ASML and the Next Generation of Chips

One of the companies that is often pointed to in the technology sector as a bellwether as the world's top chip equipment maker is the Dutch company, ASML Holding NV ADR (Nasdaq: ASML). It not long ago gave a rather upbeat forward assessment of its business (thanks to smartphones and tablets) and now more good news is flowing for ASML shareholders.

The world's biggest semiconductor manufacturer Intel (Nasdaq: INTC), and one of ASML's largest customers, agreed to invest $4.1 billion into the company. Intel is putting $1 billion towards ASML's research and development costs as well as buying a 15 percent stake in the company for $3.1 billion.

Intel's major investment into ASML may soon be followed up by other sizable investments from other of the company's major customers. These customers include Taiwan Semiconductor Manufacturing ADR (NYSE: TSM) and Korea's Samsung Electronics Co. Ltd. (NASDAQOTH: SSNLF.PK). It has been reported that ASML has asked its three biggest customers, accounting for 41 percent of its revenues, to help fund its R&D in exchange for up to 25 percent of the company.

Why would these three semiconductor companies be so anxious to help out ASML? Because they are very concerned about maintaining the progress in chip miniaturization over the coming years.

In particular, the money from Intel, Samsung and TSM will help ASML accelerate the development of the next step beyond laser technology, extreme-ultraviolet (EUV) lithography. This is a new process that is seen as key to producing smaller chips. It requires a vacuum inside the machine and mirrors instead of lenses to focus the light on the silicon. ASML is seen as the leader in the field and it believes that the new technology will be able to be used for mass production of chips below 20 nanometers beginning in early 2013. The research money should allow it to break the 10 nanometer barrier later this decade.

In addition, the money injections will be used to help with the development of equipment that can handle larger-sized circular wafers from which chips are cut. The next generation 450 millimeter diameter wafers will contain roughly double the amount of chips as existing 300 millimeter wafers. Development of this technology should result in cost savings for chip makers of 30-40 percent.

From ASML's viewpoint, these investments will be key to it remaining number one in semiconductor equipment and ahead of its Japanese rival Nikon Corporation ADR (NASDAQOTH: NINOY.PK). That company is also working on EUV lithography technology and has ASML a bit worried. But the good news here is that it is believed Nikon is at least two years behind ASML in developing EUV technology with its version of EUV technology not coming onstream until at least 2015. And this cash injection by Intel and the other major chip makers into ASML is sure to put Nikon even more behind the proverbial eight ball.

This development and advancement in chip manufacturing technology bodes well long-term for users of tech gadgets such as smartphones and tablets too since production costs for such gadgets will be much lower. Nomura's global technology specialist, Richard Windsor, even told Reuters that “We're talking about $50 tablets”.

But the real winner here is ASML and its shareholders as it has basically cemented its place as the number one semiconductor equipment for the next decade.

This article was originally written for the Motley Fool Blog Network. Don't miss my daily articles for the Motley Fool at http://blogs.foool.com/tdalmoe/.