Samsung reduces chip production to combat deflation; Stock rise

Samsung Electronics Co Ltd (005930.KS) said on Friday it would make a “meaningful” cut in chip production, similar to smaller rivals, as it grapples with a sharp global downturn in demand for semiconductors. Which led to lower prices.

The unusual production cut by the world’s largest memory-chip maker — without an earlier announcement that Samsung officials and analysts recall — came after it posted a worse-than-expected 96% drop in first-quarter profit.

Ignoring the profit loss, investors bet that the move by the industry leader would support chip prices, which have fallen about 70% over the past nine months.

Samsung shares jumped 4.5 percent in early trade, the biggest one-day rise since September, while rival SK Hynix Inc (000660.KS) rose 5.6 percent.

Makers of smartphones and personal computers stockpiled chips during the pandemic when demand for consumer devices soared, but are now running low on inventories as shoppers cut back on purchases amid soaring inflation.

Samsung said demand for memory fell sharply due to the weak global economy and slow customer purchases as they focused on depleting their inventory.

“We are reducing production of memory chips at a meaningful level, especially on products with guaranteed supplies,” she added, referring to those with sufficient inventory.

Samsung did not reveal the size of its planned production cuts, but it sent a strong signal to a company that previously said it would make small adjustments such as pausing to renew production lines but not a complete cut.

“The fact that the first company in the market is joining the production cuts lifted the shares… SK Hynix and Micron (MU.O) announced production cuts, but only Samsung didn’t, so the market was watching,” he said. John Park, analyst at Daishin Securities.

“Today’s production cut signal indicates a positive outlook for the memory chip recovery in the second half of the year.”

Despite the short-term production cuts, Samsung said it was still making long-term investments in infrastructure and research to secure the cleanrooms needed to produce chips and expand its technology leadership.

It did not say how its investment plans for 2023 would be affected, after previously indicating capital spending similar to an investment of 53.1 trillion won in 2022.

SK Hynix said in October it would cut its capital spending by more than half in 2023 versus 2022, while Micron cut financial investment plans for 2023 by more than 30% in September.

Chip loss record

Samsung estimated its operating profit fell to 600 billion won ($455.5 million) in the January-March period, from 14.12 trillion won a year earlier, in a short preliminary earnings statement. It was the lowest profit in any quarter in 14 years.

First-quarter earnings were just under 873 billion won on Refinitiv SmartEstimate, geared towards the ever-more accurate analysts. Multiple estimates were revised down from earlier this week.

Its chip division is likely to post a record loss of 2.1 trillion won ($1.6 billion), according to the median of analyst expectations, and lose another 2 trillion won in the current quarter, a stark contrast to what was Samsung’s most important money. A cow, which in better years brings in about half of its earnings.

Analysts said Samsung’s production cut could slightly improve its performance in the current quarter and could boost or accelerate memory chip price recovery.

“Samsung’s talk of production cuts is evidence of how bad the current recession really is,” said Greg Roh, head of research at Hyundai Motor Securities.

The company is set to report detailed earnings, including divisional dividends, later this month.

($1 = 1,319.0000 won)

(Reporting by Joyce Lee and Heekung Yang); Additional reporting by Yoon Ah-moon. Editing by Myung Kim and Jimmy Fried

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