ASML is a critical supplier of semiconductor lithography machinery for foundries like Intel and
TSMC. In my video discussing TSMC's $28 billion capital expenditure, I briefly discussed their
situation. Their CEO said in an earnings call that they can make 50 high-end EUV lithography machines
a year. That's it. Without those machines, the foundries cannot churn out more 5nm chips.
So why not make more of these machines? ASML itself has thousands of suppliers
making parts that end up into its machines. Coordinating and integrating all of these parts
together into a single smooth-running machine is immensely challenging.
In this brief video, we will continue our deep dive into ASML and look at how the company puts
together centi-million dollar lithography machines for multi-billion dollar semiconductor companies.
And how EUV makes it so much harder.
You might want to watch my ASML explainer video first before starting on this one,
just in case you need a refresher.
ASML is a global, sprawling company - befitting the nature of its work.
The factory is based in the Netherlands but there are
additional manufacturing and R&D sites located in Connecticut and California.
Its products are more like airplanes than you might at first expect. In my video about COMAC,
I mentioned that Boeing and Airbus no longer make the majority of the parts that they put
together. Instead they have evolved into having a system integrator role where they select,
procure, and put together the outputs of different suppliers in their network.
ASML is the same. Their lithography machines, like those of the TWINSCAN variety, are built
out of independent modules. Kind of like the Megazord in Power Rangers.
90% of the components that go into these modules are made by the 500-600 outside companies
within ASML's outsourced supplier network. These are extremely critical companies and differentiate
ASML's supplier network from its competitors Canon and Nikon, which tend to do things in-house.
300 of these suppliers are located in the Netherlands.
Another 100 are in other parts of Europe, mostly Germany. And the rest are largely
in the United States. Coordinating within this global network is critical.
Just as TSMC leans heavily on ASML to provide training and advice on how to use their products,
ASML in turn leans heavily on its suppliers on how to best use their components.
For instance, their strategic alliance with German company Carl Zeiss AG.
Zeiss is a specialist in precision optics and helps produce the lens - a very critical part.
So why outsource? Isn’t that the reason why Boeing can’t make good stuff anymore?
Isn’t outsourcing a scourge of western capitalism?
Well, ASML might from time to time purchase a supplier company to bring critical, unique
expertise in-house. For instance, the acquisition of Brion Technologies, a US firm specializing in
computational lithography, and Cymer, another US firm specializing in lasers. It happens.
But for the most part, ASML wants to remain in a system integrator role and leave as
much of the actual manufacturing to its suppliers. There are a few reasons for this.
First, ASML can get its module components without needing to learn how to be the best in the world
in making that specific part. A single lithography stepper can incorporate over 1,600 individual
components. 200 of those are not cheap to procure in terms of cost or production time.
The company cannot focus on those components'
minutiae while at the same time maintaining a big picture view.
Second, this allows ASML the flexibility to change and adapt themselves to changing technology
trends. If something happens and ASML has to radically change the way it creates its machines,
like as it did with EUV, then it has the flexibility to make that change - without having
to deal with the sunk cost of having invested resources to develop a now-defunct technology.
Third, like with Boeing and Airbus, ASML wants the system integrator role because it puts them
at the capstone of the entire massive enterprise. The gateway that listens
to the customer requirements and has final say on which part goes where.
This role allows for the most economic value. Indeed, ASML is often its suppliers’ single
most important customer. It might represent 50% or more of their revenues (though this is not
the preferred situation). Thus, ASML can exercise strong influence on their operations and planning.
Many of these suppliers are too specialized to diversify away from ASML.
How many customers are out there for high-precision motors or a beam measuring unit?
Okay, so now that we have a good idea of what the supplier network is,
let us look at how it works. At least, this is how it worked as of the past few years.
Might have changed a bit since then. This is the latest information that I have.
It starts with the client. Intel, Samsung, or TSMC plan out their future customer and
product demand. They need to do this a year or more ahead of time, which can be challenging.
They inform ASML that they would like to purchase a machine to meet this demand
and when they would like this machine to be delivered.
When making that order, the client chooses from over 30 client-specific options,
crafting the end product to meet their own needs. This means that no single machine
that ASML puts out is exactly the same as the other. It also explains why TSMC,
Intel and Samsung can get different results despite sharing the same supplier.
Once ASML knows that it has an order, their Supply Chain Planning Department
makes a Master Production Schedule. This MPS clarifies when production for this specific,
individual machine starts and ends. It takes into account resource needs,
available workforce hours, component lead times, and of course, customer deadlines. After that,
the suppliers are notified and issued purchase orders to get working.
As I explained earlier, each machine is made up of modules.
These modules are built independently in a process step referred to within the company as "ASSY". The
modules then are integrated together in a step called "FASY" (standing for "Final Assembly").
After FASY, the machine is tested to see whether or not it meets internal benchmarks.
Configurations may be made to help improve performance. This stage is called "Test".
Once the machine is determined to have met ASML standards for performance and reliability,
the machine is disassembled and packed for delivery to the customer.
Over 80% of ASML's customers are located in Asia, so this often will be a long flight.
Once it gets to its destination, ASML’s technicians work with the
foundry’s technicians to install the device into a fab clean room for use.
It is a harrowing, delicate process. If you want to know more about how foundries build
and set up such rooms, I recommend watching my video about TSMC’s fab construction work.
ASML not only has to build and deliver the product, but they also are responsible for
its upkeep and service time. It is not like a refrigerator where they set it up and go home.
ASML signs service contracts with its foundry customers after the sale with uptime KPIs.
Such arrangements are normal for large capital purchases between companies.
These service contracts can hold ASML financially liable for lost sales due to machine downtime.
So the company offers 24/7 support coverage with trained technicians and staff.
These come out of their local technology development and training sites in Japan,
Korea, Taiwan, United States, and 16 additional countries around the world.
When things do break, it is critical that spare parts go out to customers ASAP. The company keeps
spare parts at local service warehouses. If a customer needs something that the local warehouse
does not have, then the central warehouse has to ship it over, with a target date of 14 days.
Better than having fast turnaround on replacing broken parts is to have them not break in the
first place. To do this, ASML maintains rigid quality control standards on their
suppliers - a policy of "zero defects". Each part is closely inspected on the factory floor
and if anything can go wrong, then it is rejected.
ASML's supply chain in action is a symphony of chaos and nervous tension.
Their planners have to account for parts being rejected on the factory floor due to defects,
possible disruptions, and transport issues.
If a rejected or missing part is not all that important, then workers can find a workaround -
usually by replacing the item with a "dummy part" - and continue on schedule. But if the
part is mission-critical, then production can stop entirely and the whole module can be put at risk.
It is totally understandable from the supplier's perspective that things can
go wrong. It happens. But ASML has to deliver a machine to its customers by the deadline.
And a foundry like TSMC does not want to have to go to Apple
and tell them their iPhone has to be delayed due to insufficient capacity.
Furthermore, some of these parts - usually the lens and lasers - need a lot of lead time. Longer
than the actual lead time of the final product. A single lens can take up to 40 weeks to be made.
This means that some of the work needs to be started far in advance of actual customer orders.
So it is not like you can ring that up overnight even with all the money in the world.
Ah yes. Money. I have not mentioned cost yet, but that matters too.
Part of the reason why it can cost $18 billion to build a new leading edge fab
has to do with the rising costs of the latest lithography equipment.
EUV equipment can cost $150 million each, as much as a Boeing airplane. Individual components and
replacements for those machines often cost far in excess of a million dollars each.
Oh, since we mentioned EUV ...
Extreme Ultraviolet Lithography is the most advanced lithography technology available today.
Its commercialization with the TWINSCAN NXE series
is expected to be more cost-effective than other techniques for sub-10nm nodes.
The technology has been around since the 1980s. I have done a
video about it earlier if you want to learn more about that.
I won't repeat myself recounting the long journey. So let’s get into some gritty details.
EUV lithography requires a re-engineering of many traditional semiconductor fabbing principles.
I have heard it described as a revolutionary,
rather than evolutionary technique and I think that is about right.
ASML's entire supply chain has to be rejiggered from the bottom up to accommodate these changes.
Let me give you just one example of this in action. A key challenge for EUV lithography
is how to make sure that you can etch enough wafers in a given amount of time
while avoiding substantial yield defects. But the EUV mirrors have relatively
low reflective-ness, less than 70%. So they need a very powerful light source.
They achieve this by firing a CO2 laser at droplets of tin
in order to create clouds of plasma and ultraviolet light.
Why droplets? Because they need to reduce the amount of tin debris from the plasma
so to prevent the contamination of the mirrors collecting and focusing the light.
At first they experimented with a rotating cylinder, then they moved to a thin target tape,
and then a spray jet, and then a liquid filament, before finally settling on tiny droplets.
The margin of error when it comes to the power source is really tight and this has
had consequences across the entire supply chain. It is common in older lithography methods to use
something called a pellicle, a polymer film just 1 micrometer wide, to prevent particles
from casting a "shadow" discrepancy that gets projected onto the etched wafers and ruins them.
In the EUV world, however, even the super thin traditionally-used pellicles can absorb and weaken
the EUV light. So while ASML works to develop a suitable pellicle, earlier generations of
EUV machines all across the supply chain now have to adhere to ultra-strict cleanliness standards.
A particle just 52 nm wide, the size of a small virus, can contaminate the EUV supply component.
Maintaining such cleanliness pushes the limits of what is technically possible.
New proprietary detectors were installed at all supplier premises.
Particle flushing steps had to be added throughout the whole build process.
Such challenges are why EUV commercialization
was delayed for several decades even after proving the feasibility of the science in the 80s.
Note. It has recently been announced that pellicles are now available for EUV machines.
So it is likely from now on that this cleaning won’t need to be a part of the workflow.
But before that, such cleanliness standards were enforced for a few years.
Having them now will improve wafer yields and cost.
ASML's market leadership in this sector is defined in two ways.
The first is in the technological superiority of its products. ASML products are twice as expensive
as competing products from Nikon or Canon, but perform much better than the competition. They
can print in more detail and at a higher rate. That’s what the customers want more than price.
The second has to do with its very strong record of collaboration.
The company works closely with both its customers and its suppliers,
conducting between all of them to deliver a product as demanding as any airplane.
This track record and constant process improvement helps to keep ASML
at the leading edge of the market, and Moore's Law humming along.