Samsung Electronics has announced it will cut chip production after flagging its worst profit figures in nearly 15 years.
According to details in its financial statement, the South Korean tech giant said that it expects first-quarter operating profits to dive by more than 96 percent amid declining memory chip sales worldwide.
Samsung’s profits in January-March are expected to decline to $455 million, a huge drop compared to $10.7 billion that it achieved in Q1 2022.
In a regulatory filing, the company pointed to “continuing weak demand for IT products that have aggravated the performances of all sectors”.
Samsung, South Korea’s largest conglomerate, did not specify by how much it would scale back production but said the cut would be “meaningful”.
“We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured,” the company said in a statement.
The South Korean tech giant estimates its operating profit for Q1 2023 to be around $454.9 million,
Samsung’s revenue also fell to $47.77 billion, a 19 percent drop compared to $58.99 trillion recorded in 2022.
The company hasn’t revealed its net profit yet, and its final earnings figures will be announced later this month.
Over the past few years, Samsung’s Device Solutions business (overseen by the Samsung Semiconductor division), which makes semiconductor chips, has been its most profitable arm.
However, during Q1 2023, it saw losses of around $3.03 billion. This is the semiconductor division’s first loss in the past 14 years. This is due to a sharp drop in demand for semiconductor chips like SSD and DRAM.
Global firms have significantly reduced spending money for buying semiconductor chips for their servers and cloud infrastructure.
However, Samsung continued to manufacture chips, which led to a surplus inventory over the past few months. And it isn’t just Samsung affected by the fall in chip demand. Rivals Micron and SK Hynix also reported heavy losses.
The last time Samsung’s semiconductor business saw such a loss was in Q1 2009, when the world was recovering from the 2008 financial crisis.
The company expects the global chip market to drop 6 percent to $563 billion and expects tough times to continue for the rest of the year.
“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,” said analyst Peter Hanbury from management consultancy Bain & Company.
“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.
Samsung, the world’s biggest maker of televisions, tablets and smartphones, had resisted the move to cut memory chip production compared to its competitors.
Analysts say the company’s announcement of a production cut is rare. Last month, it announced plans to invest 300 trillion won over 20 years to develop a mega semiconductor hub in South Korea.
“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,” said Dylan Patel, chief analyst at SemiAnalysis.
Investors are hopeful that Samsung’s announcement is a sign of a market recovery in the semiconductor industry.
“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.