After forecasting a 96% decline in its quarterly operating profit, the slimmest since the 2009 financial crisis, Samsung Electronics has said it will reduce output of memory chips. In reducing output, the sector has taken a major step toward eliminating the oversupply that has been depressing prices.
First quarter operational earnings for Samsung were down 600 billion won (£366m) from the same period last year, when they were 14 trillion won. The result fell short of the 1.4 trillion won that was predicted by analysts. Revenue was down 19% at 63 trillion won.
Investors shrugged past the revenue shortfall in the hopes that the industry leader’s action would prop up chip prices, which had plummeted by almost 70% over the previous nine months.
The company’s stock increased by more than 4% despite the current data and the plan to reduce chip production; in fact, it leapt 4.5% in early trade, the highest one-day advance since September, while competitor SK Hynix’s stock surged 5.6%.
Samsung has declared it will cut production of memory chips to a “meaningful level” in response to an inventory glut that has hurt pricing and profitability. This action was expected by rivals. Memory chips saw increasing demand as consumers bought new home devices to keep themselves entertained during Covid-induced lockdowns.
South Korea’s largest business, determined to gain market share from competitors SK Hynix Inc. and Micron Technology Inc., who have been forced to reduce output due to the recession, had resisted cutting back. The semiconductor sector may get some much-needed support from Samsung’s pricing decreases.
Several semiconductor makers are still having trouble striking a balance between their stockpiles and current demand, even though the industry has been recovering from a chip scarcity over the previous couple of years.
It is anticipated that Samsung’s memory chip division lost almost $3 billion this year.
Despite temporary production cuts, Samsung has stated it would continue to invest in the sector over the long term, both in terms of infrastructure (such as building new clean rooms for chip manufacture) and research.
Short-term production plans have been slashed, but “strong demand is projected for the mid-to-long term,” the company said in a statement, so “we will continue to invest in infrastructure to secure necessary cleanrooms and to boost R&D spending to strengthen tech leadership.”
Investment intentions for 2023 were not specified, but the company had previously suggested that capital spending will be similar to the 53.1 trillion won investment in 2022. Micron announced in September that it would drop its fiscal 2023 investment forecasts by more than 30%, while in October, competitor SK Hynix announced that it will cut its capital spending in 2023 by more than half compared to 2022.
The South Korean firm has traditionally chosen to keep pushing through tough times in order to increase market dominance. A new plant is being constructed in the United States, and it is also spending hundreds of billions of dollars to construct the largest chip factory in the world in its native nation. Financial incentives are being offered by the governments of both South Korea and the United States to help strengthen indigenous industry.
The firm has already announced that the first quarter will see a decline in profitability due to declining sales. Yet, due to weak demand for several electronic devices, including smartphones and PCs, memory costs fell more than expected as consumers and businesses negotiated economic concerns. China’s market has likewise not recovered as swiftly as some had hoped after reopening after the Covid incident.
Samsung’s inventory increased to 52.2 trillion won by year’s end because the corporation kept producing despite a drop in demand.
The news from Samsung has given investors optimism that the semiconductor business is beginning to rebound.
We anticipate that the current phase of inventory “digestion” will run its course during the next three to six months. Peter Hanbury predicted that by that time, final markets will have depleted their stockpiles and reverted to a more regular buying pattern.
Later this month, Samsung will release a comprehensive financial statement detailing the company’s net income and the results of each of its divisions.
