Unprecedented! A customer proposes to pay to help SK Hynix "buy lithography machines and build production lines"
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The AI chip shortage is intensifying, and tech giants have begun directly offering money to help chip manufacturers expand production and buy equipment—a move unprecedented in the memory chip industry.
According to a Reuters report on May 8, citing six sources familiar with the matter, several major global tech companies are mounting a “campaign” in a rare manner towards South Korean memory chip giant SK Hynix—proactively proposing to invest in the construction of its new production lines and even willing to pay for its purchase of lithography (EUV) equipment.
SK Hynix is a main supplier of high-bandwidth memory (HBM) chips globally, and its products are core components of AI servers. Currently, the supply-side capacity expansion is far behind the explosive growth in demand for memory chips.
What customers want: Pay to buy machines, build production lines
There are mainly two types of proposals from customers to SK Hynix:
First, invest in dedicated memory chip production lines. Customers propose to finance SK Hynix in building production lines specifically serving their own needs.
Second, funding to buy extreme ultraviolet (EUV) lithography machines. Customers are willing to support SK Hynix in purchasing ASML’s EUV lithography machines—these machines are used to etch circuits onto silicon wafers and each costs several hundred million dollars.
One of these proposals targets the first phase of a large wafer fab that SK Hynix is building in Yongin, South Korea, which is expected to focus on DRAM production.
Such proposals are extremely rare in the memory chip industry. The memory chip industry has always been known for its intense cyclical fluctuations, and it is unprecedented for customers to directly participate in the capacity construction of their suppliers.
Specific details of the above proposals are being disclosed for the first time. SK Hynix, Samsung Electronics, and Micron have previously stated they were negotiating multi-year supply contracts with customers but have not revealed details.
Why isn't SK Hynix rushing to accept?
SK Hynix currently is not short of cash and is taking a cautious attitude toward these proposals.
Hynix’s concern is: Once they accept customer funding, they may be “tied” to specific buyers and be forced to supply at lower prices in exchange for more stable long-term revenue.
One source told Reuters directly: “Regardless of the proposal, currently the available capacity is basically zero. There isn’t even a small part that can be allocated to any specific customer.”
Another source pointed out that chip suppliers are very careful when distributing scarce capacity. They do not want to trigger regulatory scrutiny or be seen as “favoring” any customer. “They don’t want to bet on a particular horse in the AI race and then realize they bet on the wrong one.”
SK Hynix said it is not convenient to disclose the specific terms of its customer contracts, but said "it is comprehensively evaluating various approaches and structural alternatives different from traditional long-term agreements.”
How are long-term contracts negotiated: Price range + prepayment
In addition to the above investment proposals, negotiations on long-term supply contracts between memory chip makers and their customers are also underway, but pricing and fulfillment mechanisms remain challenging.
One type of contract structure currently under discussion is the “price range mechanism”—setting upper and lower limits for annual chip prices, thereby abolishing the usual practice of negotiating prices quarterly or seasonally.
Another structure being discussed is a prepayment arrangement, requiring customers to pay 30% to 40% of the price in advance.
Samsung Electronics said last month that some recently signed long-term agreements with customers are different from before and are now “binding” contracts, but did not disclose more details.
Chip executives, investors, and analysts have all pointed out that how to ensure customers do not break contracts halfway, and how to maintain favorable pricing, remain unresolved issues.
Why are tech giants in such a hurry?
Pressure from the demand side explains why tech companies are willing to make such rare proposals.
Meta mentioned in its earnings call last week that it is “actively investing to meet infrastructure needs,” and specifically mentioned “securing agreements across the supply chain to ensure the key components needed for future capacity.”
Microsoft said it expects its capital expenditure to rise to $190 billion this year, of which $25 billion is due to rising costs of chips and other components.
SK Hynix and Samsung both said last month that the current shortage of memory chips will persist because the “structural growth” in AI demand means capacity expansion will take time to catch up. At that time, SK Hynix also said that customers’ requests to sign long-term contracts to lock in supply “are increasing sharply.”
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