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Samsung Electronics, the world’s largest memory chip maker, announced on Friday that it would cut its chip production to a “meaningful level” after revealing a worse-than-expected 96% plunge in its quarterly operating profit estimate.
The South Korean tech giant stated that it is adjusting its lower memory production to a meaningful level centering on products that have secured enough inventory to respond to future demand while optimizing line operations that are already underway.
Samsung did not disclose the size of the “meaningful level” cut. However, it is the first time the company has officially declared that it will cut output, as it had maintained its position not to seek an artificial cut in production.
The company forecasted its January-March operating profit to be KRW600bn ($455m), plunging from KRW14.12tn a year prior. The figure was far lower than the consensus of KRW1.1tn by local analysts provided by market intelligence FnGuide.
Sales were expected to have lost 19% on-year to KRW63tn, still lower than the previous market consensus of KRW64.2tn. It was the first time in 14 years that Samsung had reported a quarterly operating income of below 1tn won since Q1 2009 when it logged KRW590bn in profit.
Samsung blamed sluggish demand for memory chips for the drop in profit. While details on each business sector’s estimated figures were not available for Friday’s earnings guidance, market watchers assumed the company’s chip deficit was partially offset by its mobile and appliances businesses.
According to Samsung’s 2022 annual report released last week, its semiconductor division posted approximately KRW29.6tn in inventory assets as of Q4 2022, up 76.6% compared to the same period in the previous quarter.
NH Investment analyst Doh Hyun-woo said Samsung has already cut production on a significant scale, and market watchers expected memory chip prices to continue to decline in the second quarter. DRAM prices have fallen 20% in the January-March period, and the prices are expected to fall another 10 to 15% in the April-June period. However, with inventory pressures persisting for both DRAM and NAND flash, demand is expected to pick up in the third quarter alongside the industry’s rebound.
Investors welcomed the news of Samsung’s production cut, with the company’s bellwether stock soaring about 3.5% in early trading. Samsung shares closed at KRW65,000, up 4.33%. The company will release a detailed first-quarter earnings report at the end of this month.
However, the recent announcement has prompted concerns over the potential impact on the broader tech industry as Samsung is a major player in the semiconductor market. The global chip downturn has been attributed to factors such as an oversupply of chips and a decline in demand.
In response to the news, some analysts have called for greater collaboration among chipmakers to address the challenges facing the industry. Others have suggested that governments should offer support to the sector, given its importance for a wide range of industries and applications.
Despite the challenging market conditions, Samsung has indicated that it remains committed to investing in research and development to maintain its technological leadership in the semiconductor space. The company also plans to continue expanding its infrastructure, including essential clean rooms, to meet future demand.
In addition to its chip business, Samsung has a diverse range of operations that include mobile devices, home appliances, and display panels. While the company’s earnings guidance for the first quarter was lower than expected, some analysts have suggested that its mobile and appliances businesses may help offset some of the losses from its chip division.
The announcement of the production cut has been welcomed by investors, with Samsung’s stock price rising by over 4% in early trading on Friday. However, the longer-term implications of the global chip downturn for Samsung and the wider tech industry remain uncertain.
Samsung is set to release a detailed first-quarter earnings report at the end of this month, which will provide more insights into the company’s financial performance and the impact of the production cut.