Samsung Electronics Co. Ltd. said on Friday it is implementing a “meaningful” cut in its chip production after profits plunged, and after smaller companies also announced cuts in chip production.
According to a Samsung press release published Friday, the largest memory chipmaker had a profit of 600 billion Korean won ($455 million) for its first quarter of 2023. In the first quarter of 2022, it had a profit of 14 trillion won ($10.6 billion), and in the fourth quarter of 2022, it had a profit of 4 trillion won. This was the biggest decline in profits for the company in 14 years.
Investors speculated the move by the industry leader would support chip prices that had fallen by about 70 percent over the last nine months.
Smartphone and personal computer makers had stocked up on chips during the pandemic when demand for consumer devices surged, but they are now running down inventories as shoppers cut back on purchases amid rising inflation.
Samsung said memory demand had dropped sharply because of a weak global economy and customers slowing purchases as they focused on using up their stocks.
“We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured,” it added, in a reference to those with sufficient inventories.
Samsung did not disclose the size of the planned production cut, but it sent a strong signal for a company that had previously said it would make small adjustments like pauses for refurbishing production lines, but not a full-blown cut.
“The fact that the number-one market share firm is joining production cuts lifted shares ... SK Hynix and Micron have declared production cuts, but only Samsung had not, so the market was watching for it,” said John Park, an analyst at Daishin Securities.
Although cutting short-term production, Samsung said it was 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 investment of 53.1 trillion won in 2022.
SK Hynix said in October 2022 that it would more than halve its capital spending in 2023 versus 2022, while Micron cut fiscal 2023 investment plans by more than 30 percent in September.
“Samsung talking about production cuts is evidence of how bad the current slump really is,” said Greg Roh, head of research at Hyundai Motor Securities.
Impact on the Korean Economy
The Samsung group accounts for about 20 percent of South Korea’s GDP, and is vital to the country’s economy.The company’s weak financial performance has thus impacted the Korean economy.
To reverse the weakening profitability, Samsung plans to invest 300 trillion won (about $227 billion) over the next 20 years to build five new chip plants in South Korea as part of the government’s goal to establish “the world’s largest” chip center by 2042.
South Korea has experienced a trade deficit for over a year, and one of the main contributors is the deteriorated business environment for its semiconductors or chips.
According to market research provider TrendForce, the market share gap between the two leading chip foundries, TSMC and Samsung Electronics, further widened, from 40.6 percent in the third quarter to 42.7 percent in the fourth quarter last year, with TSMC leading by a large margin.
