LTA Spreads: Semiconductor Industry Shifts from Cyclical to Order-Based Business

There is an analysis suggesting that long-term supply agreements (LTA) for memory semiconductors are expanding to include multilayer ceramic capacitors (MLCC), package substrates, and power equipment.

According to an industry report from Growth Research on August 3, cycle-based industries that were once swayed by fluctuations in supply, demand, and prices are increasingly shifting toward order-based businesses, where production and investment decisions are made on the basis of contracts.

Recently, LTAs are evolving beyond simple extensions of contract duration to include terms such as minimum purchase quantities, price ceilings and floors, advance payments, and take-or-pay obligations. The report explained that, for example, Micron is seeing structural changes in the industry by requiring customers to pay more than USD 22 billion in advance at the contract stage, enhancing the effectiveness of long-term purchase commitments.

This trend is driven by the intense competition among big tech companies to invest in artificial intelligence (AI) infrastructure. Samsung Electronics has signed LTAs covering 60 to 70 percent of its production capacity in order to both defend sales prices and secure additional profits, while SK hynix has completed negotiations with over 10 companies. Samsung Electro-Mechanics and HD Hyundai Electric have also successfully closed large-scale long-term contracts amounting to 1.5 trillion won and 1.1 trillion won, respectively.

Yonghee Han, a researcher at Growth Research, said, "More than simply whether an agreement is signed, the key elements determining corporate value will be the minimum purchase obligations, price floors, size of advance payments, and the sustainability of customer investments. In Korea, Samsung Electronics stands out as a leading example of this shift."

This content was produced with the assistance of AI translation services.