Hyperscalers and GPU makers pursue three- to five-year expansion of Long-Term Agreements while advance payments and possible price floors fund capacity are expanded
SK Hynix GDDR5 memory. (photo courtesy of SK Hynix)
The expansion of Long-Term Agreements (LTAs), with terms of up to five years, in the memory semiconductor market is expected to accelerate facility investments by major manufacturers like Samsung Electronics and SK hynix. Analysis suggests that large-scale advance payments from global Big Tech (large information technology companies) will be utilized as key investment ‘capital’ for expanding production capacity.
According to industry sources on April 1, Samsung Electronics and SK hynix are recently pursuing LTAs of one year or longer with their clients. It is reported that they are in discussions for multi-year contracts of three to five years with hyperscalers operating large-scale data centers, and three-year contracts with global Graphics Processing Unit (GPU) manufacturers. Samsung Electronics and SK hynix recently formalized this direction at their general shareholders’ meetings.
This phenomenon is a result of client requests amid concerns of a memory supply shortage driven by the expansion of artificial intelligence (AI) infrastructure. To secure a stable supply of necessary volumes, Big Tech companies are now taking the lead in pursuing long-term contracts, moving away from the past practice of quarterly or yearly agreements.
This trend of long-term contracts is expected to extend beyond High Bandwidth Memory (HBM) to general-purpose product lines such as DDR5 and eSSDs. An industry official stated, “As shortages are currently occurring not only in HBM but across all high-performance general-purpose product areas, there is a growing trend among customers who need to make large-volume purchases to secure mid- to long-term supply stability, regardless of the product line.”
It is also being suggested that these LTAs, unlike in the past, may include conditions favorable to manufacturers. In particular, there is speculation that a ‘price floor’ clause, which prevents prices from falling below a certain level during the contract period, could be included in some agreements.
The same industry official explained, “It is difficult to provide a uniform explanation as the terms of LTA contracts are negotiated individually depending on the client and product,” but added, “Mechanisms to mitigate market volatility and ensure a stable supply are sometimes reflected, and these elements tend to be considered more importantly, especially for high-performance, high-value-added products.”
The industry anticipates that the advance payments from clients like Big Tech will be utilized as a key financial resource for manufacturers’ future investments. The explanation is that with conditions in place to secure funds for facility investment without separate external financing, these resources can be comprehensively channeled into mid- to long-term investments aimed at securing overall production capacity and strengthening supply stability.
Ryu Hyung-geun, an analyst at Daishin Securities, pointed out, “LTAs are a change that increases the possibility of the memory semiconductor industry shifting to a long-term cycle,” adding, “They can reduce the risk of cycle volatility by generating stable Free Cash Flow (FCF).”
Another senior industry official analyzed, “The liquidity secured through long-term contracts and advance payments will serve as a strong foundation for maintaining continuous technological leadership and enhancing shareholder value, regardless of market conditions.
Kim Eun-jin
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