Samsung Electronics announced on Friday its decision to make a significant cut in chip production, following the lead of its smaller rivals, as it struggles with a sharp decline in semiconductor demand worldwide, causing prices to plummet. The unexpected output cut by the world’s largest memory chipmaker came after it reported a worse-than-expected 96% plunge in its first-quarter profit.
Investors, however, remained optimistic about the move, as they believe that it would support chip prices that had fallen by approximately 70% in the last nine months. Samsung’s shares jumped by 4.5% in early trading, the biggest one-day rise since September, while rival SK Hynix Inc’s shares surged 5.6%.
Stockpiling During the Pandemic Leads to Inventories Being Run Down
Smartphone and personal computer manufacturers had stocked up on chips during the pandemic when there was a surge in demand for consumer devices. However, inventories are now being depleted as shoppers cut back on purchases due to rising inflation. Samsung said memory demand had dropped sharply because of a weak global economy, and customers are slowing their purchases as they focus on using up their stocks.
Memory Demand Drops Due to a Weak Global Economy
Samsung announced that it is significantly lowering the production of memory chips, particularly those with a secured supply, as memory demand has dropped sharply due to a weak global economy. Although the company did not disclose the size of the planned production cut, it sent a strong signal as it had previously stated that it would only make small adjustments like pauses for refurbishing production lines, but not a full-blown cut.
Long-term Investments Are Still Being Made
Despite cutting short-term production, Samsung said that it is still making long-term investments in infrastructure and research to secure clean rooms needed for chip production and to expand its technological lead. The company did not specify how its investment plans for 2023 would be affected, having previously flagged capital spending similar to the 53.1 trillion won investment in 2022.
Analysts Weigh in on Samsung’s Production Cut
Samsung’s production cut may improve its performance slightly in the current quarter and could cement or hasten the rebound of memory chip prices. “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. The company is set to release detailed earnings, including divisional breakdowns, later this month.
In conclusion, Samsung’s decision to cut chip production is an unusual move by the world’s largest memory chipmaker, but one that investors seem to be optimistic about, as it could support chip prices that have fallen significantly in recent months. Despite the short-term production cut, Samsung is still investing in its long-term infrastructure and research plans to expand its technological lead in the future. Analysts predict that this move by Samsung may improve its performance in the current quarter and hasten the rebound of memory chip prices.
