As the demand for AI memory chips outstrips supply by a wide margin, manufacturers like Samsung Electronics have leveraged the existing circumstances to negotiate long-term supply contracts with their key customers. These contracts have locked up 80 percent of the company’s production for 2027.
Those deals have left other buyers scrambling for the remaining expected production, and suppliers of memory, including Samsung, have accordingly raised their prices since the market firmly favors them.
The deals locking up supply reportedly span 3-5 years and they have a provision to extend the agreements on an annual basis subject to discussion of the terms.
Samsung has enjoyed growing quarterly revenues. Its recent preview of the Q3 earnings shows that the company is slated to announce record earnings of $80 billion for the quarter ending in September 2026.
The favorable market isn’t only leaning towards memory suppliers. Other AI segments, such as cooling systems, stack substrates and accelerators, have also enjoyed surging demand. This situation has driven the market towards long-term supply agreements as AI hyperscalers like Google, Meta and others undertake measures to lock in assured supplies of the materials they need to implement their growth plans.
This hasn’t always been the case. Previously, supply agreements spanned one quarter at a time, but trends have changed to tilt the market towards manufacturers and not customers.
Many manufacturers are working to scale up their production capacity, but it is becoming increasingly difficult to ramp up fast enough to address the accelerating demand. This mismatch has pushed customers to lock in the materials they need, and fabs are winning in two key ways.
First, the long-term deals allow them to lock in clients for the foreseeable future, ensuring that the additional products that they make have an assured market at predetermined prices. These prices are currently elevated, giving some firms margins as high as 80% or even more.
The other benefit is that the long-term agreements require an upfront payment in the region of 25% of the agreed costs. This money is helping the manufacturers to finance their expansion projects at minimal risk since they aren’t using their money for the expansion.
However, analysts say these deals carry some risk. If the market turns, manufacturers could end up being compelled to renegotiate the long-term deals, and many customers could end up preferring to incur penalties for breaching supply orders rather than pay for inputs they will not use once the market turns and the AI build-out slows to a trickle.
For now, Samsung and other memory manufacturers are happy to sign lucrative long-term deals with leading tech giants like Nvidia Corp. (NASDAQ: NVDA), Microsoft, Google, and others.
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