Did a Fire Just Burn Down Our Semiconductor Supply?

A fire at ASML, the critical semiconductor equipment monopolist, may have destroyed key capacity. And semi stock TSMC went up! This is an example not of economies of scale, but economies of fail.

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It’s called ‘The Day the Music Burned.’ In 2008, a fire at a Universal warehouse destroyed the original master tapes for many of the greatest artists in history, everyone from Nirvana to Tupac Shakur to Bing Crosby, Ella Fitzgerald, and Chuck Berry. This was the greatest disaster in music history. Each master is the closest in audio quality to the original recording, and every copy of a copy reduces the fidelity of the song.

Fires happen, and some things are just not replaceable. By pooling all of these masters into one place, however, Universal didn’t just lose some of our cultural heritage, but a great deal of it. That’s the peril of monopoly.

And with that, let’s talk semiconductors, the scarcity of which is driving up prices for everything from trucking to toys. Microchips are the brains of most machinery these days, and arguably the most important resource in the modern world. High-end semiconductors are a highly concentrated set of industries; the software to design semiconductors, the equipment to make them, and the software to design them are all controlled by a small number of firms.

In this kingdom, two firms now stand alone. The first is ASML, the Netherlands-based company that makes extreme ultraviolet lithography machines that produce semiconductors. These machines are the most complex products constructed by humanity, basically they shoot lasers to carve shapes that are a few molecules wide, measured in nanometers (or billions of a meter). By way of context, the human blood cell is 7,000 nanometers across, the etchings on the chips produced by ASML machines are 10 nanometers wide. ASML has a massive contractor network of firms that are also insanely sophisticated, contractors that produce the most accurate lasers ever made, mirrors that are the flattest objects ever produced, etc. most of which are sole suppliers with exclusive contracts.

ASML is a monopoly, largely because of its technological lead, which is a result of savvy long-term investments, brilliant engineering, and knowledge transfers from the U.S. government in the 1990s. ASML isn’t the only monopoly in the industry; the other king is Taiwan Semiconductor (TSMC), which is the contract manufacturer for every major user of advanced processors, from Apple to Nvidia to Qualcomm. Samsung is sort of in this space, as is Intel, but for the true bleeding edge, you go to TSMC. Taiwan Semi buys its equipment to make chips from ASML, which means that the ASML-TSMC nexus could be considered the monopoly supplier of the most important resource in the world.

These two firms, as it turns out, are also incredibly vulnerable, and not just because Taiwan Semiconductor is located a few miles away from a Chinese state bent on military conquest of the island. A few days ago, there was a fire at an ASML factory in Berlin.

The fire impacted approximately 200 square meters out of a total 32,000 square meter Berlin-based site, according to the local fire brigade. Only the affected area remains closed and other areas of the manufacturing site are still operating, an ASML spokesperson told Bloomberg on Tuesday.

The Berlin site makes various parts that go into ASML equipment, including the wafer clamp and mirror block in advanced extreme ultraviolet lithography machines.

This is super-complex equipment, it’s not necessarily the kind of product line you can just reboot. So what happened in the markets? Here’s Barron’s.

TSMC (ticker: TSM) ADRs rose 7.1% to close at $128.80—good for its biggest percentage gain since July 29, 2020…

The biggest news was a disclosure from ASML Holding (ASML) about a fire inside a part of its factory in Germany. ASML, which makes the equipment that makes chips, said it was too early to make a statement on the damage or whether it would impact its output plans. The company plans to take a few days to investigate and make a full assessment.

“Any limits to ASML output tied to today’s fire could hinder (at least in the near term) planned foundry production adds: typically supply limitations create better fundamentals in semis and TSMC is the largest supplier of production from advanced nodes today (which require EUV tools from ASML),” Bryson said.

It’s still too early to know how bad the fire damage was, and TSMC stock might have increased for other reasons. But it’s clear that monopolies in these critical sectors are extremely dangerous. And investors are profiting off of the fragility.

Are there economies of scale? Yes. And though there are exclusive contracts at play, it’s impossible to argue that ASML is a bad actor, because it’s quite clear that their market power is a result of phenomenal scientific engineering pushing the boundaries of human knowledge. But there are also diseconomies of scale, such as the possibility of destroying a critical industry sector upon which we all rely because of a random fire. And because of that, we should recognize that monopolies, even monopolies who have earned their market position through ingenuity, probably shouldn’t exist, any more than we should be stacking all our musical heritage in one giant potential fire pit.