Risks in Storage: Can "Evergreen Contracts" Really Be "Enforced Long-Term"?

A single Evergreen Contract serves as both a commercial pillar of the AI boom and a potential source of risk for the next downturn.

The AI frenzy has given rise to a batch of massive Evergreen Contracts. Chip manufacturers, cloud computing companies, and AI developers have all used these agreements to demonstrate "unprecedented revenue visibility" to investors. However, according to a recent analysis by The Wall Street Journal, while these contracts appear impregnable during periods of prosperity, their actual enforceability warrants serious scrutiny once demand reverses.

For instance, history shows that similar contracts were widely waived during the pandemic after supply and demand dynamics shifted, indicating that their binding power is far more fragile than it seems on the surface.

Memory Market: The "Most Extreme Sample" of Evergreen Contracts

The memory chip industry is the most typical microcosm of this trend.

The explosive growth of autonomous AI agents has driven up demand for memory, as these applications are heavily reliant on memory resources. This has prompted the memory industry—historically known for fierce price wars and strong cyclicality—to begin transitioning toward a more stable model.

The three memory giants—Samsung Electronics, SK Hynix, and Micron Tech—are currently recording record profits and expect supply shortages to persist until 2028. SK Hynix recently listed in New York this month, and an executive stated in an analyst call in April that Evergreen Contracts help improve market perception of the entire memory industry.

Micron has been particularly aggressive. Its "Strategic Customer Agreements" typically span five years and include "take-or-pay" clauses—meaning buyers must pay regardless of whether they actually take delivery. Micron CEO Sanjay Mehrotra stated in last month's earnings call that these agreements will contribute more than half of the company's revenue in the future.

The capital market's reaction was directly reflected in stock prices: Micron's stock has risen approximately threefold year-to-date, SK Hynix has seen similar gains, and Samsung has roughly doubled.

The "Achilles' Heel" of Contracts: Who Enforces Them When Demand Slumps?

The question remains: While Evergreen Contracts fuel prosperity during upcycles, can they truly exert binding force during downcycles?

According to The Wall Street Journal's analysis, the answer is likely no. The logic is simple:

First, if demand shrinks before the contract expires, chip manufacturers are reluctant to force shipments onto customers—because chips that customers cannot use will simply pile up in warehouses. When demand returns, customers will digest existing inventory before purchasing new goods, thereby delaying revenue for chip manufacturers.

Second, forcing inventory onto customers damages long-term client relationships, especially when competitors opt for more flexibility. Manufacturers insisting on strict contract enforcement may find themselves at a disadvantage.

History provides precedents. The chip shortage during the pandemic also spawned a wave of Evergreen Contracts, but when the shortage turned into surplus, these contracts were renegotiated or extended, with customers receiving numerous waivers.

Microcontroller chip manufacturer Microchip Technology launched its "Preferred Supplier Program" in 2021, requiring customers to sign long-term commitments. A few years later, as supply and demand reversed, the program was abruptly halted. CEO Steve Sanghi stated bluntly last November: "We will not force customers to buy anything they do not need."

This statement is virtually a true reflection of the entire industry during a downcycle.

Risks Have Spread Across the Entire AI Supply Chain

This risk is not limited to the memory market but permeates the entire AI supply chain.

The chain roughly operates as follows: AI developers (such as OpenAI) sign computing power contracts with cloud computing companies (such as Oracle and CoreWeave); cloud computing companies then sign procurement contracts with AI chip manufacturers; chip manufacturers outsource production to TSMC; and TSMC signs long-term equipment procurement contracts with ASML from the Netherlands.

Each link relies on the fulfillment of demand by the next.

The amounts involved are enormous. Oracle signed a massive cloud computing contract with OpenAI last year, and by the end of the last quarter, its "remaining performance obligations" (i.e., undelivered contracts) reached $638 billion. Oracle CFO Hilary Maxson told analysts last month that this figure "provides excellent visibility into our future revenue growth, all supported by long-term customer contract commitments."

Data shows that contract dependency has surged dramatically over the past year. Since mid-2025, the combined revenue backlog of the four major AI spenders—Google, Microsoft, Amazon, and Oracle—has increased by over $1 trillion, more than doubling in total volume.

Bank for International Settlements Issues Warning

This "visibility" could become blurred at any moment.

In its annual economic report this month, the Bank for International Settlements (BIS) pointed out that shortages in various links of the AI supply chain may be amplifying overinvestment—"because companies attempt to lock in future capacity through Evergreen Contracts, which in turn make them more vulnerable to shocks from demand falling short of expectations."

In other words, lenders and investors providing funds to related enterprises based on Evergreen Contracts may face unexpected losses if demand cools.

The larger the contracts and the longer the chain, the more severe the transmission effects will be if any single link breaks.