The United States is engaged in an economic and national security arms race with China. Superiority in technology, especially in the artificial intelligence complex, is a critical battleground.
A handful of companies possess technologies that could help determine which country wins this contest. Nvidia, which holds a near monopoly in accelerated computing semiconductors, is one of them. But there is another technology leader that arguably represents an even more essential asset in the battle with China. ASML, headquartered in the Netherlands, traditionally a close U.S. ally, has a monopoly on manufacturing machines essential to fabricating the world’s most advanced semiconductors. This includes the chips that form the foundation of the artificial intelligence revolution.
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Over the past three decades, ASML has invested billions of dollars in developing the processes and technologies required to manufacture extreme ultraviolet lithography machines. Each EUV machine costs hundreds of millions of dollars and is roughly the size of a bus. U.S.-led export controls prevent China from purchasing these machines, which are critical to maintaining the West’s technological advantage in advanced semiconductors.
The complexity of EUV machines is almost otherworldly. Inside each machine, a laser strikes microscopic droplets of molten tin, creating plasma at temperatures far hotter than the surface of the sun. Precisely engineered mirrors are essential to directing the resulting EUV light and printing extraordinarily small patterns onto silicon wafers. These mirrors, manufactured for ASML by the German company Zeiss, are precise to nearly the atomic level.
Because ASML has a monopoly on EUV lithography machines, the company enjoys extraordinarily high returns on capital, over 35%. Returns of that magnitude inevitably attract competition. Over the past few weeks, the media have reported on three U.S. startups developing technologies that could eventually challenge ASML’s dominant position.
China, of course, is also investing enormous sums to develop alternatives to ASML’s machines. Beijing understands that unless it can develop equivalent systems for printing extremely small semiconductor patterns on silicon wafers, challenging U.S. and allied supremacy in AI chips will be extremely difficult. China is pushing toward advanced process nodes, but it remains well behind in fabricating the most advanced chips that depend on ASML equipment and technological support.
But how credible are the threats to ASML’s competitive advantage?
With regard to China, ASML’s technological leadership is unlikely to face a serious challenge for a decade or more. China is aggressively attempting to replicate ASML’s technology, and there are credible reports that China has stolen ASML intellectual property. But replicating individual components is not enough. The enormous challenge is synchronizing an extraordinarily powerful light source, precision mirrors, wafer stages, software, and metrology while maintaining nanometer-scale accuracy and economically efficient production speeds across thousands of wafers.
Moreover, ASML is not standing still. The company continues to develop increasingly sophisticated generations of EUV technology, including its “high NA” systems and longer-term successors. The three American startups are attempting to challenge parts of ASML’s technology by leveraging particle accelerator technology rather than relying on conventional laser-produced plasma light sources. In theory, particle accelerators could generate brighter, more controllable EUV light sources.
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But moving from a promising laboratory technology to reliable, high-volume semiconductor manufacturing is an enormous undertaking. Outside experts believe commercialization could take many years.
ASML therefore appears likely to maintain an extraordinarily powerful market position well into the next decade. But the U.S. and its allies must continue imposing strict export controls that prevent China from acquiring the advanced technology and intellectual property of ASML and other companies essential to U.S. economic and national security interests.
The writer owns shares in Nvidia.
James Rogan is a former diplomat who later worked in law and finance for over 30 years. Today, he writes a daily note on markets, economics, politics, and social issues. He can be reached at [email protected].
