Samsung Promises to Reduce Chip Production

Amid a global decline in demand, Samsung Promises to Reduce Chip Production; Shares Rise 4.5 Percent

The largest memory chip manufacturer in the world announced an unusual output reduction after reporting a worse-than-anticipated 96 percent decline in first-quarter profit.

As it struggles with a sharp global decline in semiconductor demand that has sent prices tumbling, Samsung Electronics announced on Friday that it would make a “meaningful” reduction to chip production, following the example of smaller competitors.

According to Samsung officials and analysts, the world’s largest memory chipmaker unexpectedly reduced output without making any prior announcements after reporting a worse-than-anticipated 96 percent decline in first-quarter profit.

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Investors ignored the missed profit, assuming the industry leader’s action would support chip prices, which had decreased by about 70% over the previous nine months.

The shares of rival SK Hynix Inc. rose 5.6 percent while Samsung’s shares increased 4.5 percent in early trading, marking the company’s largest one-day gain since September.

Manufacturers of smartphones and personal computers had stocked up on chips during the pandemic when demand for consumer electronics spiked, but they are now depleting inventories as consumers reduce their purchases in response to rising inflation.

According to Samsung, the weak global economy and consumers delaying purchases in favour of using up their stock were to blame for the sharp decline in memory demand.

It continued, referring to products with sufficient inventories, “We are reducing the production of memory chips by a meaningful level, especially that of products with supply secured.”

Samsung did not specify the extent of the planned production reduction, but it sent a strong message to a business that had previously stated it would only make minor changes, such as pauses for repairing production lines, rather than a complete reduction.

The market was waiting for it, according to John Park, an analyst at Daishin Securities. “The fact that the No. 1 market share firm is joining production cuts lifted shares… SK Hynix and Micron have declared production cuts, but only Samsung has not,” he added.

The production cut signal from today is encouraging for a recovery in memory chip prices in the second half of the year.

Samsung claimed that despite short-term production reductions, it was continuing to invest in infrastructure and research in order to secure the clean rooms required for chip manufacturing and increase its technological advantage.

Although it had previously signalled capital spending akin to the KRW 53.1 trillion (roughly Rs. 3,29,500 crore) investment in 2022, it did not specify how its 2023 investment plans would be affected.

In comparison to 2022, SK Hynix announced in October that it would more than halve its capital spending. Micron, meanwhile, announced in September a more than 30% reduction in its fiscal 2023 investment plans.

extreme chip loss

In a brief preliminary earnings statement, Samsung estimated that its operating profit decreased from KRW 14.12 trillion (roughly Rs 87,600 crore) a year earlier to KRW 600 billion (roughly Rs 3,700 crore) in the months of January through March. In 14 years, this quarter’s profit was the lowest of any other.

The first-quarter profit fell short of a Refinitiv SmartEstimate that was weighted towards analysts who are more reliably accurate and was KRW 873 billion (roughly Rs. 5,400 crore). Several predictions were reduced earlier this week.

According to an average analyst forecast, its chip division is expected to post a record loss of KRW 2.1 trillion (roughly Rs. 13,000 crore) and another KRW 2 trillion (roughly Rs. 12,400 crore) loss in the current quarter. This would be a significant departure for what had previously been Samsung’s most significant cash cow, accounting for about half of its profits in better years.

According to analysts, Samsung’s production reduction could slightly boost its performance in the current quarter and could also solidify or hasten the price recovery of memory chips.

Greg Roh, head of research at Hyundai Motor Securities, stated that “Samsung talking about production cuts is evidence of how bad the current slump really is.”

Later this month, the company is expected to release comprehensive earnings, including divisional breakdowns.