Samsung Electronics unveiled a new contract framework to run up to 70% of its memory production capacity under long-term agreements (LTAs) to address a prolonged shortage of artificial intelligence (AI) memory supply. It said it has already signed contracts with global data center customers and, for the first time, disclosed a new contract structure that includes advance payments and price caps.
Kim Jae-jun, executive vice president and head of strategy and marketing at Samsung Electronics' Memory Business, said on the 30th during the second-quarter earnings conference call that "as the view spreads that memory shortages will be prolonged with the expansion of AI service infrastructure, many customers are requesting multi-year supply agreements."
Samsung Electronics said it is signing long-term supply agreements using a "five-year rolling" structure, with five years as the base term and annual negotiations to extend the contract by one year at a time.
Kim said, "To ensure production flexibility, we plan to operate long-term supply agreements at 60%–70% of total capacity," adding, "once the ongoing negotiations conclude, we expect to fully reach the target level."
Samsung Electronics said it has already finalized contracts with five major global data center customers and is in the final stages of negotiations with five large AI-related customers. It projected that the number of customers seeking long-term deals will grow over time.
It also disclosed specific contract terms. To increase the binding force of execution, it included advance payments with the nature of deposits held over multiple years as part of the contract conditions, and said it has already received about one-fourth of the total advance payments. The size of advance payments is expected to grow as additional contracts are signed. However, it did not disclose specific amounts under non-disclosure agreements (NDAs) with customers.
The pricing structure will also change from before. Samsung Electronics said it is applying different pricing models by customer and product family, and for commodity memory it is incorporating a certain level of price cap into contracts to reduce investment risk from sharp market price swings.
Kim said, "In the past, the memory industry saw high volatility as it was centered on consumer products," adding, "we will increase the share of order-based business anchored by multi-year supply agreements to enhance business stability and earnings visibility."
Kim added, "We are reflecting our principle of a balanced customer portfolio that is not concentrated in specific customers in these long-term contracts," and said, "we will expand our business portfolio around AI applications to maintain leadership in the memory market."