The wave of artificial intelligence infrastructure investment is reshaping global memory chip procurement patterns. Microsoft and Alphabet are seeking to sign unprecedented multi-year DRAM supply agreements with SK Hynix. The contracts not only include price floor protection clauses but also introduce an advance deposit mechanism—a first in the history of the memory industry.
According to industry sources in South Korea, SK Hynix and Microsoft are finalizing terms for a long-term DDR5 supply contract, covering a three-year period starting this year, with a value reaching tens of trillions of Korean won. Key clauses under discussion include establishing a price floor to prevent significant declines in DRAM unit prices during the contract period and requiring the buyer to pay an advance deposit equivalent to 10% to 30% of the total contract value. SK Hynix is also in negotiations with Alphabet concerning long-term supply of High Bandwidth Memory (HBM) and server-grade general-purpose DRAM.
The structure of these agreements breaks from conventional practices in the memory industry. A person familiar with the negotiations noted, "The most significant difference with these long-term agreements is the willingness of hyperscale cloud providers to pay deposits in advance—this is quite remarkable." Microsoft and Alphabet have historically avoided annual or multi-year supply contracts with memory manufacturers due to the high volatility of DRAM prices, which made long-term price locking unsuitable.
Supply shortages and soaring prices have made a "volume-first" strategy necessary. Fixed transaction prices for DRAM have risen for 11 consecutive months. The contract price for DDR4 surged from $1.35 in March last year to $13 at the end of last month, an increase of nearly tenfold. The market widely anticipates that Samsung Electronics and SK Hynix will report record-high earnings for the first quarter.
The long-term agreement structure is unprecedented, with advance deposits being the standout feature. A Long-Term Supply Agreement (LTA) is a contract that locks in purchase volumes and prices in advance, typically adopted when specific products face tight supply or sharp price increases. However, such contracts have been extremely rare in the DRAM sector.
Due to heavy reliance on market supply-demand cycles and significant price fluctuations, large technology firms have traditionally signed procurement agreements with manufacturers on a quarterly basis, rarely engaging in annual or longer price-lock contracts. The proposed three-year agreements by Microsoft and Alphabet represent a breakthrough in contract duration.
The advance deposit clause goes even further. Reports indicate the parties are discussing a plan where the buyer prepays 10% to 30% of the total contract value. This means Microsoft or Alphabet would pay SK Hynix trillions of won upfront before product delivery, effectively securing revenue for the supplier in advance and sharing investment risk. The contracts also include a price floor clause, providing a safety net for the seller to hedge against potential future sharp declines in DRAM prices.
Furthermore, Microsoft and Alphabet are simultaneously pursuing similar negotiations with Samsung Electronics. Meanwhile, U.S.-based Micron Technology, the world's third-largest DRAM supplier, reportedly signed a contract of this nature last month. This indicates the long-term agreement trend is unfolding across the entire industry.
Volume takes precedence as AI arms race intensifies supply concerns. The primary driver for large tech companies scrambling to secure volume-lock agreements is the DRAM shortage triggered by the global AI infrastructure investment boom.
A senior semiconductor industry executive stated, "The issue now isn't just that prices are rising too high, but that securing DRAM volume itself has become extremely difficult."
According to data from DRAMeXchange, fixed transaction prices for DDR4 have shown an upward trend for 11 consecutive months, with monthly increases for PC DRAM peaking at 46%. Concurrent shortages of general-purpose DRAM and HBM, required for AI servers, are creating substantial bottlenecks for the data center expansion plans of cloud computing firms.
Analysts suggest that as the global AI infrastructure competition becomes a long-term trend, leading technology companies are shifting their procurement strategy from "price optimization" to "priority volume locking," willing to accept higher price rigidity risks and capital occupation costs. This LTA surge essentially signals tech firms reclassifying DRAM from a commodity purchase to a strategic resource reserve.
Samsung and SK Hynix ramp up production, targeting both HBM and general-purpose DRAM. In response to intensifying demand pressure, both Samsung Electronics and SK Hynix have deployed new capacity investment plans.
Samsung Electronics is accelerating production increases for its 10-nanometer sixth-generation (1c) DRAM, used for HBM4, at its primary DRAM production base in Pyeongtaek, Gyeonggi Province. At its Hwaseong campus, the focus is on transitioning to the 10-nanometer fifth-generation (1b) process, targeting SOCAMM and general-purpose DRAM modules.
SK Hynix is concentrating on meeting new HBM demand primarily at its new M15X facility in Cheongju, North Chungcheong Province. Its headquarters campus in Icheon, Gyeonggi Province, is also accelerating the migration to the most advanced 1c DRAM process.
Supply shortages drive quarterly earnings forecasts to record highs. The direct beneficiaries of the DRAM supply crunch are the financial performances of Samsung Electronics and SK Hynix. Multiple securities firms predict both companies will achieve record profits in the first quarter of this year.
Meritz Financial Group, in a report dated April 3, forecast Samsung Electronics' first-quarter revenue at 122 trillion won, with an operating profit of 54 trillion won—the latter being more than three times the historical high of 14.12 trillion won recorded in the same period of 2022.
FnGuide projected SK Hynix's first-quarter revenue to reach 46.6252 trillion won, with an operating profit of 31.5627 trillion won, an increase of approximately 4.2 times compared to the 7.4405 trillion won reported in the same period last year.
Analysts generally believe that as long-term supply agreements are finalized, coupled with improved cash flow from advance deposit clauses, earnings visibility for memory manufacturers will be further enhanced. This provides more solid fundamental support for the South Korean semiconductor sector.
