I pointed our in my column on TheStreet.com on November 2, 2009 that there was a battle looming in the semiconductor lithography industry in the next-generation immersion tool market, stating:
By mid-2010 the market will change – either ASML will be set as the dominant immersion company probably through the end of the immersion era (since no new immersion tools are being developed after these) or Nikon (OTC:NINOF) will take a big jump forward and gain position with the new S620.
Now that the dust has settled for 2010, it is apparent that ASML won the battle. We estimate that a total of 112 immersion tools were sold, and ASML sold 85 for a 76% share. Nikon sold 27 units. Back in 2009, 44 immersion tools were sold and ASML sold 25 for a 57% share.
It was a great year for the overall semiconductor front-end equipment industry, which grew on the order of 107% in 2010, and an even better year for the lithography sector, which increased revenues by 175% to achieve revenues of close to $6 billion.
However, the stratospheric growth in the industry and the lithography sector in particular was attributed to, in my opinion, irrational exuberance in demand on the part of Dataram (NASDAQ:DRAM) and other manufacturers. Samsung (OTC:SSNLF) was the major culprit in the excessive purchases.
Other big spenders on semiconductor equipment in 2010 were Taiwan Semiconductor Manufacturing (NYSE:TSM), which spent about $6 billion; Intel (NASDAQ:INTC), $5.2 billion; Global Foundries, $2.8 billion; Hynix, $2.7 billion; United Microelectronics (NYSE:UMC), $1.8 billion; Inotera, $1.8 billion; Toshiba (OTCPK:TOSBF), $1.7 billion; Micron Technology (NASDAQ:MU), $1.2 billion; Texas Instruments (NASDAQ:TXN), $1.2 billion; and SanDisk (SNDK), $1.1 billion.
Immersion DUV lithography tools cost $42 million and more each, versus $27 million for dry 193nm and $5 million for I-line equipment. So it’s easy to see how a lot of $42+ million pieces of equipment can rapidly escalate into big revenue gains.
I stated on SeekingAlpha in October that I anticipate pushouts in immersion tool shipments in Q4 2010. Besides the anticipated slowdown in the semiconductor market for 2011 and capex cuts, such as those coming from Samsung and everyone else, another revealing sign is coming from ASML. The company reported a drop in immersion shipments in Q3 2010 to 23 units from 25 units in Q2. This after a Q2 6-K filing from ASML that, “In order to support this strong structural demand we will add flexible manufacturing capacity.” Or a Q3 6-K filing that said, “The very sharp demand pick-up since the beginning of the year and the success of our most advanced system TWINSCAN NXT:1950 are challenges to our capacity capabilities and we are focusing on shortening cycle times and parallel work flows to meet customer demand.”
In my interpretation of this disclosure, how could ASML add flexible manufacturing capacity and shorten cycle times to meet demand and still ship fewer units in Q3 than Q2 -- unless there was trouble brewing? I anticipate shipments of less than 20 immersion tools in Q4 due to pushouts and cancellations of orders.
Nevertheless, ASML is in the driver’s seat in the high-end immersion market. Rumors are that pricing is bumped up to $58 million for a fully loaded tool, considerably up from $42 million in 2009 when the lithography market was in the doldrums. Nikon, despite its new model S620 immersion tool, still lost share to ASML in the sector. And Canon (NYSE:CAJ) is totally out of the picture, shipping older I-line and 248nm DUV tools.
Next-generation EUV (extended UV) lithography tools are being shipped that cost as much as $100 million each. I don’t expect any real competition coming out of Nikon or Canon. Perhaps a more competitive battleground will be in next-generation lithography tools such as imprint or multiple electron beam lithography.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.