Big Tech Seeks Long-Term DRAM Supply for its AI Needs

AI hyperscalers like Google and Microsoft are seeking to secure DRAM supplies from leading manufacturers Samsung Electronics and SK Hynix under long term arrangements. This comes as the supply of memory contracts and prices of NAND flash and DRAM increase sharply.

To respond to the growing demand for DRAM and HBM (high-bandwidth memory), Samsung is moving to ramp up its production of these forms of memory.

SK Hynix, together with Samsung Electronics, leads globally in the production of memory. Talks are ongoing between Google and SK Hynix geared at locking in long term supply of memory. SK Hynix is also having similar discussions with Microsoft.

These talks come as AI hyperscalers are increasingly concerned that they may not have access to sufficient supplies of memory to meet their ambitious data center plans. The supply deals are therefore intended to ensure access to the needed memory. These discussions come as prices of memory are climbing steeply as demand skyrockets.

Big Tech is moving to sign these long term deals despite prices climbing rapidly. For these tech firms, supply is the primary concern and price is secondary.

Memory is critical to the functioning of data centers, and the current supply squeeze is threatening to pump the brakes on the expansion plans of Big Tech. Memory shortages are also affecting the consumer device industry. The prices of smartphones and laptops are ticking upwards as the cost of memory raises the production costs of firms making smartphones and laptops.

Talks between Microsoft and SK Hynix are in final stages, and insiders say the deal could ensure Microsoft has access to the memory it needs for the next 5 years. The terms of the deal being finalized include provisions on minimum prices for the memory. This inclusion is intended to protect the manufacturer against any major losses that could result when the global prices of memory slump during the time when its contract with Microsoft is still in force.

Additionally, the discussions also include a provision for the manufacturer to get 10-30% upfront payment for the memory it will be providing during the contract period.

Microsoft and Google are also talking to Samsung Electronics to agree on terms for years-long memory supply assurance. Microsoft and Google have previously preferred to buy memory as and when they need these products. This approach had worked well because supply was stable and they could benefit when prices swing downwards.

This time, tech firms are worried about supply and they are seeking proactive approaches to safeguard themselves from shortages that could arise in the coming years. The supply deals being discussed reflect this worry.

As SK Hynix and Samsung ramp up their investment in the production of advanced DRAM and HBM, they are signaling that they would like to chip away at the market share of global leader Taiwan Semiconductor Manufacturing Company Ltd. (NYSE: TSM). Whether they succeed in this, and to what extent, remains to be seen.

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