Samsung Electronics will cut back on chip production, as it faces a sharp decline in global demand for semiconductors that has sent prices plunging.
The world’s biggest memory chip maker said it would make a “meaningful” cut to chip output after sales dropped sharply and it flagged a 96% drop in first-quarter profits, worse than expected. The fellow South Korean firm SK Hynix and Micron Technology of the US have also reduced production.
“Samsung talking about production cuts is evidence of how bad the current slump really is,” said Greg Roh, the head of research at Hyundai Motor Securities.
Smartphone and personal computer makers ramped up purchases of chips during the Covid-19 pandemic, when demand for consumer electronics soared as people were stuck at home during lockdowns. This led to a global chip shortage. However, demand has waned as consumers cut back on bigger purchases amid the cost of living crisis, with food and energy bills soaring.
Samsung said demand had dropped because of a weaker world economy and companies buying fewer chips as they run down their inventories.
“We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured,” the company said, referring to customers with sufficient inventories.
It had previously talked of making small adjustments, such as pausing output to refurbish production lines.
Samsung estimated its operating profit fell to 600bn won between January and March, from 14.12tn won a year earlier, the lowest profit for any quarter in 14 years. It will report detailed figures later this month.
Analysts are forecasting that its chip division, which usually generates about half of group profits, will report a record loss of 2.1tn won in the quarter.
Investors shrugged off the news of the production cuts, as they hope that the output cut will support chip prices, which have fallen by 70% over the past nine months.
John Park, an analyst at Daishin Securities, said: “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.
“Today’s production cut signal casts a positive outlook for a memory chip rebound in the second half of the year.”
Despite the cut, Samsung said it would continue to invest in infrastructure and research. However, it did not say whether it was sticking to its investment plans for this year. SK Hynix said in October it would more than halve its capital spending in 2023 compared with 2022, while Micron cut its investment plans by more than 30% in September.