Long-Term Memory Contracts May Not Be a Safeguard! WSJ Warns: Supply Chains Hide Overinvestment Risks

Recently, the procurement boom driven by artificial intelligence (AI) has led chip manufacturers, cloud service providers, and AI developers to sign a series of massive long-term supply contracts. These agreements are seen within the industry as guarantees of stable revenue and are a key tool for convincing investors that growth is sustainable. However, if we look at the outcomes of similar contracts during past economic cycles, this seemingly solid protection may not be as reliable as it appears.

According to The Wall Street Journal (WSJ), the most noticeable shift in this trend is occurring in the memory chip industry. As autonomous AI applications demand rapidly increasing computing and storage resources, the memory market—historically known for its volatile pricing and clear economic cycles—is attempting to move toward a more stable operational model.

Samsung Electronics, SK Hynix (SKHY-US), and Micron Technology (MU-US), the three major players, have recently reported record-high profits. The market widely expects the tight supply situation to continue through 2028.

SK Hynix, which recently listed in New York, had its executives state earlier this year that long-term contracts help change the industry’s overall perception.

Among them, Micron is the most aggressive. The company’s 'Strategic Customer Agreements' typically last five years and operate on a 'take-or-pay' basis, meaning customers must pay according to the contract regardless of whether they actually take delivery. Micron CEO Sanjay Mehrotra revealed last month during an earnings call that such agreements will account for more than half of the company’s future revenue.

The market has responded with real capital. Micron’s stock price has risen nearly threefold this year, with SK Hynix’s gains close behind, while Samsung’s share price has roughly doubled.

The problem is that these long-term contracts, which fuel optimism during bull markets, may not hold their weight when demand reverses or fail to be enforced as intended.

The reason is not complicated. When market demand cools prematurely before the contract expires, chip suppliers are often reluctant to push shipments. After all, products that customers cannot absorb will only pile up in warehouses. When the economy recovers, customers will prioritize depleting inventory rather than placing new orders immediately, resulting in delayed revenue realization for suppliers.

Moreover, if suppliers insist on fulfilling contracts as written, they risk alienating key long-term customers—especially when competitors choose to offer flexible concessions. The party that strictly adheres to the contract ends up at a competitive disadvantage.

This script is not unprecedented. During the pandemic, chip shortages also led to a wave of long-term purchase contracts. But when shortages turned into oversupply, many of these contracts were renegotiated or delayed, and customers were generally granted exemptions.

Microcontroller chipmaker Microchip Technology (MCHP-US) is one such example. In 2021, the company launched a 'Preferred Supplier Program' requiring customers to sign long-term commitments. A few years later, as supply and demand reversed, the program was directly terminated.

CEO Steve Sanghi stated bluntly last November that the company would not force customers to buy things they don’t need—a statement that almost perfectly captures the industry’s shared position during downturns.

Notably, these concerns are not limited to the memory market but run through the entire AI supply chain.

From upstream to downstream, the chain generally follows this structure:

AI developers like OpenAI sign computing power procurement contracts with cloud providers such as Oracle and CoreWeave (CRWV-US);

Cloud providers then place orders with AI chipmakers;

Chipmakers outsource manufacturing to TSMC (2330-TW);

TSMC, in turn, signs long-term procurement agreements with Dutch equipment maker ASML (ASML-US).

Each link depends on the next to fulfill demand as scheduled.

The amounts involved are substantial. Oracle’s (ORCL-US) major cloud computing deal with OpenAI, signed last year, had an outstanding contractual obligation of $638 billion as of the end of the last quarter.

Oracle CFO Hilary Maxson told analysts last month that this figure provides excellent visibility for the company’s future revenue growth, supported by long-term customer contracts.

Data also shows that corporate reliance on long-term contracts has significantly increased over the past year. Since mid-2025, the total backlog revenue of the four major AI investment giants—Google (GOOGL-US), Microsoft (MSFT-US), Amazon (AMZN-US), and Oracle—has increased by over $1 trillion, more than doubling from previous levels.

However, the Bank for International Settlements (BIS) warned in its annual economic report this month that supply shortages at various stages of the AI supply chain may be fueling overinvestment risks.

The report指出 that companies are trying to lock in future capacity through long-term contracts, but such agreements also make firms more vulnerable when faced with demand falling short of expectations.

In other words, banks and investors providing capital to companies based on these long-term contracts may face unexpected losses if market demand cools.

And the larger the contract scale and the longer the supply chain, the faster and more forcefully the impact will spread if one link breaks.