Samsung cuts chip production after profit drop
Due to a slow global economy and less demand after Covid, Samsung Electronics plans to cut memory chip production after estimating a 96% drop in its quarterly operating profit.
According to preliminary figures, Samsung’s operating profits declined 600 billion won (£366m) from 14 trillion won during January-March. Despite the move to slow chip-making, Samsung’s shares rose more than 4%.
The South Korean tech giant said, “We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured.”
Consumers bought new electronics to use at home during Covid-induced lockdowns, which spiked demand for memory chips. As the industry recovers from a chip shortage over the past few years, many semiconductor manufacturers are finding it difficult to balance their inventories and current demand.
Analyst Peter Hanbury from management consultancy Bain & Company said, “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.”
“This led to a strong ‘bullwhip’ effect for semiconductor makers further back in the supply chain, where sky-high demand during the chip shortage suddenly dried up”, he added.
Compared to its rivals, Samsung, the world’s largest maker of televisions, tablets, and smartphones, has resisted the move to cut memory chip production.
South Korea’s semiconductor industry has been in the news for developing mega semiconductor hubs that will cost 300 trillion won over 20 years, according to analysts.
Dylan Patel, the chief analyst at SemiAnalysis, said, “Samsung faces a double whammy of DRAM and NAND [memory chips] losing money and needing to update the process technology their [factories] use due to falling behind over the last couple of years.”
In the semiconductor industry, investors hope Samsung’s announcement signals a recovery.
“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,” said Peter Hanbury.
A detailed earnings report will be released later this month by the company.
