[Edaily SOYEON KIM Reporter Song Jae-min] Five-year Long-Term Agreements (LTAs) for memory—which allow companies to secure both high profitability and stability—are spreading across the industry. This is a result of increased bargaining power stemming from the explosive growth in demand for artificial intelligence (AI) memory. This is highly unusual, given that the memory industry has traditionally been synonymous with cyclicality.
However, given that the supplier-dominated market dynamic could shift at any time, concerns are emerging that LTAs could actually act as a “shackle” if AI demand subsides. This is because it is difficult to guarantee that the AI memory market will continue to enjoy a boom for the next five years. Frequent long-term contracts have historically been a sign of a bubble in various industries.
◇ Long-Term Memory Supply Contracts: The New Normal
According to industry sources on the 3rd, memory manufacturers—including SamsungElectronics, SK hynix, and Micron—have recently been signing LTAs with global Big Tech companies one after another. During its recent second-quarter earnings conference call, SamsungElectronics announced that it had finalized contracts with its five major global data center customers and was in the final stages of negotiations with five major AI-related customers. SK hynix is also finalizing LTA negotiations with about 10 companies, including key customers.
SamsungElectronics projected that, once the ongoing negotiations are concluded, multi-year contracts will account for 60–70% of its total memory production capacity (CAPA) based on its mid- to long-term production plans.
Memory manufacturers have put measures in place to ensure contract compliance. Micron has introduced a price band that sets upper and lower limits for memory prices. The company explained that by setting only a lower price limit based on market prices—rather than an upper limit—it can secure a gross profit margin (GPM) that exceeds the quarterly peak levels seen in any past business cycle, even with just the lower price limit applied throughout the contract period. In addition, by applying “take-or-pay” clauses—which mandate the purchase of specific volumes over multiple years—the company ensures that customers bear the costs even if they do not use the contracted volume.
SamsungElectronics and SK hynix also opted for a method of receiving advance payments to enhance contract enforceability. SamsungElectronics included advance payments—which function as deposits held for multiple years—in the terms of significant contracts and has already received about a quarter of that amount.
◇ Long-Term Contracts May Also Be Subject to Renegotiation During an AI Bubble
This is not the first time long-term supply contracts have been introduced. In 2005, Apple signed long-term NAND flash contracts with SamsungElectronics, SK Hynix, Micron, Intel, and Toshiba, agreeing to make an upfront payment of $1.25 billion (approximately 1.8 trillion won). While the payment was unprecedented by the standards of the time, it allowed Apple to secure the large volumes of NAND required for the iPod ahead of its competitors. This is said to still serve as the backbone of Apple’s supply chain today.
However, there have been numerous failures as well. During the memory supercycle of 2017–2018, when demand for server DRAM skyrocketed, Big Tech companies rushed to sign LTAs. However, as inventory adjustments began in the second half of 2018, contract fulfillment was delayed, and the industry eventually faced a downturn in 2019 marked by a sharp drop in memory prices.
Earlier, in 2012, AMD signed a long-term wafer supply agreement with GlobalFoundries that included a clause requiring it to purchase a certain volume. However, as wafer demand declined due to a slump in the PC market, it became difficult to maintain the contract. Consequently, in the fourth quarter of 2012, GlobalFoundries waived part of the “take-or-pay” obligation in exchange for a $320 million contract amendment and termination fee from AMD.
Industry observers believe that renegotiation of recent long-term agreements will be inevitable. This is because current LTAs also have practical limitations in terms of their legal enforceability. For example, it would be practically difficult for SamsungElectronics and SK hynix to cut ties with their key Big Tech customers by charging them liquidated damages due to an oversupply of AI memory. Ultimately, renegotiations may take place through methods such as sharing a portion of the losses, delaying delivery schedules, or adjusting unit prices. This is because straining relationships with key customers could result in the loss of future supply opportunities.
Lee Jong-hwan, a professor in the Department of System Semiconductor Engineering at Sangmyung University, said, “The downside is that even if a contract is terminated, its legal enforceability is limited,” adding, “The contract term, which is typically five years, may be somewhat long and needs to be adjusted to around two to three years.”
Traditionally, memory manufacturers have responded to price declines during periods of oversupply by cutting production. However, as long-term contracts increase, it becomes difficult to reduce output because contracted volumes must be produced first. If production capacity for high-value-added AI memory is shifted to the general-purpose market, oversupply could spread to that market, further intensifying downward pressure on prices.
Kim Yang-paeng, a senior researcher at the Korea Institute for Industrial Economics & Trade, said, “Setting price floors and ceilings would be advantageous for memory companies,” adding, “To ensure greater stability, they must secure ways to strengthen contractual enforceability—such as advance payments, deposits, and minimum volume requirements—to guard against past failures.”
