ASML sell-out: Dreams and rumors will not break the monopoly

Shares of ASML, the largest and, according to many, the most important company in Europe, fell as much as 8% during Monday’s session. The situation was so dramatic that the Amsterdam exchange had to halt trading in the instrument.

The catalyst for the decline was news that China is set to begin mass production of “DUV” systems (operating in the ArF system). But what does this really mean for the market and for ASML?

Questions without answers

A seemingly simple message contains a large number of implications, doubts, and questions, but almost no specifics.

• Phantom companies

  • The best primary source is a Reuters article. It points to an anonymous informant from within China’s semiconductor industry, who said that a small state-owned company in Shanghai is expected to attempt production of DUV machines. The amount of information about this entity online is close to nonexistent. At the moment, it is difficult to determine whether the companies involved in the initiative even exist.

• Not much "mass" in production

  • “Mass production,” as some sources describe it, means a planned 5 machines in 2026 and up to 20 machines in 2027. Is that mass production? ASML already produces dozens of such machines per year.

• A race from decade ago 

  • For ASML, the DUV business is a segment the company is moving away from, because it is an outdated standard compared with ASML’s core business, EUV (Extreme Ultraviolet).

• Not all DUV's are made equal

  • If Chinese DUV machines (specifically ArF tools) exist, nothing is known about their resolution, reliability, throughput, or yield. Even small changes in these parameters can worsen their profitability by orders of magnitude.

Source: ASML

In summary, the DUV segment itself, while still important (just under 30% of sales), is one that ASML is clearly moving away from, because the breakthrough EUV offers much better margins and a growth scale that more than compensates for the Chinese market, assuming it were to disappear quickly for the company.

An indestructible monopoly?

A much more important question can be asked: if China currently has DUV production technology, or at least anonymous sources claim so without providing any evidence, is it only a matter of time before China also acquires EUV technology, which is ASML’s main competitive advantage?

Absolutely not, under any circumstances. If China has obtained the ability to produce DUV (ArF) machines at the dizzying volume of a few units, that only represents plugging a gap in the capabilities of China’s lithography industry, which even in light of this hypothetical revelation remains decades behind Europe’s ASML. It is hard to find circumstances in which this would be a breakthrough.

It must be understood that ASML’s products are not consumer solutions, like consumer electronics, that can be copied. The jump from DUV to EUV is not a step or a march, but a flight, and not to the Moon bur rather - to Mars.

To get where it is today, ASML had to build a network of ultra-specialized companies that, over decades, perfected every component of ASML’s machines. Even obtaining a complete ASML EUV machine, which is protected in a manner comparable to how, for example, nuclear weapons are safeguarded, would only be the beginning of building an entire production chain from scratch, and in the best case would take many years. Trying to replicate ASML’s success by any other entity through classic R&D would take, at best, 10 years and more likely around 20 years.

ASML earnings [2018–2026]

The current sell-off in ASML is a price move based on unconfirmed information that the market has heavily overinterpreted. The fundamentals and outlook for ASML remain unchanged.