AI Demand Reshapes Chip Supply Chain, Creating New Winners Beyond Major Chipmakers

AI Rally Ripples Through Chip Supply Chain, Minting New Winners

The artificial intelligence rally exploding across Asia is now spreading deeper into the supply chain. For much of the past year, the spotlight has been on chipmakers such as Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co. and SK Hynix Inc. -- all critical suppliers to Nvidia Corp. A global chip shortage has sent those stocks skyrocketing to record highs. Now, investors are looking further into the AI supply ecosystem as even the most powerful processors cannot work without the lesser-known components that support them. That growing awareness -- combined with rising demand and prices -- is helping a new group of companies rally. They fall into three main categories. Multi-layer ceramic capacitors (MLCCs) regulate power inside electronic systems. Advanced chip substrates connect semiconductors to the rest of the hardware. And thermal compression bonding (TCB) is the precision process that fuses everything together. "Think of the printed circuit-board as a dining table. Then the plate on the dining table, you can call it a substrate -- and the food inside the plate is the chips," said Kieron Poon, investment director of Asian equities at Aberdeen Investments. Within this group, substrate makers such as Unimicron Technology Corp. and Ibiden Co. have surged around 770% and 530% respectively over the past 12 months. MLCC producers Samsung Electro-Mechanics Co. and Murata Manufacturing Co. climbed to record highs this month. TCB leader Hanmi Semiconductor Co. also hit an all-time high. Much of this supply chain is concentrated in Asia, mainly South Korea, Taiwan, Japan and China. What's driving this is the intensity of AI infrastructure buildouts. AI servers consume far more power than conventional ones, and that has a cascading effect. More power means more components to manage and stabilize it. An AI server can use 10 to 15 times more MLCCs than a standard server, and about 30 times more than a smartphone, according to Young Jae Lee, senior investment manager at Pictet Asset Management. This surge in demand is tightening supply and pushing up prices for those components. Samsung Electro-Mechanics said this week it's considering raisingBloomberg Terminal MLCC product prices by as much as 10%. Citigroup Inc. analyst Takayuki Naito also highlighted growing expectations for price increases across components like MLCCs, aluminum capacitors and package substrates. Naito sees this as a potential support for Japanese manufacturers such as Murata Manufacturing and Taiyo Yuden Co., which may take a more aggressive approach to pricing. JPMorgan Chase & Co. analysts raised their price targets for Murata and Yuden last week, saying supply and demand are likely to stay tight for an extended period. Production lines for MLCCs and substrates are already running at more than 90% capacity, said Simon Woo, head of Korea research at BofA Global Research. "If AI demand ramps up even slightly from here, capacity for conventional use will shrink sharply," he said. The ripple effects are spreading further across the ecosystem. Optical component makers have also been pulled into the rally, as investors pay closer attention to the role these technologies play in data centers, especially as rising use of AI drives the need for ever more bandwidth. Supply of capacitors, substrates and TCB remains concentrated and the firms serve a rapidly expanding pool of customers, said Aberdeen's Poon. This means pricing power will "definitely still be in the hands of the supplier," he said.

AI frenzy signals end of boom and bust for memory chipmakers

Investors are betting on a prolonged boom for memory chipmakers amid voracious AI demand that has prompted customers to lock in multiyear contracts with SK Hynix and Samsung Electronics. Hynix, the world's second-largest memory chipmaker and a key supplier to Nvidia, said the "structural shift" differs from past booms because customers are prioritising security of supplies over price amid an acute shortage. That shift is reinforcing expectations that an industry long defined by boom-and-bust cycles may be shaking off its volatile past. Analysts say the memory sector is facing a supply crunch as chipmakers, which also include Micron Technology, struggle to meet demand driven by a global data centre build-out, making memory a key bottleneck in the AI supply chain. Many view the shortage as structural rather than temporary because demand has shifted from cyclical consumer electronics to deep-pocketed AI hyperscalers rapidly increasing capital spending. Demand is also becoming more persistent as AI spreads into everyday applications, increasing the need for memory across devices and services. Samsung's co-chief executive Young Hyun Jun told shareholders in March that AI demand was driving an "unprecedented supercycle" in the semiconductor market and the company is planning a "substantial" increase in capital expenditure this year to meet surging memory demand. SK Hynix and Samsung, which reports quarterly results on Thursday, say customers are now seeking contracts for three to five years rather than the usual quarterly agreements. This move shift enhances demand visibility and reduces the risk of oversupply, enabling producers to increase capital spending in a more controlled way. "We are in a supercycle as AI requires more powerful memory for inference and agentic services," said Kwon Seok-joon, a professor at Sungkyunkwan University. AI inference is the process whereby a trained AI model such as a chatbot generates responses. Agentic AI services are advanced systems that can handle complex problems and act on their own, with little human assistance. "Hyperscalers are expanding capacity aggressively to avoid falling behind in the AI race, pushing up chip prices while production remains constrained." Samsung's Young Hyun Jun told shareholders in March that the company was talking to major customers about moving on to contracts of between three and five years. The company also plans to increase spending this year, earmarking a record Won110tn for chip capacity expansion and research. Analysts say the supply crunch is unlikely to ease before 2028, given the time required to build new plants. SK Hynix said it would "significantly" increase capital spending this year, but technological challenges are expected to limit how quickly supply can expand. "We are in the third year of the upcycle with no end in sight," said Daniel Kim, an analyst at Macquarie. "Chipmaking has reached a level of complexity where supply cannot easily be increased. Shortages are likely to intensify next year." As a result, the industry has become a seller's market, with tight supply giving producers greater pricing power. Long-term contracts also allow companies to better manage output, unlike in the past when they were forced to react to volatile demand. "The tables have turned," said Kwon, noting that Samsung, SK Hynix and Micron jointly control about 90 per cent of the market for DRam, which serves as the main memory for computers and smartphones. "Producers now have the upper hand." Analysts believe this oligopoly, formed after decades of consolidation, will allow memory makers to sustain elevated margins as long as investment in AI infrastructure continues. SK Hynix reported a quarterly operating margin of 72 per cent, while Samsung's memory margin is estimated to be well above 60 per cent, compared with Nvidia's 65 per cent and TSMC's 58 per cent. Nomura analyst CW Chung said memory chip prices could rise by up to half in the second quarter compared with the first three months of the year, potentially lifting margins to above 80 per cent. He added that the growing share of long-term contracts would reduce sharp price swings. "Memory chips have become a core pillar of AI infrastructure," Chung said, predicting that the upcycle could last three to five years. Net profits at Samsung and SK Hynix this year are forecast at $151bn and $115bn respectively -- far bigger than TSMC's $81bn, according to Bloomberg. Yet both Korean companies are valued at less than six times projected earnings, compared with roughly 19 times for TSMC and 22 times for Nvidia. The gaps reflect the industry's historical cyclicality, although analysts expect them to narrow as earnings stability improves. SK Hynix shares have surged more than 600 per cent over the past year, while Samsung shares have gained nearly 300 per cent. Risks for the sector remain, however. Rapid capacity expansion could eventually lead to oversupply, particularly if hyperscalers slow their investment in AI infrastructure. Growing competition from Chinese players such as CXMT and YMTC also raises concerns about excess long-term supply in lower-end products. "This is certainly a supercycle. But that doesn't mean there won't be ups and downs," said Chris Miller, author of Chip War: The Fight for the World's Most Critical Technology. "The data centre business will have its own cycles, even if longer-term contracts smooth some volatility." Kwon expects demand to remain strong, arguing that on-device AI could eventually surpass data centres as the main driver of memory consumption. But he warned that oversupply in legacy chips could emerge about 2035 as new plants come online and Chinese capacity expands. Kwon estimates Samsung and SK Hynix could more than double their combined capacity by then: "There is strong optimism about the durability of this cycle -- but it ultimately depends on how long the current pace of AI data centre expansion can be sustained." Miller also warned that Chinese producers are using the current boom as an opportunity to strengthen their position, as tight supply pushes some western manufacturers to consider broader use of Chinese chips in consumer electronics. Citi analyst Peter Lee predicted that the upcycle could extend beyond seven years if AI momentum holds but cautioned against assuming a permanent break from the past. "Many investors still don't believe the industry's cyclical nature has fundamentally changed," he said. "This cycle may be stronger and longer-lasting, but cycles won't disappear."