[quanto]

I have an interesting discussion with a senior colleague: why ASML? why are they by far the best? Their competitors are a few generations behind.

The colleague claimed that there is no special magic. It's not that ASML is using some otherwise unknown laws of physics nor is any single step or component particularly special or novel. It's just that they meticulously optimized each step, and the sum of such steps is the winning solution.

In fact, this is probably why it's so hard to copy ASML. If there was a single magic component, a single or few engineers could be poached away to a competitor to copy it. However, copying a well-optimized company with many simultaneous optima is a much harder task.

Our discussion was in the context of why our quant hedgefund competitor was performing so well, far above the market norm. By nature and design, quant finance is an incredibly efficient field (and most techniques are more or less known by veterans), and we had thought unlikely that one fund could do so much better. Our conclusion was that this fund must be the well-optimized ASML of our field. My colleague happened to know the founder and indeed that was his personal impression as well.

[rgalate]

The best explanation as to why ASML is so dominant is that they have locked out the best suppliers by signing exclusivity deals with them. If you want to compete with ASML you have to vertically build: the best lenses, the best lasers, the best metrology. A new entrant would need to replace ten different world-class vendors simultaneously. Unlike common business wisdom that dictates having multiple suppliers to mitigate risk, ASML succeeds by identifying the best supplier in the world for each critical component—such as Zeiss for optics or their specific metrology group—and securing exclusive, multi-year deals with them.

Dan Gelbart gives exactly this view in a podcast he took part: https://youtu.be/UTgrWmOk4q8?si=Zp13SPqN_Vx-kFlq&t=1564

[theptip]

It does seem like the USG should fund a few $10B to build out the alternative stack, given the strategic sensitivity. Best time to have started would have been 20y ago, second best is today.

This is small change in the military budget.

[mandevil]

The US Government made ASML dominant when it allowed it to acquire (US Company) Cymer, Inc.- the company that was best in the world at the time at EUV. Merging Cymer's EUV work with ASML's meticulous perfection and delivery of the entire rest of the system is what made them the only vendor that matters for semiconductor manufacturers.

This acquisition is also what gives the US Government the ability to veto customers of ASML even today- this is why Chinese semiconductor manufacturing is so far behind, because the USG controls who can access ASML's EUV work.

[theptip]

TIL! I had assumed that veto was purely diplomatic muscle.

That seems like a potentially very cunning soft takeover, in that case.

Still, I think onshoring is strategically wise in a world where the US is actively antagonizing the EU.

[ericmay]

Why would the US need to fund and build out an alternative stack? ASML is de facto controlled by the United States.

Of course, having competitors is probably a good thing...

[EtienneK]

Carl Zeiss only has a €2.2B market cap. What stops someone from just buying all these world class vendors?

[CGMthrowaway]

Carl Zeiss Meditec /= Carl Zeiss. $AFX is the publicly traded non-semis division. Carl Zeiss AG is the parent company which is private

[locallost]

Correct. Funny enough though, their corporate structure and the name AG means they do have stocks, but they are not traded and 100% privately owned. For some reason I see this often with German companies, e.g. the German railway. Not sure why that is, although for the railway plausible since they are owned by the state that might eventually want to sell parts of it.

[robwwilliams]

Zeiss and Schott are both owned in their entirety by a foundation that is not allowed to sell shares. Most of the dividends go to larger research institutions in southern Germany (about $80 million to Heidelberg, Stuttgart, Tübingen, Freiburg, Ulm, Mainz, Jena).

[tgsovlerkhgsel]

I believe the two applicable options to have a company that counts as its own "person" is either AG or GmbH (~= LLC / "limited").

There is also SE which is a EU form for an AG, and various "partnership" forms that involve a partner that's fully liable. Usually, that partner is not an actual person but a "legal person", i.e. another SE or GmbH.

Even if you're not listed on a stock market, you might want to take on investments, e.g. "give me 10 million for 5% of the company" and I assume the latter is much easier with an AG.

[sehansen]

An AG corporation has stocks in order to track who owns how much and also attach different economic and voting rights to different classes of stock. The other way to incorporate a limited-liability company in Germany is the GmbH, which tracks ownership directly in the articles of incorporation, but are in other ways subject to way lower management, disclosure and accounting requirements. So the AG is mostly useful if you want it to be easy to change your ownership structure, if you for instance raise capital from new investors, issue employee shares, change cross-ownership within a conglomerate or go public some day.

Why Carl Zeiss is an AG I don't know. The West German Carl Zeiss was re-formed as a GmbH in 1946, but had changed to an AG by 1973. The East German Carl Zeiss was turned into a GmbH during reunification and then split in two. One part merged into the West German Carl Zeiss AG and the other is now called Jenoptik. Jenoptik was converted into an AG in 1996 and went public in 1998. AFAICT Carl Zeiss has been privately owned by the Carl Zeiss-Stiftung since 1889, except of course for the temporary East German part.

[stefanfisk]

AFAIK that’s how incorporated companies work in Europe.

Here in Sweden we have A LOT of companies own and operated by state and local government and they’re all “aktiebolag” which literally translates to “stock companies”. For smaller businesses you can register as a sole proprietor and some other odd structures if you are a group of people. You’ll often see the same thing for non-profits as well.

[KellyCriterion]

You create a German AG entity to make it easier to onboard new shareholders/offboard old shareholders.

In most entity types, this involves a lot of paperwork while its quite easy within an AG.

AG does not mean necessarily its publicly traded.

[RobotToaster]

Isn't that commonly called anti-competitive practices?

[CGMthrowaway]

It would fall under the category of exclusive dealing.(1) Exclusive dealing is never per se illegal, but it can be as a matter of judgment before a court.

ASML would argue that it's legitimately justified because

  a) there is mutual coinvestment (ASML owns 25% of Zeiss semi optics division) and thus there is symbiosis / shared risk not a simple exclusionary supply contract
  b) no viable alternative customers exist for Zeiss so it doesn't matter
  c) EUV litho is so tightly coupled to optics that having a single supplier is a technical necessity
  d) the market was CREATED through innovation and investment across ASML and suppliers, rather than exclusionary conduct (cf. the difference between "a monopoly" and "monopolization")

The affordance of a monopoly also prevents free riding. ASML and Zeiss spent billions of dollars and decades co-developing very specific, custom-tailored technology. If a competitor could simply walk up to Zeiss and buy the lenses that ASML spent billions helping to develop, the competitor would be free riding on ASML's investment - and creating a chilling effect for future innovation.

(1) https://en.wikipedia.org/wiki/Exclusive_dealing

[phkahler]

  b) no viable alternative customers exist for Zeiss so it doesn't matter

  c) EUV litho is so tightly coupled to optics that having a single supplier is a technical necessity

B can also be an argument against putting exclusivity into a contract.

C is just a business decision - exclusivity due to need, not contract.

[momoschili]

yes, but it has been given the blessing by the western governments.

[quanto]

Interesting. This observation only reinforces the hypothesis that my colleague had. Well optimized components procured with exclusivity.

[varispeed]

> best suppliers by signing exclusivity deals with them

In the UK, if you are a supplier and lock in an exclusivity deal, and also you are small business, they don't treat you as legitimate business and company revenue gets taxed as employment income (IR35).

I wonder why regulators don't look into that. If they have exclusive deal, are they really in business or is it just some sort of tax structure masqueraded as supply chain?

[tstenner]

It's hard to qualify Zeiss as a "small business". Also, they pay their own employees wages and deduct taxes and social insurance so it's not like they pretend to be an independent contractor to save some money.

[joe_the_user]

Technology can explain why ASML or other companies are dominant at a given moment but it can't explain how it became dominant. Essentially, technological superiority involves research and that requires money. IE, it is a product of investment in the various technologies.

The history of ASML involves a "failed" company that other multinationals felt they had to keep alive to allow the technologies to continue. And that's saying that the capital investment needed to produce a thing of that scale can't work if it is subject to a yearly profit cycle (or works much more poorly).

The further factor shaping ASML is that as chip technology has grown, the investment required for support technology has grown and so only a single supplier can remain profitable and it seem logical there would only be a single company acting as supplier (maintaining research and expertise in two or three huge companies, only one of which can be profitable at a time, is highly inefficient - why we're done down to 1-3 cutting edge chip makers at this point also).

So ASML was economically logical and it being in Europe is perhaps a combination of European tradition and Europe wanting some part of the global chip production system (which is by a fair bit the largest/most-valuable concentration of capital and technology in the world).

https://medium.com/@crcjeffkim/why-these-5-acquisitions-have...

[AlotOfReading]

ASML is in Europe because Philips/NXP is in Europe. The fundamental research EUV is based on was done in the US, then made available to industry via a holding company called EUV, LLC. Intel tried to bring in Canon and Nikon, but was rejected by the US government. Two others were approved, ASML and an American company called SVG. ASML spent a couple decades doing the incredibly hard work of productizing EUV and acquired SVG along the way. Canon and Nikon tried playing catch-up with an Asian consortium, but arrived late to the party.

[cma]

> it being in Europe is perhaps a combination of European tradition and Europe wanting some part of the global chip production system

The US doesn't randomly hold export veto power on ASML through unilateral threats. EUV had a lot of tech transfer from the US of the initial research as the sibling comment lays out, and the agreements for those transfers allowed restrictions.

[tim333]

ASLM have put massive financial investment into getting where they are including raising money from customers like Intel in return for shares. Also, form wikipedia "employs more than 42,000 people.. and relies on a network of nearly 5,000 tier 1 suppliers". It's going to be a lot of time and money to match that.

[random3]

Veritasium has a nice video about it https://www.youtube.com/watch?v=MiUHjLxm3V0

Obviously, there are a lot of reasons why. But it boils down to having the vision, the belief and the strength to follow through over many years. It's important to not confound vision with random Kool-Aid. Instead it's grounded in research. That research is itself grounded in a strong vision and belief — it got laughed by the entire physics community at the time:

> 'people seemed unwilling to believe bending x-rays, and they tended to that we had actually made an image by regard the whole thing as a big fish story

Now contrast this with the current academic reality — "publish or perish" and the reality of venture financing and corporate culture that "depends" (arguably in self-inflicted manner, that's not 100% the case) on quarterly repots.

ASML is just a recent story, but if you look back, you'll see that most revolutions have a similar pattern of people crazy enough to deviate from the herd.

The rest— the immense financial risk, the 5000 suppliers, etc. came as a result of having the ability to see through all the noise and the grit to to follow through when everyone calls you an idiot for not doing something "useful"

[bobbruno]

One could argue that NVidia's advantage comes from a similar vision epiphany that led to them developing CUDA years before it was viable. The result is similar.

[CamperBob2]

I'm tempted to call that pure luck. As far as they knew, crypto would be the killer app.

However, if you start with the assumption that at some point, people are going to need a lot of fast parallel compute for something, you could rationally justify their long-term strategy. They skated where the proverbial puck was going. They couldn't see the puck, but they were pretty sure there was one. In hindsight that really does look like a safe bet.

[dist-epoch]

People were (ab)using OpenGL to run compute on GPUs in 2004-2006, doing stuff like rendering 2 triangles covering the whole screen and then doing the actual compute in the pixel shaders, getting 10x speedups over CPUs for some problems.

NVIDIA just had their eyes open to an obvious market demand and made it easier by creating CUDA.

[KK7NIL]

Nvidia subsidized machine learning research for years (both with CUDA, hardware donations and developing what was a very niche product line just for them) before deep learning became big, much less the advent of LLMs.

Certainly Jensen seemed to have an extremely long view on this burgeoning machine learning market in the early 2010's.

[Danox]

It didn’t hurt that they had a two companies named Intel and Microsoft that completely missed the boat where GPUs or mobile computing were concerned both are currently the top two companies in tech today by market cap?

[fhn]

CUDA came out of the need for running parallel cores in their GPUs. This is not luck, it's product evolution. They did it first, they did it best, and they are reaping the benefits. The alternative here is to Not have CUDA and continue writing sub-optimal code for GPUs.

[jpfromlondon]

it's hard to recommend Veritasium on this subject when Asianometry exists... https://www.youtube.com/watch?v=CFsn1CUyXWs&list=PLKtxx9TnH7...

[Danox]

Very true one thing you have to be impressed with is ASML willingness over time to iterate and iterate again nose to the grindstone. More companies could learn a lesson from that. There were several American companies that had it all in the last 60 years and squandered it. IBM, Xerox, Kodak, US Steel.

[BXLE_1-1-BitIs1]

Xerox in my time there skewed compensation to the salespeople while turning a blind eye to the software developers who made the sale possible.

[quirkot]

> But it boils down to having the vision, the belief and the strength to follow through over many years

And importantly, that vision being correct. The graveyard of history is full of the dedicated yet incorrect.

[maccard]

You can also have the right vision but at the wrong time.

[kevin_thibedeau]

The short answer is they solved something very difficult to accomplish and have a stack of trade secrets as their moat.

[vrganj]

The Economist had a good article on this a few years ago: https://www.economist.com/business/2024/01/08/does-europe-at... https://archive.ph/jP1HX

Basically, ASML has an incredible pan-European supply chain of the sort of stuff Europe does best. Deep tech, advanced precision manufacturing, that sort of thing.

I know it's popular to poo-poo Europe around these parts, but those are the sort of thing we genuinely are the best in the world at. Technology isn't just shiny apps and LLMs. It's also this sort of thing, and the shiny LLMs wouldn't work without it.

[pjc50]

> It's not that ASML is using some otherwise unknown laws of physics nor is any single step or component particularly special or novel. It's just that they meticulously optimized each step, and the sum of such steps is the winning solution.

Previously in the context of Apple I likened this to becoming a chess grandmaster: all you have to do is make the optimal decision every time you make a move, over and over again, for years

People don't like hearing that there isn't One Weird Trick which you can just copy, but it's the reality of these situations. To the extent that they can be analyzed, the best people to send are often anthropologists to look at the decision making culture. Culture is even harder to copy; this was a factor in the difficulties of TSMC Arizona starting up, despite it being literally the same company it's not the same people.

[skew-aberration]

ASML actually did develop new (understanding of the) laws of physics, the so called Extended Nijboer-Zernike theory in the early 2000's (which extended diffraction optics to work in the high-NA regions relevant to modern lithography) and subsequently patented its application.

Zernike, a Nobel prize winning physicist who worked on optics, was also Dutch, and developed the original Zernike theory of aberrations in the mid 20th century. This was a vast improvement over previous theories as it was far more useful for optical design and analysis.

So the Dutch have a rich history of developing the most advanced physical theories for optical engineering (all the way back to Huygens even)

[ijidak]

Is the quant competitor Renaissance? The Medallion Fund?

[quanto]

No, not Rentech. While Rentech is truly marvelous, it has been around for a while. There is a new kid in town, and this kid is very very good. To the point that it drove out other veteran shops out of the same market it traded.

[KellyCriterion]

Who is this new kid in town?

[infinite8s]

QRT?

[IshKebab]

Which hedgefund?