Samsung Electronics to cut chip production to ride out downturn
Seoul: Samsung Electronics Co Ltd said on Friday it would make a “meaningful” cut to chip production after flagging a worse-than-expected 96% plunge in quarterly operating profit, as a sharp downturn in the global semiconductor market deepens.
The rare announcement of an output cut by the world’s biggest memory chipmaker, which had resisted the broader industry trend of a steep investment reduction, underscored the depth of the current market downturn but also lifted hopes of a faster market recovery.
Shares in Samsung jumped 4.5% in early trading in the biggest one-day rise since September, while rival SK Hynix Inc’s shares surged 5%, as investors bet the move by the industry leader would support chip prices that had fallen by about 70% over the last nine months.
Samsung said memory demand had dropped sharply because of a weak global economy and customers slowing purchases as they focused on using up inventories.
“We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured,” it added, in a reference to those with sufficient inventories.
The production cut signal was unusually strong for the company, which previously said it would make small adjustments like pauses for refurbishing production lines but not a full-blown cut.
It did not disclose the size of the planned cut.
“The fact that the industry’s market share No. 1 firm is joining production cuts lifted shares… SK Hynix and Micron have declared production cuts, but only Samsung had not, so the market was waiting for it,” said John Park, analyst at Daishin Securities.
“Today’s production cut signal casts a positive outlook for a memory chip rebound in the second half of the year.”
Record chip loss
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.
The first-quarter profit fell short of a 873 billion won Refinitiv SmartEstimate, weighted toward analysts who are more consistently accurate. Multiple estimates were revised down earlier this week.
Its chip division is likely to report a record loss of 2.1 trillion won ($1.6 billion), according to an average of analyst forecasts, and post another 2 trillion won loss in the current quarter, a major divergence for what had been Samsung’s most important cash cow, generating about half of its profits in better years.
With consumer demand for tech devices sluggish due to rising inflation, semiconductor buyers including data centre operators and smartphone and personal computer makers are refraining from new chip purchases.
Analysts said Samsung’s short-term production cut might improve its performance slightly in the current quarter and could also cement or hasten the rebound of memory chip prices.
“The company has signalled it will cut production this time, and if it is really meaningful, the second quarter is expected to be better than the first quarter,” said Greg Roh, head of research at Hyundai Motor Securities.
“Fixed prices of DRAM memory chips are also expected to rebound from the third quarter… Samsung talking about production cuts is evidence of how bad the current slump really is,” he added.
The company is due to release detailed earnings, including divisional breakdowns, later this month.
($1 = 1,319.0000 won)
(Reporting by Joyce Lee and Heekyong Yang; Additional reporting by Youn Ah Moon; Editing by Miyoung Kim and Jamie Freed)
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