Samsung To Cut Chip Production Amid Profit Decline

Samsung Electronics has responded to the uncertain economic conditions worldwide, with a significant decision.

The South Korean firm is the world’s largest memory chip maker, but on Friday it said it would make a “meaningful” cut to chip production, Reuters reported.

The decision follows similar moves by smaller rivals such as SK Hynix and Micron. It also means that now all eyes will be focused on any announcements from Taiwan’s TSMC, the world’s largest contractor chip maker.

Chip production

Samsung’s decision to cut chip production comes amid a sharp global downturn in semiconductor demand, that has sent prices plummeting.

It also comes not long after the world faced a lengthy chip shortage – triggered by the Coronavirus pandemic, as well as Russia’s illegal invasion of Ukraine.

Reuters noted that Samsung’s unusual output cut comes after the electronic giant flagged a worse-than-expected 96 percent plunge in its first-quarter profit – its lowest profit in 14 years.

Earlier this week analyst house Gartner predicted that IT spending would grow 5.5 percent in 2022, despite the global uncertainty.

But Gartner did warn of tough times for the likes of Apple and Samsung, after it cautioned that the devices segment will decline 4.6 percent in 2023, as consumers defer device purchases due to declining purchasing power and a lack of incentive to buy.

It should be noted however that investors seemed to be relatively unfazed by Samsung’s massive profit decline, with them betting that Samsung’s chip production reduction will actually support chip prices, which have fallen by about 70 percent over the last nine months.

Reuters reported that Samsung shares jumped 4.5 percent in early trading in the biggest one-day rise since September, while rival SK Hynix Inc’s shares surged 5.6 percent.

Industry demand

Reuters noted that smartphone and PC makers had stocked up on chips during the Covid-19 pandemic, when demand for consumer devices surged, but they are now running down inventories as consumers cut back on purchases amid rising inflation.

Samsung reportedly said memory demand had dropped sharply because of a weak global economy and customers slowing purchases as they focused on using up their stocks.

“We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured,” Samsung reportedly said, in a reference to those with sufficient inventories.

Reuters reported that Samsung did not disclose the size of the planned production cut, but it sent a strong signal for a company that had previously said it would make small adjustments like pauses for refurbishing production lines but not a full-blown cut.

Although cutting short-term production, Samsung reportedly said it was still making long-term investments in infrastructure and research to secure needed clean rooms for chip production and expand its technological lead.

Last month Samsung said it plans to invest 300 trillion Korean won ($228 billion) in a new semiconductor complex in South Korea.

Samsung’s new facility will be part of a “semiconductor cluster”, which the South Korean government says will be the largest in the world.

Operating profit

Samsung estimated its operating profit fell to 600 billion won ($455.5 million) in January-March, from 14.12 trillion won a year earlier, in a short preliminary earnings statement.

It was the lowest profit for any quarter in 14 years.

Meanwhile Samsung’s chip division is likely to report a record loss of 2.1 trillion won ($1.6 billion), Reuters noted.

The firm is due to release detailed earnings, including divisional breakdowns, later this month.