As chipmakers race to add capacity, orders are pouring in at ASML. Part of the demand stems from the current chip shortage, but underneath there are long-term growth trends that the equipment maker didn’t acknowledge before. Preparations to expand manufacturing capacity in Veldhoven are underway.
Taking in 8.3 billion euros in orders in the second quarter, ASML nearly doubled its backlog to 17.3 billion euros. It’s the highest quarterly order intake the company has ever seen, prompting it to work “extremely hard” to produce the machines that customers “crave,” says CEO Peter Wennink. As a result, ASML has raised its full-year revenue growth guidance to 35 percent, up 5 percentage points from its estimate in Q1.
The current high demand is partly due to a catch-up effect from the Covid year, which will stretch into 2022, Wennink predicts. Things won’t slow down any time soon, though: artificial intelligence and high-power compute keep driving demand for leading-edge chips. But on top of that, there’s an explosion of demand from manufacturers of mature semiconductors, which has caught ASML off guard. “The very strong demand from the non-leading-edge customers across the globe really surprised us,” Wennink admitted to analysts.
Demand at mature nodes is propelled by the rise of the intelligent edge. “Distributed systems, which are being supported by 5G, are growing so fast. They don’t all need 5nm or 7nm. They need compute power to assist the sensor. This is a secular trend that will not go away very soon. Actually, we think it will continue throughout the rest of the decade.”
The third trend driving demand at ASML is the desire of countries and regions to become less dependent on foreign companies for advanced technology, or even pursue technological sovereignty. Both the United States and Europe feel they should share in the “big growth that’s coming.”
How big will that growth be? “Semiconductor makers currently have a combined sales number of about 500 billion dollars per year. That could be a trillion dollars by the end of this decade. The future for the industry looks bright.”
To accommodate the sustained growth, ASML – together with suppliers – is working on increasing manufacturing capacity, particularly for building dry DUV machines used to manufacture mature chips. The low-hanging fruit is a reduction in cycle time, which by Wennink’s estimation will take 6-12 months. Then there’s hiring and training more people to build more equipment, taking 12-18 months. And finally, ASML is considering expanding factory floor space, which would require two to three years to complete. In DUV, Wennink predicts a “significant double-digit” rise in capacity.
In EUV, ASML is squeezing out “one or two more tools” this year. Along with customers ordering more optional extras on tools, raising the average selling price, EUV revenue is now expected to grow by 35 percent this year. The previous forecast was 30 percent.
Last quarter, ASML already said it would increase the number of EUV systems to be built in 2022 from 50 to 55, and it’s looking to bring that capacity to 60 scanners in 2023. Even that won’t be enough to satisfy longer-term unit demand, despite the fact that EUV scanners get increasingly productive – so chipmakers need less of them to reach their desired capacity. The newest NXE:3600D model, of which the first system was shipped last quarter, features 15-20 percent higher productivity compared to its predecessor.
Challenged by an analyst how ASML could be so sure the increase in demand will be sustained, Wennink answered that everything is “happening at a speed that we completely misjudged.” Yes, there’s a shortage and that will take time to resolve, but underneath, there’s also a very real growth trend, he said. “So we’ll build that capacity.”
“Over the last 15 years, we’ve structurally underestimated the growth of the industry. In 2007, we gave you, for the first time, a target 5 years out based on certain market assumptions and we got there 1 year early. The second time, we got there 2 years early. And the third time we did it, that’s the one we’re in today. We’re guiding about 18.9 billion euros in revenue this year, which was the mid-market scenario that we gave you for 2025. We again are years early. I’m not concerned in building that capacity. We will use it.”
Neither is Wennink worried that large US and European investments to reshore semiconductor manufacturing will lead to overcapacity. This won’t happen, the CEO explained, because new fabs will be built by established chipmakers, who will be carefully planning their capacity expansions as usual. “I don’t think that any administration can go to the CEOs of one of those companies and say, because we want that capacity, you have to build it. They’re not going to do that.”
Because he expects his customers to behave rationally, Wennink isn’t opposed to the ambitions of Europe and the US. Considering the fact that overall semiconductor industry revenue is expected to double over the next ten years, the desire to spread manufacturing across the globe in fact “seems very logical,” he said.
This would cause some, but not massive efficiency, the CEO added. “You’re building a new fab in a place where you cannot piggyback on your local ecosystem – that will be somewhat inefficient. But it’s not going to be double-digit percentages. I don’t believe that at all.” Of course, ASML stands to gain from that inefficiency. Essentially, taxpayers may fund the sale of additional lithography tools in the future.