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The semiconductor capital equipment industry is experiencing higher capital intensity, rising from 10-15% to 20-25% of semiconductor sales. Diversified end uses like AI and automotive tech have stabilized market cycles. China’s heavy reliance on subsidies poses an oversupply risk, while ASML and ASM lead in EUV and ALD technologies. Service revenues now outpace new equipment sales, though global subsidies may trigger overcapacity concerns.
Imagine the semiconductor industry as a giant, sprawling city that’s always under construction. Every building here represents a wafer fab, every road is a data pipeline, and the construction companies are equipment manufacturers like Lam Research, ASML, and Applied Materials (AMAT). Today, we’re diving into the most exclusive neighborhood—capital equipment—and discussing the dynamics, technologies, and strategies that dictate whether skyscrapers rise or fall. Buckle up, because it’s about to get technical—with just a hint of Tim Urban-style humor.
1. The Capital Intensity Conundrum
Picture the semiconductor capital intensity as a muscle-bound bodybuilder—huge, resource-hungry, and constantly demanding more to keep growing. Over the last decade, the capital intensity of the semiconductor industry—essentially the cost of tools and fabs as a percentage of overall semiconductor sales—has steadily increased. This rise isn’t arbitrary; it’s linked to the complexity of new chips, the surge in global device demand, and rapid innovation across applications from AI to IoT to automotive.
Graph: The Steady Climb of Capital Intensity — A line graph showing semiconductor capital equipment investment as a percentage of overall semiconductor sales, from 10-15% in the past decade to the recent 20-25% spike, driven by the complexity of AI and advanced automotive technologies.
Capital intensity in semiconductors has steadily climbed, reaching over 22% by 2023.
2. Breaking the Cycle
The semiconductor equipment market has historically been a rollercoaster. The former director of Lam Research puts it simply: “Back in the day, it was all about the PCs—booming when people bought them, busting when they didn’t.” But today, we’re talking about a wide array of end uses. From your smartwatch to self-driving cars, semiconductors are everywhere, and that’s reduced the cyclical risk, making it easier to plan and stabilize the supply chain. This diverse portfolio means the dreaded ‘boom or bust’ model of the 90s has been somewhat tamed—but not eliminated.
Semiconductor cycles have shifted from volatile PC-driven swings to steady, diversified growth.
Now, let’s introduce a subplot: China. Since 2019, China’s semiconductor equipment purchases have grown significantly. This isn’t just market enthusiasm; it’s deeply tied to the government’s industrial policies and subsidies aimed at reducing reliance on Western tech. For Lam Research, over 40% of its revenue comes from China—that’s like building a skyscraper with more than half of the floors reserved by a single tenant.
However, there's a twist: What happens if these government subsidies suddenly vanish? Investors are keenly watching this situation, as it could mean a sudden drop in revenue, particularly for companies like Lam that are heavily exposed. The expert from Lam believes China’s overbuying could potentially lead to an oversupply scenario, artificially inflating capital intensity now, which could drop later.
China’s semiconductor equipment purchases have surged since 2019, driven by government subsidies.
4. The Competitors: ASML, Lam, AMAT, and ASM
The capital equipment landscape is populated by fierce competitors, each vying for the lead in an increasingly complex ecosystem. The key players are Lam Research, Applied Materials (AMAT), Tokyo Electron, ASM International, and ASML—the latter holding a near-monopoly on EUV lithography. EUV, by the way, is like having the key to the fanciest penthouse in the city—the most advanced semiconductor production method available.
Lam dominates the etch market but faces stiff competition in the deposition space, particularly from AMAT and ASM. The former director of Lam suggests investing in ASML and ASM, as they are set up for robust growth—ASML due to its stronghold on EUV, and ASM due to its leading position in Atomic Layer Deposition (ALD).
ASML leads in EUV, while ASM dominates ALD, with AMAT competing across both fronts.
5. ASMI: The Underdog Growth Story
ASM International (ASMI) might be the little sibling among the giants, but don’t let that fool you. With a 60% market share in the ALD space, ASMI is growing rapidly, and their focus on expanding their footprint in the epitaxial (Epi) process market is making them a threat to AMAT’s once-dominant position. Think of AMAT as the once untouchable local restaurant, and ASMI as the up-and-coming food truck that’s suddenly winning all the awards.ASML leads in EUV, while ASM dominates ALD, with AMAT competing across both fronts.
ASM leads the ALD market with a 60% share, outpacing AMAT and other competitors.
6. EUV: The Crown Jewel or Overrated Hype?
EUV lithography—extreme ultraviolet technology—is the biggest thing in chipmaking since, well, ever. Intel is leading the charge to adopt these tools, but it’s costly and takes years to deliver a new machine. The former director mentions that from the time a purchase order is placed, it could take up to three years before the tool is delivered and operational. This means investors need patience, as EUV isn’t an overnight cash cow—it’s more like planting an expensive tree that’ll yield fruit in a few years.
EUV technology grows slowly but holds significant long-term investment potential.
7. China and EUV: An Impossible Dream?
With export controls in place, China can’t buy EUV machines, which presents an enormous challenge to their ambitions of self-reliance in semiconductor technology. The expert suggests that despite the challenges, China will continue finding workarounds to sustain growth. In the short term, China’s focus remains on lower-end lithography tools—a necessary step before they eventually tackle EUV.
China aims to progress from DUV tools to EUV deployment by 2030 despite challenges.
Lam and AMAT’s largest revenue stream isn’t from selling brand new machinery—it’s from their services division, where they manage installed bases and provide spare parts. This aftermarket service revenue accounts for a significant share of their profitability. For ASM, this area remains underdeveloped but represents a major growth opportunity as their installed base grows.
Service revenues now surpass new equipment sales in the capital equipment industry.
9. What Lies Ahead: Overcapacity Risks and Government Subsidies
One of the major concerns brought up by the former director is the potential overcapacity due to aggressive government subsidies in regions like the US, Europe, and China. The risk is real: if every region is building fabs and everyone is getting subsidized, we might end up with more skyscrapers than tenants. Investors need to watch out for how capacity planning aligns with actual market demand—or we could see a temporary glut that hurts profitability.
Global fab capacity and subsidies have surged since 2020, raising overcapacity concerns.
Conclusion: The Semiconductor Chessboard
The semiconductor equipment industry is like a chessboard—each company is a piece maneuvering for strategic advantages. ASML might be the queen with its EUV technology, Lam is the rook dominating etch, and ASM is the agile knight that’s capturing market share. The industry is set for growth, but careful planning, government policy monitoring, and capital allocation will be critical to navigate the landscape effectively.
ASML, Lam, AMAT, and ASM compete strategically in the semiconductor equipment chessboard.
So, as an investor, think of your $1,000 as placing bets on a well-calculated chess match. The players are seasoned, the risks are known, but in the semiconductor game, one breakthrough can change the entire board.
That's a start to bring the Tim Urban-esque touch to this deep-dive blog post. Does this approach align with your vision, or are there specific tweaks you’d like to see?
