After forecasting a 96% decline in quarterly operating profit, Samsung Electronics will reduce memory chip output.
The chipmaker reported a steep reduction in revenues due to a slowing global economy and lower demand following Covid.
According to preliminary figures, Samsung’s operational earnings declined 600 billion won (£366 million) in January-March, from 14 trillion won the previous year.
Despite the move to delay chip production, the company’s stock gained more than 4%.
“We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured,” the South Korean tech giant said.
Memory chip demand increased during Covid-induced lockdowns as customers purchased new devices for usage at home.
The industry is already recovering from a chip shortage that occurred a few years ago, but many semiconductor firms are still battling to establish a balance between their inventory and current demand.
“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 largest manufacturer of televisions, tablets, and smartphones, has fought the effort to reduce memory chip output in comparison to competitors.
According to analysts, the company’s disclosure of a production drop is unusual. It unveiled plans last month to invest 300 trillion won over 20 years to build a major semiconductor centre 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 hoping that Samsung’s statement signals the beginning of a semiconductor market revival.
“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.
