Long-term supply agreements (LTAs), in which core components for artificial intelligence (AI) data centers are contracted several years in advance, are spreading across the components industry beyond semiconductors to semiconductor substrates and multilayer ceramic capacitors (MLCCs). In particular, contract structures have become far tighter than before as minimum purchase quantities, price ceilings and floors, advance payments, and take-or-pay clauses requiring payment even if the buyer does not take the full volume are combined.
Some also noted that only a limited number of corporations are benefiting from this supplier-friendly market. While expansion of AI infrastructure benefits large corporations capable of handling massive contracts, analysts said polarization could emerge as smaller component makers without sufficient capacity lose growth opportunities altogether if they are not chosen by Big Tech.
According to a report by independent research corporations GrowthResearch on the 4th, recent LTAs are evolving beyond simply extending contract terms to combine minimum purchase quantities, price ceilings and floors, advance payments, and take-or-pay clauses. Because AI data centers can face overall construction delays if even one of memory semiconductors, substrates, or power equipment is not supplied on time, Big Tech is seeking to lock in production capacity across the supply chain in advance, the analysis said.
◇ Long-term contracts spreading across components industry…growth opportunities for large corporations
The spread of long-term contracts is evident in the latest results and business strategies of major domestic component makers. Samsung Electro-Mechanics signed long-term MLCC contracts with about 10 customers, including hyperscalers, and secured a 1.5 trillion won supply deal for silicon capacitors with global Big Tech. In the institutional sector of flip chip ball grid array (FC-BGA), a high-performance semiconductor package substrate, it is also discussing strategic long-term contracts that include supporting customer investments.
LG Innotek has also expanded the scope of long-term contracts centered on high-value-added substrates, shifting its business structure to make new facility investments contingent on contracts with customers. The same trend is appearing in the market for power equipment for data centers. HD Hyundai Electric secured a 1.1 trillion won long-term contract for power equipment with a global tech corporation, joining the ranks of LTAs even in the power facilities market.
What these large corporations have in common is the capacity to invest first based on their own funds and credit and recoup later through volumes. The more demanding customers' contract terms become, the more they serve as an opportunity for corporations with the financial strength to accept them to lock in stable revenue.
◇ "Small and midsize firms cannot handle volumes without advance payments"
Smaller component makers with limited capital are in a different position. ISC, which makes test sockets, is a representative case. ISC is building an AI-dedicated production line using customers' advance payments as seed money. Its revenue share based on long-term contracts is expected to exceed 50% this year, and production capacity is projected to increase from 2 million units this year to 5 million units in 2029.
While it looks like rapid growth, viewed another way it means such a scale of capacity expansion would have been impossible in the first place without customers' advance payments. Unlike major component makers that can invest first with their own funds, small and midsize firms can only secure funds to expand capacity once Big Tech contracts are finalized.
A representative at a domestic small component maker said, "To win contracts with major customers, you need both technological prowess and capital strength, but not many corporations meet both conditions, so the gap between those that win contracts and those that do not is likely to widen over time," adding, "For small and midsize firms that built lines with advance payments, operations work only on the premise that the contract remains intact. Firms that cannot handle LTAs may naturally be pushed out of the market."