Author：Wall Street CN
The wave of investment in artificial intelligence infrastructure is reshaping global memory chip procurement patterns. Microsoft and Google are seeking unprecedented multi-year DRAM supply agreements with SK Hynix, contracts that not only include price floor guarantees but also introduce a prepayment mechanism—a first in the history of the memory industry.
According to South Korean industry sources,SK Hynix and Microsoft are finalizing the terms of a long-term DDR5 supply contract, which will last for three years starting this year and is worth trillions of won.Key terms being discussed by both parties include setting a price floor to prevent a significant drop in DRAM unit prices during the contract period, and requiring the buyer to prepay 10% to 30% of the total contract amount as a deposit. SK Hynix is also in talks with Google regarding the long-term supply of high-bandwidth memory (HBM) and general-purpose DRAM for servers.
The structure of the aforementioned agreement breaks with conventional practices in the memory industry. A person familiar with the negotiations pointed out:"The biggest difference between this long-term contract and previous ones is that the hyperscale cloud service provider is willing to pay a deposit in advance—this is quite remarkable."Microsoft and Google have never signed annual or multi-year supply agreements with memory manufacturers before, precisely because DRAM prices are highly volatile and have historically been unsuitable for locking in long-term prices.
Supply shortages and soaring prices have made a "volume-first" strategy inevitable. DRAM fixed trading prices have risen for 11 consecutive months, with DDR4 contract prices surging from $1.35 in March of last year to $13 at the end of last month, an increase of nearly tenfold. The market widely expects Samsung Electronics and SK Hynix to achieve record-high first-quarter results.
Unprecedented Long-Term Contract Structure: Prepayment as the Biggest Highlight
Long-term supply agreements (LTAs) are a type of contract that locks in the quantity and price of goods purchased in advance, typically used when there is a shortage of a particular product or when prices rise sharply. However, in the DRAM industry, such contracts have been extremely rare in the past.
Because memory chips are highly dependent on market supply and demand cycles and experience significant price fluctuations, large technology companies have historically signed procurement agreements with manufacturers on a quarterly basis, rarely participating in annual or longer-term fixed-price contracts. The three-year agreement proposed by Microsoft and Google represents a breakthrough in contract duration.
The prepayment deposit clause goes even further. It has been reported that...The two parties are discussing a proposal for the buyer to prepay 10% to 30% of the total contract amount.This means that Microsoft or Google will pay SK Hynix trillions of won before product delivery, effectively locking in revenue for the supplier and sharing investment risk in advance. The contract also includes a price floor clause to provide a safety net for the seller, hedging against a potential sharp drop in DRAM prices in the future.
Furthermore, Microsoft and Google are also simultaneously pursuing similar negotiations with Samsung Electronics, and Micron Technology, the world's third-largest DRAM manufacturer, reportedly completed a contract of this type last month. This indicates that this wave of long-term contracts is unfolding on an industry-wide scale.
Quantity First: AI Arms Race Exacerbates Supply Anxiety
Major tech companies are scrambling to secure supply agreements, stemming from a DRAM shortage caused by the global AI infrastructure investment boom.
A senior executive in the semiconductor industry said:"The problem now isn't just that prices have risen too high, but that DRAM itself is extremely difficult to obtain."
According to data from DRAMeXchange, the fixed trading price of DDR4 has been rising for 11 consecutive months, with the monthly increase for PC DRAM reaching as high as 46%. The simultaneous shortage of general-purpose DRAM and HBM required for AI servers is creating a substantial bottleneck for cloud computing companies' data center expansion plans.
Analysts believe that as the global AI infrastructure competition becomes more protracted, leading technology companies have shifted their procurement strategies from "price optimization" to "prioritizing quantity locking," and are willing to bear higher price rigidity risks and capital costs. This wave of LTA (Limited-Term Acquisition) boom essentially signals that technology companies are repositioning DRAM from a commodity purchase to a strategic resource reserve.
Samsung and SK Hynix are significantly expanding production, launching a two-pronged attack on HBM and general-purpose DRAM.
Faced with continuously rising demand, both Samsung Electronics and SK Hynix have deployed a new round of capacity investment plans.
Samsung Electronics is accelerating production of 10-nanometer sixth-generation (1c) DRAM for HBM4 at its main DRAM production base in Pyeongtaek, Gyeonggi Province; while at Hwaseong, it is focusing on the conversion of 10-nanometer fifth-generation (1b) process technology for SOCAMM and general-purpose DRAM modules.
SK Hynix is focusing on addressing the increased demand for HBM at its new M15X plant in Cheongju, North Chungcheong Province; its headquarters in Icheon, Gyeonggi Province, is also accelerating its migration to the most advanced 1c DRAM process.
Supply shortages drive quarterly earnings forecasts to record highs
The direct beneficiaries of the DRAM supply shortage are the financial performance of Samsung Electronics and SK Hynix. Several brokerages predict that both companies will achieve record profits in the first quarter of this year.
According to a report released by Meritz Financial Group on April 3,Samsung Electronics' first-quarter revenue is estimated at 122 trillion won, with operating profit at 54 trillion won—more than three times the record high of 14.12 trillion won in the same period of 2022.
FnGuide projects SK Hynix's first-quarter revenue to reach 46.6252 trillion won and operating profit to be 31.5627 trillion won, representing a roughly 4.2-fold increase compared to 7.4405 trillion won in the same period last year.
Analysts generally believe that with the signing and implementation of long-term supply agreements, coupled with improved cash flow brought about by prepayment terms, the earnings visibility of memory manufacturers will be further enhanced, which also provides more solid fundamental support for the South Korean semiconductor sector.
