IIn a sharp reversal, Samsung Electronics is cutting its memory chip production after adamantly ruled out an artificial reduction in supply in recent months.
The surprising announcement followed Friday’s news that operating profit in the first quarter of this year is expected to have fallen sharply by 96 percent to 600 billion won (about 417 million euros). This shows an earnings forecast from Samsung. Sales then fell 19 percent to about 63 trillion won (43.8 billion euros). The production cut and the poor business figures illustrate the severity of the crisis in the electronics industry after the Covid pandemic.
With the production cut, the world‘s largest memory chip manufacturer is reacting to the poor prospects in the electronics market, which is cooling off significantly after the upswing during the pandemic. In contrast to competitors such as Micron and SK Hynix, Samsung has not yet announced any cuts and has also stuck to its investment plans. The South Korean company is known for using times of crisis to gain economies of scale over the competition with strategic investments. Samsung has now moved a little further away from this clear line.
Weak demand as a reason
According to a statement to investors, Samsung will reduce memory chip production to a reasonable level. The company has secured enough volume to serve future changes in demand. Samsung justifies the adjustment of production with the weak demand in the current macroeconomic situation and the inventory adjustments of many customers. In the medium to long term, however, the company intends to stick to its investment plans.
Investors on the Seoul Stock Exchange reacted positively to the news. Shares of Samsung gained more than 4 percent in morning trade. SK Hynix temporarily gained 5.6 percent. The reasoning behind this is that Samsung’s decision could stabilize the prices for memory chips a little. Samsung has a market share of about 40 percent for volatile DRAM memory and about 33 percent for NAND or flash memory, which is increasingly replacing traditional hard drives in computers or networked computers for data storage. In smartphones, the NAND components store photos or videos.
Reduce supply overhang
The market for memory chips is currently characterized by an oversupply. Analysts are reporting that volatile DRAM memory prices are expected to fall 10 percent in the current quarter, after falling 20 percent and more than 30 percent in the previous two quarters. Prices for NAND or flash memory fell by 10 to 15 percent in the first quarter, according to data from the Taiwanese analysis company Trendforce. Just last week, Trendforce expected another minus of 5 to 10 percent for the current quarter. The average selling price could rise in the final quarter if demand stabilizes at current levels and stops falling, Trendforce predicted.
The situation on the market for memory chips has developed worse than Samsung expected in the past few months. Samsung will only present detailed business figures for the period from January to March towards the end of the month. However, analysts estimate that Samsung’s business with electronic memory modules should have made a loss of around 2.7 billion euros. Overall, Samsung expects quarterly operating profit of 600 billion won, falling short of average analyst expectations of 1.4 trillion won. Analysts suspect that Samsung has absorbed at least part of the losses in the semiconductor division in the smartphone business.