ASML: Competing with Moore’s Law
Business Breakdowns Podcast (REPLAY)
Release date: March 6, 2026
Host: Matt Reustle
Guest: Tom Walsh, Portfolio Manager at Baillie Gifford

Episode Overview

This episode offers a comprehensive breakdown of ASML, the Dutch company at the heart of the semiconductor supply chain and the world’s only supplier of advanced extreme ultraviolet (EUV) lithography machines. Tom Walsh expertly demystifies the technology, charts ASML’s rise from humble origins as a Philips spinout to industry dominance, and discusses how the company's innovations underpin the ongoing evolution of computational technology—powering everything from smartphones to AI. The conversation also delves into ASML’s business model, competitive moat, and the critical lessons investors can draw from its success story.

Key Discussion Points & Insights

1. ASML’s Unlikely Origin and Path to Dominance

• Origins ([03:35])
  • ASML was spun out of Philips in 1984, not as an industry champion but as a “problem child.”

    “It emerged into the industry as number 10 of 10 lithography players… They had no revenue, no commercially credible product, no offices.” — Tom Walsh [03:56]

  • Early years centered on survival, with little expectation of success.
• Ingredients for Survival
  • Leveraged two advanced technologies from Philips and a determined core of engineers.
  • Benefited from a technology transition in lithography unmet by incumbents.
• Rise to Leadership
  • By the 1990s, became one of three leading lithography players (with Nikon and Canon).
  • Surpassed Nikon in 2002 to become #1 in the industry.
  • Focused relentlessly on investing in “moonshot” innovations, culminating in pioneering EUV lithography by 2019.

2. Photolithography Explained & Technological Progress

• Photolithography Basics ([07:08])
  • Photolithography is the process of using light projected through a mask to etch microscopic circuits onto silicon chips.

    “In concept, it’s much the same as if you go to the old fashioned cinema projector… The difference… is the image is obviously not Spider-Man. This is the circuits of a semiconductor.” — Tom Walsh [08:06]

  • The process requires extreme precision due to atomic-scale features.
• Industry Influence
  • Camera industry players like Nikon and Canon leveraged lens expertise to dominate early lithography, but ultimately lost ground to ASML’s innovation.

3. Scale and Economics

• Market Size ([10:39])
  • 2022 revenue: €21 billion
    2025 revenue: ~€32 billion ([00:40])
  • Only hundreds of machines sold annually, but each can cost over €150 million.
• Customer Concentration ([36:14])
  • 60-70% of revenue comes from top three customers (TSMC, Samsung, Intel).
• Durability & Upgrade Cycle ([26:04]):
  • 90% of lithography machines sold in the last 30 years are still operational.
  • Machines are often upgraded and serviced in the field, creating recurring revenue.

4. Moore’s Law & the Role of Lithography

• Centrality to Moore’s Law ([15:04])
  • Photolithography has been the "key gating technology" enabling ongoing transistor miniaturization.
  • Whenever lithography stalled, the pace of Moore’s Law slowed.
• Machine Size ([15:43])
  • Modern EUV machines are as large as double-decker buses and require massive logistical efforts to install.

    “It takes three jumbo jets to get them there.” — Tom Walsh [16:22]

5. The Advent and Monopoly of EUV

• Technical Evolution ([17:06])
  • Progressed from visible to deep ultraviolet to extreme ultraviolet (EUV) as transistors shrank.
  • EUV development: Initially a U.S. research initiative, but Americans lacked a domestic OEM and partnered with ASML.
  • After years of industry-wide struggle, only ASML could marshal the R&D and supply chain integration necessary to commercialize EUV.

    “Of all competitive advantages… I can’t think of one that’s more significant than ASML’s.” — Tom Walsh [22:47]

• Barriers to Entry
  • EUV requires bespoke components: e.g., a unique tin droplet/laser light source unmatched elsewhere.
  • No other competitors (including Nikon or Canon) have managed to deliver a competitive EUV system.

6. Business Model, Margins, and Corporate Culture

• Revenue Streams ([27:25])
  • 75% from new machine sales; 25% from services, upgrades, and options.
• Cyclical Nature ([27:58])
  • Historically cyclical, but as the sole supplier and “only shop in town,” ASML’s revenues have become less volatile.
  • Capacity constraints mean customers must queue; cancellations delay their own future projects.
• Manufacturing Model ([31:05])
  • ASML is more an “architect and integrator” than a true manufacturer: 80% of COGS is external components; assembly done in-house.
• Margins & Pricing ([32:59])
  • Gross margins now ~50%; operating margins ~30% and improving.
  • Pricing is collaborative: ASML splits profitability improvements roughly 50/50 with customers, avoiding price gouging to ensure long-term relationships.

    “Their approach is incredibly collaborative… They want to split the benefit of that 50/50 between themselves and their customers.” — Tom Walsh [35:12]

• Cash Flow & Capital Allocation ([38:57])
  • Robust cash generation; steady reinvestment in R&D (15-16% of revenue) and capacity.
  • Returns surplus cash via dividends and share buybacks, unusual for high-growth tech.

7. Structural Drivers & the Road Ahead

• Growth Opportunities ([40:13])
  • “Smaller, sharper, faster” remains the structural story—the world’s demand for more transistors and better chips is unrelenting.
  • ASML is also expanding into computational and metrology solutions, critical for defect detection at the nanoscale.
• Incremental vs. Transformational Innovation ([42:32])
  • The risk mainly lies in major generational shifts (like EUV), but most progress is modular and incremental, lowering operational risk.

8. Risks and Challenges

• Supply Chain Coordination ([45:09])
  • Risk that key suppliers (mirrors, light sources) can't match ASML’s technology pace—has led to acquisition or investment in critical partners.
• Disruptive Technologies ([45:09])
  • ASML’s “competition is not really another company, but Moore’s Law itself.” If another method breaks the productivity/cost curve, ASML’s advantage could be eroded.
  • Example: Shift to 3D NAND in memory reduced lithography significance in that niche.
• Geopolitical Risks
  • Large revenue exposure to Taiwan, South Korea, and China; geopolitical instability could sharply impact business.

Notable Quotes & Memorable Moments

• “ASML started as the tenth of ten players, with no revenue, no product, and a staff sent there to be laid off. Now they have a monopoly on the world’s most advanced chipmaking equipment.” — Tom Walsh [03:50]
• “If you want to build a wafer fab to produce the next generation of chips, you have to get your order into ASML because there’s no other shrew in town.” — Tom Walsh [28:32]
• On EUV: “The light source involves shooting a laser at droplets of tin smaller than a dust particle… You have to strike each twice. Once to flatten it, once to vaporize it, to turn it into plasma 40 times hotter than the surface of the sun. And you have to do that 50,000 times a second.” — Tom Walsh [22:08]
• “Of all competitive advantages, of all the technological advantages I’ve ever come across, I can’t think of one more significant than ASML’s.” — Tom Walsh [22:47]
• On pricing: “Economic theory would say ASML could jack up their prices by twofold and take what they like. But they know if they took advantage of their pricing power, it would produce a massive incentive for customers to look elsewhere.” — Tom Walsh [34:20]
• On resilience: “Don’t underestimate the power of human ingenuity... There’s always been uncertainty about ASML and what the semiconductor industry might look like five, ten, twenty years out, but the drive is to keep bringing through innovations that keep advancing Moore’s Law.” — Tom Walsh [50:08]

Important Segment Timestamps

• [03:35] — ASML’s origins & early struggles
• [07:08] — Photolithography simply explained
• [10:39] — ASML’s current scale, revenue, and unit economics
• [15:04] — Role of photolithography in Moore’s Law
• [17:06] — The story of EUV: industry partnership and ASML’s ascent
• [22:47] — Technology moat and EUV’s barriers to entry
• [26:04] — Machine lifecycle, durability, and recurring revenues
• [27:58] — Cyclicality and secular trends
• [31:05] — ASML’s supplier-centric manufacturing model
• [32:59] — Margins, pricing philosophy, and cash allocation
• [36:14] — Customer concentration and competitive landscape
• [40:13] — Future growth drivers and holistic lithography
• [45:09] — Major business risks
• [48:57] — Three key lessons for investors

Lessons for Investors & Operators

• Look beyond industry cycles: Structural growth outpaces cyclical fluctuations.
• The role of luck and resilience: Success involved good fortune alongside innovation and execution.
• Never underestimate human ingenuity: Continuous innovation pushed Moore’s Law beyond all expectations.

ASML’s story is one of unexpected survival, engineering brilliance, and strategic alignment—defining and driving the future of semiconductor manufacturing. The episode’s sweeping narrative and granular detail make it essential listening for anyone seeking to understand technology’s industrial backbone.