News One Hundred and Nighty-six: Samsung to cut chip production after profits plunge 96%

Samsung Electronics will cut memory chip production after estimating a 96% drop in its quarterly operating profit.

The chip-making giant said sales had dropped sharply due to a slow global economy and less demand after Covid.

Samsung said preliminary numbers showed operating profits fell 600 billion won (£366m) in January-March, from 14 trillion won the previous year.

The firm’s shares rose more than 4% despite the decision to slow chip-making.

“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.

Demand for memory chips ramped up during Covid-induced lockdowns as consumers bought new electronics to use at home.

The industry is now recovering from a chip shortage over the past couple of years, but many semiconductor manufacturers are struggling to find a balance between their inventories 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 biggest maker of televisions, tablets and smartphones, had resisted the move to cut memory chip production compared to its competitors.

Analysts say the company’s announcement of a production cut is rare. Last month, it announced plans to invest 300 trillion won over 20 years to develop a mega semiconductor hub 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 hopeful that Samsung’s announcement is a sign of a market recovery in the semiconductor industry.

“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.

The company is scheduled to release detailed earnings later this month.