Samsung to Cut Memory Chip Output After Worst Profit Since 2009

(Bloomberg) — Samsung Electronics Co. said it’s cutting memory chip production after reporting its slimmest profit since the 2009 financial crisis, a significant step toward ending a supply glut that had cratered prices across the industry. Shares rose.

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Operating profit at the world’s largest maker of memory chips plunged more than 95% to 600 billion won ($450 million) for the three months ended March, missing the average analyst estimate of 1.4 trillion won. Sales fell 19% to 63 trillion won.

Samsung said it would cut memory chip production to a “meaningful level,” a move competitors had been waiting for after a pileup of inventory hurt pricing and profits.

South Korea’s largest company had resisted pulling back despite the downturn, in part to grab market share from rivals SK Hynix Inc. and Micron Technology Inc., which have been forced to cut output. Samsung’s cuts could help bolster chip prices, a key step for the industry’s recovery.

“Because it is adjusting production and lowering memory-chip output to a meaningful level, the supply-demand situation can improve much faster,” said Baik Gilhyun, an analyst at Yuanta Securities Co. “Short-term concerns are coming to an end.”

Samsung’s shares rose as much as 4.7% in the highest intraday jump in three months. Hynix shares surged as much as 6.7%.

Still, Samsung indicated it’s committed to long-term investment in the industry.

“We have cut short-term production plans, but as we project solid demand for the mid-to-long term, we will continue to invest in infrastructure to secure essential cleanrooms and to expand R&D investment to solidify tech leadership,” it said in a statement.

Samsung plans to provide a full financial statement with net income and information on divisional performance later this month.

The company had warned that earnings would fall in the first quarter on slowing sales. But memory prices tumbled more than anticipated because of sluggish demand for a wide range of electronics from smartphones to PCs, as consumers and companies navigated recession risks. Despite its post-Covid re-opening, China’s market has also not bounced back as quickly as some anticipated.

Samsung is estimated to have lost about $3 billion in its memory chip division.

The Covid pandemic whipsawed the semiconductor industry, leaving many of the biggest players struggling to keep up with market changes. Demand soared as consumers locked down at home bought new computers and smartphones. The trend quickly reversed as restrictions lifted and the global economy suffered economic shocks from rising inflation, surging interest rates and the war in Ukraine.

Prices of DRAM – a type of memory used to process data – are expected to fall in the current quarter by around 10%, according to Yuanta’s Baik. That follows a roughly 20% slide in the previous three months and a more than 30% drop in the fourth quarter of last year.

Micron, the largest US maker of memory chips, has said customer inventories are declining, and predicted gradual improvements to the supply-demand balance. Hynix executives have said production cuts by memory suppliers should take effect in the second half and help prop up prices. But the two Samsung rivals underscored the pace of the recovery will hinge on peers’ efforts to cut supply.

The South Korean giant historically has opted against slowing down during difficult times so that it can take share from rivals. It’s spending hundreds of billions of dollars to build the world’s largest chip complex in its home country, and is building a new facility in the US too. The South Korean and US governments are both offering financial incentives to bolster their domestic industries.

Inventory at Samsung had swelled to 52.2 trillion won at the end of last year after the company maintained production despite a collapse in demand.

The existing high inventory will take time to digest, said TrendForce Senior Vice President Avril Wu. “Slower-than-expected demand in the second half of 2023 will prolong the time required for inventory to get back to normal levels.”

What Bloomberg Intelligence Says

Memory-chip prices could have dropped significantly in 1Q, which might have caused an inventory valuation loss. The firm’s TV and home-appliance profit could have been sluggish due to weak end-demand caused by inflation. OLED display sales and profit in 1Q might have dropped due to lower output for the iPhone 14. Mobile-segment sales could have been solid due to the new Galaxy S23.

– Masahiro Wakasugi, BI analyst

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It’s unclear how the US-China conflict over semiconductors might affect the industry in coming years. Last week, Beijing launched a security review of chips from Micron, spurring concerns the Chinese government is taking a more aggressive line toward American companies.

Samsung managed to stay in the black during the first quarter in part because its new Galaxy S23 series bucked the overall smartphone slump. Sales of the phone lineup came to about 11 million units during those three months, up 50% compared with its predecessor, according to Hanwha Investment & Securities analyst Kim Kwangjin. The smartphone division’s profit rose 123% quarter-on-quarter to 3.3 trillion won, Kim estimated.

(Updates with share price reaction and analyst comment from the fifth paragraph)