Big Tech's Long-Term Supply Deals Expand Beyond Semiconductors

Samsung Electro-Mechanics’ FC-BGA.. (Photo provided by Samsung Electro-Mechanics) Long-term supply agreements (LTAs), which were previously centered around memory semiconductors (hereafter referred to as memory), are spreading beyond semiconductor components to the power infrastructure sector, including power equipment. This is the result of a supply shortage driven by expanded artificial intelligence (AI) investments and the competition among big tech companies to secure volume in advance. Long-term supply contracts are emerging as the new transaction standard in the AI industry. According to the industry on Oct. 22, Samsung Electro-Mechanics recently signed a long-term supply contract for FC-BGA (Flip Chip Ball Grid Array) in the 1 trillion won (approximately $755.2 million) range with American electric vehicle company A. The structure reportedly involves Company A providing advance payments and subsidizing a portion of the production line expansion costs. Samsung Electro-Mechanics also announced on the previous day that it had formed a strategic business partnership with Nvidia to supply package substrates for AI semiconductors over multiple years. Although the duration was not disclosed, it is expected to be at least three years. The contract size is estimated at 2.6 trillion won. Samsung Electro-Mechanics has signed more than 10 long-term supply contracts for FC-BGA and MLCC (Multilayer Ceramic Capacitors) with global big tech companies this year alone. LG Innotek is also expanding its long-term FC-BGA supply contracts based on advance payments from big tech companies. Cho Ji-tae, Executive Vice President and Head of the Package Solution Business Division at LG Innotek, stated at the ‘Media Tech Day’ in June, “We are in specific discussions with two customers for expansion investments in FC-BGA.” This expansion of long-term supply contracts is the result of aligning interests between big tech companies seeking to minimize bottlenecks and component manufacturers, as the supply shortage of core components deepens due to the rapid surge in AI demand. Because package substrates for AI semiconductors are produced according to the specific requirements of each customer, it is difficult to expand supply in the short term. The structure allows big tech companies to secure long-term volume by supporting facility investments, while component manufacturers lower their investment burden based on stable demand. Long-term supply contracts are also showing signs of spreading beyond semiconductor components to the power infrastructure sector. On August 19, LS ELECTRIC signed a long-term supply contract for power distribution solutions worth 168.9 billion won with a global big tech company for the first time in its history. Power distribution boards have relatively short delivery times and are not typically an area for long-term contracts, but the explanation is that securing a stable volume has become important as supply shortages persist due to the expansion of AI data center construction. According to global construction consulting firm Linesight, the lead time (the period from order to delivery) for power distribution boards and switchgears in North America has increased to 30 to 40 weeks, which is two to three times longer than usual. An industry official explained, “The situation is so serious that heavy power distribution boards are being shipped by plane instead of by ship.” Similar movements are being detected in areas such as power distribution and power equipment, transformers, and bus ducts, with HD Hyundai Electric, Hyosung Heavy Industries, and Gaon Cable also recently signing long-term supply contracts. As capital expenditures by big tech companies increase, the trend of expanding long-term supply contracts is expected to continue. Meta recently raised its capital expenditure forecast for this year by $5 billion during its earnings announcement and foreshadowed aggressive investments for next year. Market research firm TrendForce projected that the capital expenditure of the top nine global CSPs (large Cloud Service Providers) will reach $1.531 trillion next year. Elon Musk, CEO of Tesla and SpaceX, also predicted during the earnings conference call on Oct. 20 (local time), “The shortage of superintelligent computing resources will persist for a long time,” adding, “The constraints on building superintelligence will appear in power, cooling, and infrastructure rather than chips.” An industry official said, “A shortage of even a single core component in AI infrastructure investment can disrupt the entire schedule,” adding, “The competition to secure volume in advance through long-term supply contracts will become even more fierce.”