Samsung Electronics, the world’s largest memory chipmaker, announced on Friday that it would be making a “meaningful” cut to its chip production. This came as no previous announcement had been made, and followed a worse-than-expected 96% plunge in the company’s first-quarter profit.
company’s decision followed the lead of smaller rivals SK Hynix and Micron, who had previously announced their own production cuts in response to a sharp global downturn in semiconductor demand that has sent prices plummeting.
Investors Still Optimistic
Despite the profit miss, investors have remained optimistic, betting that Samsung’s move would support chip prices that had fallen by about 70% over the last nine months. This resulted in Samsung’s shares jumping 4.5% in early trading, in the biggest one-day rise since September, while rival SK Hynix’s shares surged 5.6%.
Samsung’s decision to cut production was due to a sharp drop in memory demand, resulting from a weak global economy and customers slowing purchases as they focused on using up their inventories. However, Samsung did not disclose the size of the planned production cut.
A Record Loss is Likely
The company’s chip division is likely to report a record loss of 2.1 trillion won ($1.6 billion), according to an average of analyst forecasts. This marks a significant divergence from what had been Samsung’s most important cash cow, generating about half of its profits in better years. Nevertheless, the production cut might improve Samsung’s performance slightly in the current quarter, and could also cement or hasten the rebound of memory chip prices.
Samsung’s move comes as smartphone and personal computer makers are running down their chip inventories, having stocked up on chips during the pandemic when demand for consumer devices surged. As shoppers cut back on purchases amid rising inflation, the demand for chips has also decreased. This has resulted in smaller rivals, such as SK Hynix and Micron, announcing their own production cuts.
Looking to expand Technological Lead
Although Samsung is cutting its short-term production, it is still making long-term investments in infrastructure and research to secure needed clean rooms for chip production and expand its technological lead. It did not say how its 2023 investment plans would be affected, having previously flagged capital spending similar to the 53.1 trillion won investment in 2022.
Samsung is due to release detailed earnings, including divisional breakdowns, later this month. The company’s decision to cut production may signal a positive outlook for a memory chip rebound in the second half of the year. Analysts believe that this move could also help to support chip prices that have fallen dramatically in recent months.
