Samsung to Reduce Memory Chip Output as Weak Demand and Oversupply Hit Profits

Highlights

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• Samsung Electronics Co., the world's largest memory chip maker, announces it will reduce its memory chip output due to oversupply and weak demand.
• The company's operating profit for Q1 2023 was 600 billion won ($450 million), down more than 90% from a year ago.
• Samsung's sales also fell to 63 trillion won, down 14% from a year ago.
• The semiconductor division is estimated to have lost about $3 billion in the first quarter.
• Samsung accounts for about 40% of the global DRAM and NAND flash market share.
• Memory chips are used in smartphones, computers, servers, and data centers.

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Samsung Electronics Co., the world's largest memory chip maker, has announced that it will reduce its memory chip output after posting its worst quarterly profit since the 2009 global financial crisis. The company said that the memory chip market has been hit hard by oversupply and weak demand, resulting in a sharp decline in prices and profits.

According to Samsung, its operating profit for the first quarter of 2023 was 600 billion won ($450 million), down more than 90% from a year ago and below the average analyst estimate of 1.45 trillion won. Its sales also fell to 63 trillion won, down 14% from a year ago. The company plans to provide a full financial statement with net income and information on divisional performance later this month.

The main culprit for Samsung's dismal performance was its semiconductor division, which is estimated to have lost about $3 billion in the first quarter. Samsung is the dominant player in the $160 billion memory chip market, accounting for about 40% of the global DRAM and NAND flash market share. Memory chips are used to store and process data in various devices, such as smartphones, computers, servers, and data centers.

However, the memory chip industry has been facing a severe downturn since late 2021, due to a combination of factors, such as the Covid pandemic, the global economic slowdown, the trade war between the US and China, and the geopolitical tensions in Eastern Europe. These factors have dampened the demand for memory chips, especially from smartphone and PC makers, while also disrupting the supply chain and logistics.

At the same time, memory chip suppliers have been struggling with excess inventory, as they ramped up production in anticipation of higher demand that did not materialize. This has led to a glut of memory chips in the market, forcing prices to plummet. According to Yuanta Securities Co., prices of DRAM - a type of memory chip used to process data - fell by around 10% in the first quarter of 2023, following a roughly 20% slide in the previous quarter and a more than 30% drop in the fourth quarter of 2022.

In response to this challenging situation, Samsung said that it will cut its memory chip production by adjusting its capacity utilization and investment plans. The company did not specify how much it will reduce its output, but analysts expect it to be around 10% to 15%. Samsung said that this move is aimed at improving the supply-demand balance and stabilizing prices in the long term.

Samsung's decision to cut its memory chip output is seen as a significant step for the industry, as it signals that the market conditions have reached a critical point that requires collective action from suppliers. Samsung's rivals, such as SK Hynix Inc. and Micron Technology Inc., have already announced production cuts last year, but their efforts were not enough to offset Samsung's continued output expansion.

Analysts expect that Samsung's production cut will have a positive impact on the memory chip market recovery, as it will help ease the inventory pressure and boost prices. However, they also caution that the recovery pace will depend on various factors, such as the demand recovery from smartphone and PC makers, the resolution of trade and geopolitical issues, and the Covid situation around the world.

Samsung said that it expects its earnings to improve in the second half of 2023, as it launches new products and services across its business segments, such as smartphones, displays, consumer electronics, and network equipment. The company also said that it will continue to invest in future technologies, such as artificial intelligence, 5G, cloud computing, and biotechnology.