The largest union at Samsung Electronics has suspended a planned strike after reaching a last-minute tentative pay agreement with the South Korean technology giant.

This move has temporarily eased fears of disruption at the world's largest memory chipmaker during a boom in the building of artificial intelligence (AI) data centres.

The union, which represents nearly 48,000 workers, said industrial action that was due to begin on Thursday would be suspended while members vote on the deal from 22-27 May.

What is the dispute about?

The dispute centres on how to distribute profits generated by soaring demand for AI memory chips. At issue is the distribution of bonuses between staff in memory chip divisions and those in other units.

Samsung had planned to pay generous bonuses to 27,000 staff making memory chips – at least six times more than its workers making other chips, and electronics.

The union expressed concerns that 23,000 workers who were making less advanced chips for companies like Tesla and Nvidia should not be left behind.

Possible disruptions to chip production raised alarms, given the significant implications for global supply chains and South Korea's export-driven economy.

Currently, Samsung is the world's largest memory chipmaker by sales, a major supplier of chips used in AI data centres, smartphones, and laptops.

The broader Samsung Group accounts for roughly a fifth of South Korea's economic output. Thus, this dispute is particularly sensitive as the company faces increasing competition from rivals SK Hynix and Micron amidst rising AI-driven chip demand.

What has Samsung said?

Samsung's operating profit in the recent quarter skyrocketed about 750% from a year earlier, fueled by booming demand for AI chips. This spike led its market valuation to surpass $1 trillion.

Interestingly, last year, rival SK Hynix abolished its bonus pay cap for ten years, resulting in bonuses three times higher than Samsung's offers, prompting some Samsung workers to leave for SK Hynix.

In an effort to not lose talent, Samsung proposed bonuses of 607% for memory chip workers compared to just 50% to 100% for others.

However, Samsung management has expressed concerns over the potential economic impact of a strike, which could lower sales and tax revenues in South Korea.

"With a humble attitude, we will build a more mature and constructive labour-management relationship to ensure that such an incident never happens again," said Samsung in a statement.

On Thursday, shares of Samsung rose over 5% following the announcement.

What impact could a strike have?

JP Morgan estimates a strike could impact Samsung’s operating profit by 21 trillion won to 31 trillion won ($14.08bn to $20.79bn). However, any walkout would likely be limited due to a South Korean court injunction that demands normal staffing levels to ensure production quality and safety.

The court prohibited the union from occupying company facilities and threatened fines if the order is violated.

The American Chamber of Commerce in Korea noted, “In today's interconnected global economy, disruptions in strategically important industries can create ripple effects extending well beyond a single company or market.”