Samsung Electronics, the largest maker of memory chips in the world, has announced that it is reducing its memory chip production. This move comes after the company reported its slimmest profit since the 2009 global financial crisis.
For the three months ended March, Samsung’s operating profit fell more than 95% to 600 billion won ($455 million), missing the average analyst estimate of 1.4 trillion won. The company’s sales also fell to 63 trillion won. The decline in profit and sales has been attributed to a pileup of inventory that has hurt pricing and profits.
Is Samsung the only player to cut production?
The company had warned of a decline in earnings in the first quarter of 2022 due to slowing sales. The prices of memory fell more than anticipated due to weak demand for personal computers and smartphones as consumers and businesses grappled with the risks associated with an economic downturn. Despite the easing of COVID-19 restrictions in China, its market did not rebound as fast as anticipated.
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Baik Gilhyun, an analyst at Yuanta Securities Co., predicts that the prices of DRAM, a type of memory used for processing data, will fall by approximately 10% in the current quarter, following a roughly 20% slide in the previous three months and a more than 30% drop in the fourth quarter of last year.
Samsung’s competitors, Micron and Hynix, have also been forced to reduce production due to the decline in memory prices. According to Micron, customer inventories are recovering, and it anticipates a gradual improvement in the supply-demand balance. Hynix executives have indicated those memory suppliers’ production cuts should begin to take effect in the second half of the year, contributing to stabilising the prices. However, the pace of the recovery will depend on peer efforts to cut supply.
Samsung, which historically has not slowed down during difficult times, has now decided to cut its production. The company is investing billions of dollars to construct the world’s biggest chip complex in South Korea and a new factory in the United States.
What will be Samsung’s next move?
In just three months, Samsung Electronics’ shares rose up to 4.7%, marking the highest intraday jump. Competitor SK Hynix’s shares also surged up to 6.7%.
However, despite the production cuts, Samsung has indicated that it will not retreat from its aggressive strategy. The company has stated that while it has cut its short-term production plans, it will continue to invest in infrastructure to secure essential clean rooms and expand research and development (R&D) investment to strengthen its technological leadership. Samsung expects solid demand for the mid-to-long term period, which is why it will continue to invest in its capabilities.
Samsung has announced that it will release a comprehensive financial statement later this month that will provide details on divisional performance as well as net income. This statement is expected to provide a clearer picture of the company’s overall financial situation, including the impact of its decision to reduce memory chip production.
What Samsung is saying?
Samsung’s decision to cut memory chip production to a “meaningful level” is a move that competitors have been waiting for. The oversupply of memory chips has caused prices to drop significantly, hurting the profits of companies across the industry. Samsung had been reluctant to reduce its production in the past few months, as it wanted to increase its market share among its competitors.
However, in a statement, the company clarified that it had “obtained sufficient volume to address potential changes in memory demand” and was “adapted to decreasing memory production by concentrating on items with increased supply and optimizing line operations that are currently ongoing.”
The company’s decision to cut production is significant, as it had previously resisted doing so in order to grab market share from competitors SK Hynix and Micron Technology, which have been forced to cut their own output due to the oversupply of memory chips.
Baik Gilhyun, an analyst at Yuanta Securities Co., stated that the supply-demand situation can improve much faster due to the adjustment in production and lowering memory-chip output to a meaningful level, bringing an end to short-term concerns. With Samsung leading the way, other companies in the industry may follow suit and reduce their own production levels, helping to stabilize the market further.
U.S. and South Korea offer incentives
The U.S. and South Korean governments are both offering financial incentives to bolster their domestic semiconductor industries, while it remains uncertain how the U.S.-China conflict over semiconductors might affect the industry in the coming years. Last week, Beijing initiated a security review of chips from Micron, sparking concerns that the Chinese government is taking a more aggressive stance toward American companies.
However, Samsung’s smartphone division managed to stay profitable during the first quarter due to the success of its new Galaxy S23 series, which sold approximately 11 million units, up 50% from its predecessor. According to an estimation made by Kim Kwangjin, an analyst at Hanwha Investment & Securities, the profits of the division increased by 123% in the last quarter, reaching 3.3 trillion won.