In light of projecting a 96% decline in its quarterly operating profit, Samsung Electronics plans to reduce its memory chip production.
Due to a sluggish global economy and reduced demand following the impact of Covid-19, the chip-making giant reported a significant decline in sales.
Preliminary data from Samsung shows a drop in operating profits by 600 billion won (£366m) in the January-March period, marking a decline from the previous year’s 14 trillion won.
Despite the decision to reduce chip-making, the company’s shares experienced a more than 4% increase.
In a statement, the South Korean tech giant announced a substantial reduction in the production of memory chips, focusing particularly on those with assured supply.
During the lockdowns caused by the Covid-19 pandemic, there was a surge in demand for memory chips as consumers purchased new electronics for home use.
Following a chip shortage experienced in the past couple of years, the industry is now in a phase of recovery. However, semiconductor manufacturers are facing challenges in finding a balance between their inventories and the current demand.
According to Peter Hanbury, an analyst from management consultancy Bain & Company, “As the overall economy experienced a slowdown, the demand for end products decreased. Consequently, the manufacturers of these end products halted chip orders and prioritized selling their existing inventory.”
Peter Hanbury further commented, “This resulted in a significant ‘bullwhip’ effect for semiconductor manufacturers located further back in the supply chain, as the previously soaring demand during the chip shortage suddenly evaporated.”
In contrast to its competitors, Samsung, the largest producer of televisions, tablets, and smartphones worldwide, had initially been reluctant to reduce memory chip production.
According to analysts, the company’s decision to implement a production cut is an uncommon occurrence. Interestingly, just last month, Samsung revealed its intentions to invest 300 trillion won over 20 years to establish a massive semiconductor hub in South Korea.
Dylan Patel, Chief Analyst at SemiAnalysis, stated, “Samsung is confronted with a dual challenge of DRAM and NAND memory chips facing financial losses, while also needing to update their factories’ process technology after falling behind in recent years.”
Samsung’s announcement has instilled hope among investors, indicating a potential market recovery in the semiconductor industry.
Peter Hanbury anticipates that the current inventory “digestion” phase will reach completion within the next 3-6 months. He further predicts that once this phase concludes, the end markets will have successfully worked through their inventory and resumed a more typical purchasing pattern.
Source : bbc.com
