Peter Wennink: innovation is fundamental to survive and thrive

Few European companies are as synonymous with the term ‘innovation’ as ASML. We asked CFO and EVP Peter Wennink to explain how the company drives its innovation efforts and share some insights about what makes them successful.

Innovation has become a buzzword in today’s highly competitive markets, but for ASML it’s been the imperative from the beginning. Is that correct?
Yes, innovation is quite simply inherent to our business and fundamental to our ability to survive and thrive. Our market is one that requires technology to deliver massive increases in the performance of computer microchips, which must double in capacity every 18 to 24 months. The pace of change in this industry is staggering and costs must also fall by the same measure. For example, 1GB of flash memory may have cost you about $2,300 in 2000, whereas 15 years later it will only cost 17 cents. Those who do not innovate quickly in our industry just die out. There were about 13 competitors in this market when we began 26 years ago – now there are two competitors left. At the same time, there were about 35 to 40 regular customers in those days, while today there are less than 10 with regular orders.

How does ASML make sure its innovation systems and processes are working at the right pace and in the right direction?
Our industry is unique as it’s quite clear where and why innovation must take place. The industry is driven by Moore’s law, named after Gordon Moore, co-founder of Intel. He described a long-term trend in the history of computing hardware where the numbers of transistors that can be placed inexpensively on an integrated circuit will double every 18 months. This law has proven to be true for over 50 years now and is likely to continue for the foreseeable future.

The only way we’ve been able to sustain this rapid pace of change is through what is often called an ‘open innovation’ system. This approach means that our company relies extensively on external innovation, as well as internal innovation, to forge its pathways to the market. Our knowledge is not only inside the company; it resides in each step of our supply chain, including universities and research centres.

Why is it important that innovation take place off site?
First of all, because we believe in outsourcing things we know others can do better than us. Our R&D budget is between €500 million and €600 million this year and of this amount, about 15 to 20% is spent outside the company in places such as universities and research centres, while another €200 million is invested in R&D by our suppliers. When people ask me to describe ASML, I say it is a cooperative and an integrated knowledge network. We are the director or architect of this process and cooperate with our partners in supply chain, sharing our knowledge and profits with them. If you don’t share, it doesn’t work, you must leave plenty of profit in supply chain. The reason many of our competitors have dropped off is because they either couldn’t do this or they didn’t want to.

Before you start fostering innovation you need to understand what value means

Moore’s law gives you clear innovation targets, but not all companies have such visibility.
I agree and I would challenge any business leader to say whether they truly have an understanding of what drives value in their industry and what the needs of their customers actually are. Before you start fostering innovation you need to understand what value means and this is not always a straight forward answer. By having an open innovation network you will achieve a better understanding of what that value is.

The uncertain economic times means companies are scrutinising their costs. What would you say to those cutting back on their innovation spend?

I would say ‘poverty makes creative’. When ASML began it had no money, only brilliant people who went out and shared a dream with others. Some of these early suppliers have, like us, developed into huge successful businesses. You can only bring this all together by sharing and that means sharing the value as well as the pain during the downturns. I would argue that those in our industry who cut their R&D during the worst of the crisis are now struggling. Our top line dropped from €3.8 billion to €1.6 billion in just two years because of the dowturn, but our investment in R&D stayed exactly the same.

Did you cut back by outsourcing innovation to lower cost areas?
Outsourcing to markets in Asia, for example, isn’t really an option for us. Our innovation is founded on the cooperative network we have in Western Europe -- it cannot exist anywhere else. By having comparable companies within our immediate vicinity, we’ve created economies of scale that support this industry. Eindhoven is at the centre of the ‘brain’ area of the Netherlands, which has unique conditions such as good infrastructure, a highly educated population, many universities, knowledge institutions and research facilities. These are all part of our knowledge network and they have grown with us.

What advice would you give to companies looking to improve their innovation efforts?
First of all, become an open innovator and understand what constitutes value for your customers. Find partners in your supply chain with whom to innovate. Create a knowledge network of your own, even if you are a small or mid-sized business. It may not be as profitable for the short term, but in the long term, a cooperative approach will achieve more value. Next, look at your own value chain and direct your innovation towards the high end of it and to the areas you are best at, so it will be harder for others to overtake you. Lastly, maintain your focus and perseverance and be relentless in reaching your goals.

Biography

Peter Wennink was appointed Executive Vice President, Chief Financial Officer and member of the Board of Management of ASML in 1999. Prior to his employment at ASML, he worked as a partner at Deloitte, specialising in the high technology industry with an emphasis on the semiconductor equipment industry. Peter Wennink is a member of the Netherlands Institute of Registered Accountants. He currently serves on the Supervisory Board of Bank Insinger de Beaufort N.V.