Due to a significant downturn in tech demand that resulted in losses at its semiconductor division, Samsung Electronics is on track for its lowest profit since the global financial crisis, if not longer.
Analysts predict the South Korean chipmaker, which announces preliminary results for the March quarter on Friday, will disclose an operating profit drop of almost 90% to 1.45 trillion won (R19.9 billion). This is the poorest profit since 2009. Some profit predictions are less than $1 trillion, with some only barely beyond breakeven.
While the semiconductor industry is notorious for its boom-and-bust cycles, the Covid period was one for the record books. During the epidemic, demand for new computers and cellphones skyrocketed, driving chipmakers like Samsung to ramp up manufacturing. Nevertheless, sales fell once lockdowns were released, and then further shrivelled as a result of surging inflation, increasing interest rates, and other worldwide economic stress.
As a result, the US$160 billion memory chip market faces a massive supply-demand gap. Inventory skyrocketed. DRAM and NAND prices have plummeted. Samsung, the world’s largest memory chip manufacturer, is set to lose $2.7 billion in its semiconductor segment.
“The biggest problem right now is that chip inventories are too high and, in order to reduce them, the company will have to cut production,” said Lee Seung-woo, analyst at Eugene Investment & Securities.
According to industry research firm TrendForce, prices for DRAM, a kind of memory used to process data in computers and phones, fell 20% in the first quarter and are likely to fall 10-15% in the second quarter. Prices for NAND storage chips have fallen as much as 15% and are likely to fall another 5-10% in the second quarter.
“Memory prices declined further than the market’s expectations in the first quarter due to poor demand,” said Baik Gilhyun, analyst at Yuanta Securities. “Prices will fall but at a slower pace in the current quarter. There’s not much further to slide because DRAM and NAND contract prices will soon hit their cash-cost level.”
According to figures issued by the country’s commerce ministry, South Korean chip exports fell 34.5% in March, following a drop of more than 40% the previous month. Overall exports to China, Korea’s largest trading partner, decreased by 33.4% as the world’s second largest economy struggles to recover from a depression.
Sanjay Mehrotra, CEO of memory-chip competitor Micron Technologies, said last week that he expects the market to improve this year as inventory levels fall and demand returns. But, any progress will be contingent on if the main chip manufacturers reduce production. “The recovery could be accelerated if further supply cuts are made,” he stated.
Samsung has been the stumbling block. While Micron, SK Hynix, and Kioxia Holdings have reduced their investment spending and output in the hopes of halting additional price drops, the largest memory producer has maintained its own spending.
Samsung, currently run by Jay Y Lee, the founder’s grandson, has stated that its past approach has been to maintain spending throughout downturns in order to maintain its competitive position. The strategy can help the corporation acquire market share — and create new technologies to use against competitors like Hynix and Micron when they lack the funds to compete.
In Pyeongtaek, Samsung employees are hard at work building the company’s fourth, massive chip production line, with plans to add two more lines by the end of the decade. Apart from memory chips, Samsung is attempting to develop its semiconductor foundry sector, which is currently dominated by Taiwan’s TSMC. During the following two decades, Samsung plans to invest another $300 billion (R4.1 trillion) in a new mega chip campus in Yongin.
While competitors and investors have urged Samsung to follow in the footsteps of its competitors and curtail output, Samsung appears reluctant to do so. Lee urged the company’s management in February that they should “not be fazed” by the industry’s issues and should continue to invest in the future.
