Pricing, profit and cycles: Three questions surrounding long-term memory chip supply deals

Long-Term Agreements (LTAs) are becoming increasingly common in the memory chip industry as customers seek to secure supply years in advance, raising questions about the impact on chip prices and the earnings of Samsung Electronics and SK hynix. 

Samsung Electronics disclosed for the first time in April that it had signed long-term supply agreements with some customers, while SK hynix also announced plans to expand LTAs. Both companies have formed dedicated task forces to review contract terms, according to securities industry sources.

Some analysts believe the agreements could fundamentally change the memory industry's boom-and-bust cycle, while others warn they could cap price increases and cause the current upcycle to peak earlier.

Sanjay Mehrotra, CEO of Micron Technology, described LTAs as contracts that would "fundamentally transform our business model."

Today's LTAs differ in several important ways from the past.

Question 1: What happens if customers do not take delivery?

Long-term supply agreements have existed before. During the memory shortage of 2017, however, they were closer to nonbinding supply understandings than legally enforceable contracts.

"Back then, they were even less binding than memorandums of understanding," an industry source said.

Current LTAs typically specify minimum purchase volumes and require advance payments or security deposits, making it far more costly for either side to walk away. Customers secure supply for several years, while suppliers gain more stable orders. SK Securities described the arrangement as one in which both parties have significant commitments to uphold.

Specific terms remain confidential under nondisclosure agreements.

Micron Technology, one of the few companies to disclose details of its contracts, said it has signed 16 agreements under which customers must pay even if they do not take delivery of the agreed volumes. Minimum revenue, guaranteed from 14 of those contracts, is roughly $100 billion and includes about $22 billion in deposits and other advance payments.

Although contracts could still be renegotiated if market prices fall sharply, exiting them has become far more difficult than in previous cycles.

"These are take-or-pay agreements, which are different from the kind of agreements we had in the past," said Manish Bhatia, an executive vice president of global operations at Micron Technology. "Customers have much more skin in the game."
"Our long-term agreements in the past were annual agreements. Now, in most cases, we're talking about five-year agreements," added Bhatia.

Question 2: Will LTAs cap chip prices?

Some analysts have raised concerns that long-term contracts could limit future price increases if they include pricing ceilings, potentially bringing the industry's current upcycle to an earlier peak.

However, industry sources say that most three- to five-year LTAs do not fix prices outright. Instead, they typically set price floors and ceilings or adjust prices periodically based on prevailing market conditions.

Even if contract prices rise more slowly, that does not necessarily mean overall chip prices will be fixed.

If major technology companies secure supply through LTAs, smartphone and PC manufacturers could end up competing for the remaining chips, potentially driving spot prices even higher. Industry experts suggest LTAs account for about 40 to 50 percent of shipments by Samsung Electronics and SK hynix.

"The essence of LTAs is supply, not pricing," said Kim Sun-woo, an analyst at Meritz Securities.

Question 3: Will LTAs end the memory cycle?

Long-term agreements are unlikely to eliminate the cyclic nature of the memory industry.

Memory prices could still fall if investment in AI slows or chip supply expands rapidly. However, analysts say that LTAs could soften future downturns.

Micron said it expects to maintain gross margins above the peak quarterly levels achieved during previous upcycles even if contract prices fall to their minimum levels.

"LTA changes not the peak profits during boom periods but the floor and sustainability of profits during downturns," said Han Dong-hee, an analyst at SK Securities.

BY KIM IN-KYOUNG [[email protected]]