by Thomas Beattie

Eindhoven. The Netherland's fifth biggest city and home to the secret, silicon valley-like, tech monopoly ASML. Pioneers in the building of a new chip maker, utilising “extreme ultraviolet” (EUV) light with wavelengths of just 13.5 nano-metres (billionths of a metre) and weighing more than 220,000 lbs. No surprise that it requires six fully loaded Boeing planes to haul. 

Your brain contains 100 billion cells called neurons, effectively tiny switches that allow you to think and remember. Computers contain these “brain cells” or transistors; the more the faster. Moore's Law refers to Moore's perception that the number of transistors on a microchip doubles every two years, though the cost of computers is halved. To put this into perspective the chips inside NASA’s computer had approximately 2,000 transistors. The chips inside the newest Apple iphone have 4.3 billion. For decades, engineers have been making faster computers by cramming more and more transistors onto chips.
The problem is, current technology has reached its limit. With the old way of doing things, we can’t fit in any more transistors. Which means computers can’t get any faster. ASML is the only company in the world who are able to make these chips faster. It’s called an Extreme UltraViolet (EUV) lithography machine and costs $145 million. Their technology is so advanced that they can print a transistor every 10 nanometers. That means it can put 7,500 on the width of a single strand of hair. 

This is immensely impressive, however they have pretty much established a monopoly over the market. They are not the only maker of photo-lithographic machines, which use light to make the chips. However, they alone harness EUV technology as thus their market share has doubled to 62% since 2005. The fact that some of the world’s leading tech giants, Samsung, Intel and TSMC, have all become reliant on ASML means that they effectively have monopoly power on this link in the supply chain. This is shown through their high revenue and wildly profitable business model. ASML sold $1.1 billion worth of EUV machines in 2017 with Intel and Samsung ordering over 30 of them.


This makes up around 10% of their total sales and they forecast to deliver 50 EUV machines in the next two years, adding $6 billion to their revenue. Furthermore, ASML’s average net profit margin over the last half-decade has been 24%. Given the highly cyclical nature of the industry that they operate in this is incredible and beats some of the most renowned companies like Google who have a 21.5% margin and means that their rate of reinvestment is high. 

Given this recent success and reaching a market cap of around $110 billion in 2020, it seems fitting to look into the early days of the firm. The company was originally founded in 1984 as a shared venture between two Dutch companies, Royal Philips Electronics and Advanced Semiconductor Materials who are now known as ASM International. However, despite substantial growth, financial pressures created by a mid-1980s industry downturn meant that ASM sold 50% ownership of ASML to Philips in 1988. It was here, in the early, days that ASML had difficulties. Their initial product line was poor and, struggling with customer acquisition and quality control, they were kept alive by Philips and subsidies from the Dutch government. 

Now, they face one major bump in the road. China wishes to stimulate and grow its own chipmaking market, but growing pressures from America are delaying this and the Dutch government is yet to permit the firm an export license. Whilst this is a market that ASML are undoubtedly keen to capture, it is not essential for them and analysts predict that they will keep a hold of their monopoly for a while yet with reports of similar Chinese firms being “a couple of generations behind”. Silicon Valley firms like Google and Facebook face countless questions over their dominance within their markets and it is often argued that they have gained a ‘dangerous’ influence. Just 2 years ago in 2018, Mark Zuckerberg controversially faced congress over potential regulations over the sharing of Facebook data with third parties. Should ASML be forced to face similar questions?

Firstly, they haven't been short of controversy. Last April ASML said that six employees, including Chinese nationals, were involved in divulging trade secrets from its American office. However, the two are incomparable in terms of scale and consequence. Secondly, Malcolm Penn of Future Horizons thinks that another Chinese rival would take up to a decade to catch up to ASML demonstrating the hold they have on the market. Typically, firms with monopoly power in neo-classical economics are the only firm in the market and face the entire demand for the product under consideration, in this case the EUV technology. Such a circumstance usually attracts regulation as, with a complete hold on the market, monopolists have price making power meaning they can choose which price they set or the quantity at which they produce, with ASML, this is what allows them to charge $145 million per machine. Consequently, they enjoy large and long run profits. Many argue that these high prices can cause a loss for consumers (known as a reduction in consumer surplus). In essence, the company has no competitors due to such high barriers of entry, for ASML this is their seriously advanced technology, so they can charge what they like, meaning the consumer is worse off. However, this may be a rare occasion where a company should be left alone. 

The fact that Samsung and Intel are buying 30+ of these machines and almost the whole tech industry is reliant on ASML as part of their supply chain indicates that their product is good quality. Thus, a high market concentration does not always signal the absence of competition; sometimes it can reflect the success of firms in providing better-quality products, more efficiently, than their rivals. Furthermore, as firms are able to earn abnormal profits in the long run there may be a faster rate of technological development that will reduce costs and produce better quality items for consumers. In the case of ASML, this could result in lowering the production costs within the tech industry, assuming this is passed onto the consumer with lower prices, this could be extremely beneficial. 

The Dutch firm have already announced that they’ve been working on new EUV machines that are yet more efficient. They are due to ship in 2023 and, if past performance can be used as an indicator for the future, they are set to withstand anything (even their recent drop in share price due to Covid-19).