Semiconductor Hit By Chip Shortage

As a severe downturn in the global semiconductor business continues, Samsung Electronics Co., Ltd. announced on Friday that it would make a “significant” reduction in chip manufacturing after reporting a worse-than-anticipated 96% drop in quarterly operating profit.

The largest memory chip and TV manufacturer in the world saw its shares rise 3% in early trade, while rival SK Hynix Corp. had its shares rise 5% as investors embraced plans to reduce production in order to maintain pricing power.

In a succinct preliminary earnings statement, Samsung calculated that its operating profit decreased to 600 billion won ($455.5 million) in January-March from 14.12 trillion won a year earlier. In 14 years, this quarter’s profit was the lowest of any other. According to a statement from the company, “Memory demand declined substantially due to the macroeconomic circumstances and decreasing customer purchasing sentiment, as many companies continue to modify their inventories for financial reasons.”

It said, referring to products with significant stocks, “We are reducing the manufacture of memory chips by a meaningful level, notably that of products with supply secured.” The indication of a production cut is unusually significant for Samsung, which had previously stated that it would only implement minor changes, such as pauses for repairing production lines, as opposed to a complete shutdown.

It omitted to mention how big the intended cut would be. The first-quarter profit was below the $873 billion estimated by Refinitiv SmartEstimate, which is based on more reliable analysts. Some predictions were reduced early this week. According to business records, it was the lowest profit since the first quarter of 2009, when it reached 590 billion won.

Data center operators, smartphone and personal computer manufacturers, as well as other semiconductor customers, are avoiding making fresh chip purchases and using up stocks as a result of weakening consumer demand for tech products caused by growing inflation. Experts projected that the decline in memory chip prices and the subsequent decline in inventory values caused the semiconductor division to suffer quarterly losses of more than 4 trillion won ($3.03 billion).

This would be the semiconductor industry’s first quarterly deficit since the first quarter of 2009, which is a significant departure for what is often a cash cow that, in good years, contributes around half of Samsung’s profits.

According to Samsung, revenue probably decreased 19% from the same time last year to 63 trillion won.