Storage Risk: Can "Long-term Agreements" Really Be "Executed Long-term"?
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A long-term contract on paper is both the business pillar of AI prosperity and potentially the hidden risk for the next round.
The AI boom has spawned a wave of large-scale long-term supply contracts. Chip manufacturers, cloud computing companies, and AI developers are all using these to present "unprecedented revenue visibility" to investors. However, according to the latest analysis by The Wall Street Journal, while these contracts appear unbreakable during prosperous times, their binding power once demand reverses is worth serious scrutiny.
For example, history during the COVID-19 pandemic shows that such contracts were widely exempted from enforcement after supply and demand reversed, indicating their binding power is far more fragile than it appears.
Memory Market: The "Most Extreme Sample" of Long-term Contracts
The memory chip industry is the most typical microcosm of this trend.
The explosive growth of autonomous AI agents has pushed up memory demand, with these applications being highly dependent on memory resources. This has led the memory industry—historically known for intense price wars and strong cyclicality—to start transitioning toward a more stable model.
The three major memory giants—Samsung Electronics, SK Hynix, and Micron Technology—are all currently reporting record profits and expect supply shortages to persist until 2028. SK Hynix was just listed in New York this month, and in an analyst call in April, a senior executive stated that long-term contracts help improve market perception of the entire memory industry.
Micron has been especially proactive. Its "Strategic Customer Agreements" typically last five years and include "take-or-pay" clauses—meaning buyers must pay regardless of whether they actually take delivery. Micron CEO Sanjay Mehrotra said in last month’s earnings call that these agreements will contribute more than half of company revenue in the future.
The capital market’s response is directly reflected in stock prices: Micron’s stock price has tripled this year, SK Hynix’s has had similar gains, and Samsung has roughly doubled.
The "Weakness" of Contracts: Who will enforce them when demand falls?
The question is: While long-term contracts fuel prosperity in boom cycles, can they truly constrain in downturns?
According to The Wall Street Journal’s analysis, the answer is likely “no.” The reasoning is simple:
First, if demand drops before the contract expires, chip makers are reluctant to force delivery to customers—because chips customers can’t use will only pile up in warehouses, and once demand returns, customers will first consume inventory before purchasing new goods, delaying chipmakers’ revenue.
Second, forcing deliveries would damage long-term customer relationships, especially when competitors are more flexible; firms that insist on enforcing contracts would be at a disadvantage.
There is already precedent. The chip shortage during the COVID-19 pandemic also spawned a wave of long-term contracts, but when shortages turned to oversupply, contracts were renegotiated or delayed, and customers received many exemptions.
Microcontroller chip manufacturer Microchip Technology launched a "Preferred Supplier Program" in 2021, requiring customers to sign long-term commitments. A few years later, as supply and demand reversed, the program was directly discontinued. CEO Steve Sanghi said frankly last November: "We won’t force customers to buy anything they don’t need."
This statement is almost a true reflection of the entire industry in downturn cycles.
Risk Spreads Across the Entire AI Supply Chain
This risk is not limited to the memory market, but extends through the entire AI supply chain.
The chain goes roughly as follows: AI developers (like OpenAI) sign computing power contracts with cloud computing companies (like Oracle, CoreWeave); cloud computing companies sign procurement contracts with AI chip makers; chip makers entrust TSMC for foundry services; TSMC then signs long-term equipment procurement contracts with Dutch ASML.
Every link depends on realizing demand from the next link.
The involved sums are enormous. Oracle signed a massive cloud computing contract with OpenAI last year, and as of last quarter’s end, its "remaining performance obligations" (i.e., undelivered contracts) reached $638 billion. Oracle CFO Hilary Maxson told analysts last month that this figure "provides exceptional visibility for our future revenue growth, supported by commitments from long-term contract customers."
Data shows that contract reliance has surged in the past year. Since mid-2025, the combined revenue backlog of the four major AI spenders—Google, Microsoft, Amazon, and Oracle—has increased by more than $1 trillion, more than doubling in total.
Bank for International Settlements Issues Warning
Such "visibility" can become blurry at any time.
The Bank for International Settlements (BIS) pointed out in its annual economic report this month that shortages across AI supply chain links may be amplifying over-investment—"as firms try to lock in future capacity through long-term contracts, which in turn make them more vulnerable to demand shocks."
In other words, lenders and investors providing funding to related enterprises based on long-term contracts may face unexpected losses if demand cools.
The bigger the contract, the longer the chain, the more severe the propagation if any link breaks.
Risk Warning and Disclaimer ClauseThe market has risks, and investment needs caution. This article does not constitute personal investment advice and has not considered individual users’ specific investment goals, financial circumstances, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Investment based on this is at your own risk. ```