EUV has been a very important machine for AI. I would say without EUV, you don't have a 3 nanometer node. You don't have a 2 nanometer node and therefore you don't have AI. A lot of academics would widely see EUV machines as being the world's most complicated machine. They have over 700,000 components. These are not easy machines to design or build. The transistor density has to double every two years. And if you look at what has been done in the last 40 years, if you look at what is being done today with AI, not only this is still happening, but this is in fact accelerating. Whatever happens at the application or model layer, whether it's OpenAI, Anthropic, or Google, ASML wins. They're still going to have to require lithography machines to build the chips. And I think that's the core attraction that it's effectively an agnostic royalty on AI demand and more broadly compute demand.
Hello and welcome to Invest in Progress, the Scottish Mortgage podcast. I'm Claire Shaw, portfolio director. In this podcast, we take you behind the scenes to hear conversations between our investment managers and leaders of the world's most exceptional growth companies. As a UK investment trust, we can only market Scottish Mortgage to certain audiences and graphies. So, check out the podcast description to ensure this episode is suitable for you. And as with any investment, your capital is at risk. 60,000 times a second, a laser inside ASML's newest machines strikes a pollen size droplet of tin with three successive pulses, producing a kind of light normally only found in outer space. That light is how computer chips will keep getting more powerful and energy efficient for years to come. ASML builds the machines that semiconductor manufacturers use to pattern billions of transistors onto each chip. The tiny on and off switches that make computing possible. AI data centers, the smartphone in your pocket, cars on our streets, they all depend on this Dutch company's engineering. Today's guest, Christophe Fouquet, took charge of ASML two years ago, and under his leadership, it's become the most valuable company in European history and has begun shipping its next generation extreme ultraviolet or EUV system. A tool that weighs as much as a blue whale and took a decade to create. So, let's hear from manager Lawrence Burns and Christophe Fouquet.
Hi Christophe, thank you so much for joining us from your headquarters in Veldhoven. I have fond memories of the dinner we had near your headquarters just before you actually became CEO also of your predecessor Peter. That seems a long time ago and a lot has happened since then. Perhaps we could start with the same opening question we ask all our guests which is what does ASML do and what problem is the company trying to solve?
Yeah. So, ASML is doing what we call lithography. And when I say that, I think that doesn't help you at all. So, I would try to start from what most people know. Everyone of course heard about AI nowadays, right? It's becoming very very important. I understand that AI is making use of very powerful semiconductor chips and those chips are very very powerful because the number of very small transistors on them is what is creating basically the power of compute either for logic chips or memory. And if you want to be able to put a lot of transistors basically on the chips, someone needs to have a machine that will print the image of the transistor in very high quantity on those chips. And this has been the job of ASML for many many years more than 40 years now. Our mission has to be basically to allow our customer to print very very small features in order to create the most powerful chips. You for sure heard about Moore's law. Moore's law says that every two years the transistor density has to double in order to continue to create basically a road map for this industry. And the ability to print smaller and smaller transistors over time has been a key component of this Moore's law. So that's a bit the job of ASML and of course as AI becomes so important you know our role is also extremely critical nowadays.
Can you tell us a bit about ASML's origins?
This goes back more than 40 years ago and is a company that was created out of Philips. I think you are very much aware that Philips was an extremely important company in technology in the Netherlands but I will say far beyond the Netherlands and in fact here in Eindhoven Philips has been the source of many spin-offs. ASML has been one of them I think you know also is our colleagues here in the Netherlands so that's where we come from basically.
and can you give us a feel for the scale of the company and over the different time periods how it's evolved on its journey to where it is today.
We started in a very small I would say shack somewhere you know in the Eindhoven with a few people and for many many years I mean the company was really the underdog in this industry trying to capture market share basically against some of our Japanese competition and this lasted for I would say a good 20 years all the way to early 2000 maybe even 2004 2005 where even many times the company got almost bankrupt because money was very very tight. I think the first really big success of ASML was with what we call TwinScan. So the idea to have a lithography system with two stages one that we could use to expose one we could use to measure the wafer and this really created a major step into the performance of lithography machine. So this was a very first big step and this was early 2000. The second big one was the immersion technology. So the crazy idea to put water between a lens and a wafer between 2005 2010 where we got a lot a lot of traction on this technology because this was the most advanced technology and by the way we're pretty much still the only company providing this type of system today. And of course later around 2018 2020 the success of EUV I would say has really finished to transform the company. So the size of the company pretty much doubled between before and after EUV because suddenly we were not only the provider of a DUV lithography system but also EUV and both required equal attention. So I would say EUV brought us to pretty much double the size of the company both in people but also in the in foot.
You became chief executive two years ago after 16 years at ASML. One of your previous roles involved leading a core technical department at ASML. and that must have been no small feat given that ASML widely seen as making the world's most complex and advanced machines over 100,000 parts. Um, and you once told us that you actually slept at TSMC's chip facilities in its fabs in Taiwan. Um, you also have told us about during the pandemic the efforts, the incredible efforts you went to to go and visit and meet with them face to face in Taiwan under those conditions. Um, could you take us through your relationship with customers? Um, because it's quite clear that the relationship goes far beyond just delivering the equipment itself. How closely do you work together?
Yeah, I think it's a great question and I think that you know you bring back memories to me on some of those example but I think I picked this example of you know it's a long time ago of course I used to be an apps engineer and we had to fix the system at TSMC and indeed in order to fix the system we had to be there and do whatever it took and that included spending the night in the fab. But the reason we did that is because this industry is really relentless. You know, everyone wants to deliver and I think this is absolutely unique and in order to do that we all have to innovate together and I think the together is very very important. You already said it. We develop a very complex machine, very expensive machine and therefore the relationship with our customer start even before we design the next tool. We have this long-term relationship where we try together to always dream up what could happen in the next 5 10 15 years because this is how far we need to be able to look to support the growth of this industry. So we have I would say a very very intense relationship where we are strategically looking at the future together and we stay very much aligned on that and what's also interesting is we have a similar relationship with our supplier and I think that our customer nowadays have a similar relationship with their own customer so you have a very very tight what I call you know chain of trust and chain of knowledge and chain of support basically between you know the different players in the industry and if you take anyone out then you know you take the risk that the whole industry stops. So this is a bit the level of you know connection dependency we have but that's also the reason why we have been able for so many years to create so much innovation and keeps basically the industry going so strong.
It's an incredible shared human endeavor of unprecedented scale and complexity that all comes together across the globe. I want to come back to ASML's technology later but if we could take a step back for four decades your company has played a key role in keeping Moore's law going as you referred to the law just earlier. There are some that say Moore's law is now dead. Your website states it's alive and well. Could you help us untangle and understand these different perspectives?
Well, I think you have many different versions of Moore's law and we all tend to pick the one we like the most. So depending on the version I think you will find out that the law is either dead or very much alive. So I think there's two main versions of it. The first one is the one that says that the cost of a chip has to go down by a factor of two every two years. That one is dead for many many years because the cost of technology has been increasing already for a while. The version I picked before is the version that said that the transistor density has to double every two years. And if you look at what has been done in the last 40 years, if you look at what is being done today with AI, not only this is still happening, but this is in fact accelerating. So AI has taken us off this exponential growth of the transistor density and basically is requiring even more transistor addition every couple of years. So if you look at the most advanced chips or products from Nvidia you don't look at a factor of two every two year but a factor of 16 every two years. So there you could say well Moore's law is not dead. In fact, you could say Nvidia has put it on steroids. And I think that's what we see happening. Now, the last things to say about Moore, which also link a bit to lithography. Initially when Moore started, I think lithography was by far the engine to get the density because most of the density was achieved by shrink. But over time of course there's a need for a lot more technology in order to get the transistor density. But if you go back to the way Dr. Moore himself talked about his law many years ago he had already anticipated that and he said Moore's law will be about shrink and it's also going to be about integration. So from the very beginning there was the idea that there will be a need to both drive more transistor per unit of area which is basically shrinking and also more integration and I think today Moore's law is really being supported by the combination of those two and the two would be very important moving forward.
Yeah, I'm pretty sure most consumers don't feel the speed of technology and computing power is slowing down anytime soon thanks to the efforts of ASML and Nvidia. We actually have holdings in several of the leading artificial intelligence providers, Anthropic, xAI now via SpaceX, Meta and so it's quite clear from our vantage point that the appetite for compute to train models and provide inference is currently insatiable. Um, you've cited this as one reason that you've recently increased your sales forecast to between 36 and 40 billion euros this year, but I'd be interested to understand how you think about the long-term structural demand that you're seeing for compute and how you plan for that in the context of what has historically at least been a cyclical industry.
Yeah, I think it's a great question and I think it's a question that we have certainly not fully answered. I think a lot of my colleagues in the industry try to really understand what AI means on the long-term demand of chips and you summarize it yourself. I think we are getting all very bullish on what AI will drive in terms of chips demand both logic and memory and therefore we're looking most probably as a need for more capacity. how much capacity exactly I think that's still a question we all try to answer the jury is still out because what we see happening with AI today are major investment in the infrastructure investment that by the way will have to continue over time because the infrastructure will have to evolve we mentioned Nvidia before they're already working on the next two or three generation of product so this means basically that whatever infrastructure we build today we have a chance to upgrade it you know in two three years from now and then again in five and six etc etc. The other thing we still don't know is also the demand of chips coming from what I would call the end-user use of AI. So once the models have done the job, once the model allow really to use AI on more products either you know consumer product or industrial product what does it mean for the demand of chips? So that I would say the jury is still out. What you see is all of us are anticipating more need for chips. and therefore we are all I would say ramping up our capacity that's true for us that's true for our peers that's true for our customers of course and I think that in the next few months we'll try to understand where this goes on the long term when it comes to cyclical clarity I think this well most probably is going to stay because you know we are an industry where people likes to move very fast so when they see a huge opportunity they all go in and there always a moment where they say well you know maybe we need to pause a bit and then everyone gets out. So I think this has been the reason why we have seen cycles across the history of this industry. Um I still believe there will be cycles you know could be because of the industry itself. It could be because of all the excitement we have around us when it comes to geopolitics. I think this is almost extraordinary that you know so far we are so so insensitive to some of that at least when it comes to this industry but I think most probably we'll still be looking at cycles.
I want to focus on your own technology now and I think it'd be useful to delve into the different types of lithography you provide to help the non-specialist in our audience make sense of the opportunities ahead. So very broadly speaking, you make two types of machines. One is using deep ultraviolet light known as DUV to create chip patterns on a wafer. The other is more advanced and more costly extreme ultraviolet EUV. In simple terms, can you help us understand the difference between those two key products that ASML delivers?
Yeah, and maybe the best way to do that is to go back to what our customers are doing. So when they build up chips right advanced chips or non-advanced chips they do that by putting on top of each other a lot of different layers with different functions. Then there will be a lot of interconnection in order to create basically the integrated circuit. So in order to create this stack basically which become a chip a customer are going to use several dozens sometimes several hundreds of different lithography steps meaning different exposure and not all those exposure require the very tight resolution I described before. So not all of them are at nanometer level. few layers the most critical one are going to be at nanometer level and they will be using the most advanced lithography machine low NA EUV today High NA EUV tomorrow but a lot of the other layers will be in fact using deep UV machine so machine with lower resolution EUV in volume in terms of units is in fact the smallest number of machines so we ship a lot more DUV machine than we ship EUV machine. We tend to always talk about EUV because of course those are the most complex and therefore the enabling technology today for our customers while DUV you know you could look at it more a bit like as the workhorse of lithography and what's interesting is the tool in ASML we designed 40 years ago we shipped 40 years ago most of them are still being used today by our customer because they still serve some of the application that require this type of resolution.
That's extremely helpful. And within EUV, you've had the complete market to yourselves now for nearly a decade. How do you think about your ability to sustain that lead?
Yes, I think you know there's two ways we look at it. So you know I go back first to our customer because our customer wants to sustain their lead and it start there. It means to sustain their lead. They ask us to continue to innovate heavily on EUV and you know today we are of course having a tool that is working very well but when it comes to R&D we spend more money on EUV today than we did even 10 years ago when we were bringing the technology to life. So we continue to invest heavily to build on that technology and to continue to drive basically our customer. And of course as you do that you keep your lead right because you know people typically can start to dream catching up on what you do if you stop moving. But if you continue to move and you continue to move very fast, potentially even move faster, then I think you keep the lead. And when it comes to EUV, the technology is very very complex as you know. And just catching up to the very first tool we even shipped to our customer now 10 years ago or more is already very difficult. And now on top of that there is a need to catch up on whatever improvement we have done in the last 10 years. So that's a very difficult mission of course for anyone.
and it took ASML 20 years of research and development to create your EUV light source. Um many thought it would never be commercially viable. Canon and Nikon both abandoned their efforts. And looking back on our notes from around that time in 2013 at Scottish Mortgage, your first generation machines wafer throughput was well below target. There was still uncertainty about the endeavor. What made ASML take such a bold and costly bet?
It's a very good question and you have to go back in time. I was not in ASML back then. So I heard the story from Martin van den Brink who used to be our CTO and as you know has done so much for ASML but he was of course the person to bring EUV as the technology of the future for this industry and when he did that there was the choice basically between three different technology EBAM lithography nano imprints and EUV And all of them were difficult technology because they had to be developed to be economically viable. Each one of them had specific challenges but EUV was the one technology that if the challenges were to be addressed could scale. So the challenges with EUV back then were to design an optic that was capable basically to reflect enough light to bring enough light to a wafer and therefore print the feature you need and in such a way that the productivity of the tool could be good enough. So the scalability of EUV is now being realized which means that yes we spend 10 years of very hard work to get the technology going but now we have a technology that can be used for lithography for the next 10 15 years and if you look at our own map we are in fact projecting ourself as far as 2035 and 2040 when I look at our own internment plan. So Martin did definitely the right choice more than 20 years ago.
