Samsung Electronics, the world’s largest memory chip and smartphone maker, announced on Friday that it has decided to cut its memory chip production in the short term. This move comes as the company braces for a sharp decline in its quarterly profit, which is expected to plummet by 96% due to weak demand in the global chip market. This marks a significant shift from Samsung’s earlier stance of maintaining production levels despite the downturn in the semiconductor industry.
In its preliminary earnings report, Samsung estimated its operating profit for the January-March period at 600 billion won ($454.9 million), a staggering drop from the 14.12 trillion won it posted during the same period last year. This sharp decline in profit is largely attributed to sluggish demand for tech products and the subsequent adjustments in inventory levels by customers, as reported by Yonhap News Agency.
Adjusting production Amid supply glut
Samsung indicated that it is adjusting memory output “to a meaningful level” for products where it has sufficient inventory to meet future demand. However, the company did not specify what constitutes a “meaningful level.” The decision to scale back production comes as memory chip prices have been falling due to oversupply, coupled with a global decrease in demand for technology devices such as smartphones and personal computers.
The move to reduce output represents a departure from Samsung’s long-standing strategy of maintaining production during industry downturns to protect its market share. It appears the growing inventory surplus and declining prices have forced the company to take a more conservative approach to manage the supply-demand imbalance in the chip market.
Despite the short-term production cuts, Samsung emphasized its commitment to the long-term growth of its semiconductor business. “While we have adjusted our short-term production plan, we will continue to invest in infrastructure to secure clean rooms and expand R&D expenditures to strengthen our technology leadership as we forecast solid demand in the medium and long term,” the company said in a regulatory filing.
Plunge in revenue and profit
Samsung also revealed that its first-quarter sales likely fell by 19%, from 77.78 trillion won a year ago to 63 trillion won. The company has not yet disclosed its net profit figures, and more detailed results, including the performance of individual business divisions, will be provided when it releases its final earnings report later this month.
Samsung’s projected operating profit is about 16.7% lower than market analysts had expected, signaling that the company’s challenges in the semiconductor space are even greater than previously thought.
Chip business running at a loss
Samsung’s Device Solutions (DS) division, which handles its semiconductor operations, is expected to post a loss of around 4 trillion won for the first quarter. This would mark the division’s first loss in 14 years, the last occurring during the first quarter of 2009 in the aftermath of the 2008 global financial crisis. The chip unit, traditionally the backbone of Samsung’s business, has been hit hard by falling prices and growing inventory as global demand for chips continues to wane.
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The anticipated loss in the DS division underscores the severity of the current downturn in the semiconductor industry. According to analysts, Samsung’s chip inventories have grown significantly as manufacturers and tech companies have scaled back on new orders due to weakening consumer demand and economic uncertainties worldwide.
Global chip market outlook
Samsung’s bleak first-quarter results reflect broader challenges facing the global chip market. The company has forecast that the worldwide semiconductor market will shrink by 6% year-on-year in 2023, with total revenue expected to fall to $563 billion. This downturn is primarily driven by reduced demand for consumer electronics, including smartphones, PCs, and other tech gadgets that typically drive chip sales.
The company also warned that it expects challenging conditions to persist throughout the year, with little relief in sight. Despite these near-term difficulties, Samsung remains optimistic about the long-term prospects for the semiconductor industry and aims to maintain its leadership position through continued investments in advanced chip technology and research.
As the chip industry navigates this challenging period, all eyes will be on Samsung’s ability to adapt to the shifting market dynamics while maintaining its competitive edge in an increasingly volatile and uncertain global economy.
