Samsung Electronics plans to reduce its memory chip production following a projected 96% decline in its quarterly operating profit. The company, known for its chip-making prowess, cited weak global economic conditions and reduced demand due to the impact of Covid-19 as reasons for the sharp sales drop. Preliminary figures released by Samsung indicate that its operating profits for January-March 2023 fell to 600 billion won (£366m), down from 14 trillion won in the same period the previous year.
Despite the announcement of a slowdown in chip-making, the firm’s shares surged by over 4%. Samsung, the South Korean tech giant, stated that it intends to substantially reduce the production of memory chips, particularly those with a secure supply. This comes as demand for memory chips soared during the Covid-induced lockdowns, with consumers purchasing new electronics for home use. Although the industry is gradually recovering from the chip shortage experienced over the past few years, many semiconductor manufacturers are still grappling with finding a balance between their inventory and current demand.
According to Peter Hanbury, an analyst from management consultancy Bain & Company, “When the overall economy slowed down, suddenly the demand for these end products slowed. So, the makers of these end products stopped ordering chips and focused on selling through the inventory they already had.” He further explained that this led to a significant “bullwhip” effect for semiconductor manufacturers further back in the supply chain, where demand surged during the chip shortage but abruptly plummeted.
Compared to its competitors, Samsung – the world’s largest producer of televisions, tablets, and smartphones – had initially resisted the decision to reduce memory chip production. Industry experts suggest that the company’s announcement to cut production is unusual. Just last month, Samsung disclosed plans to invest 300 trillion won over the next two decades in building a mega semiconductor hub in South Korea.
Dylan Patel, Chief Analyst at SemiAnalysis, explained that Samsung is currently facing a “double whammy” of DRAM and NAND memory chips that are losing money, and the need to update their factory process technology due to falling behind over the last couple of years.
Despite this, investors remain optimistic that Samsung’s decision to cut production is a positive indication of market recovery in the semiconductor industry.
Peter Hanbury stated, “We expect this inventory ‘digestion’ phase to complete its course over the next 3-6 months. At that point, the end markets will have worked through their inventory and returned to a more normal purchasing pattern.”
Samsung is scheduled to release detailed earnings later this month.
