Samsung Electronics Co. is anticipated to report its lowest profit levels since 2009, which could be attributable to a considerable deceleration in technology demand that has resulted in losses in its semiconductor unit.
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The South Korean chip manufacturer, which is due to release preliminary results for the March quarter shortly, is projected to disclose that operating profit has plummeted about 90% to 1.45 trillion won ($1.1 billion), according to analyst estimates compiled by Bloomberg.
This would represent the smallest profit recorded since 2009. Several earnings estimates fall below 1 trillion won and, in some instances, just slightly above the break-even point.
While the semiconductor sector is notorious for its boom-and-bust cycles, it faced an unprecedented downturn during the Covid era.
The pandemic drove demand up as consumers purchased new computers and smartphones, prompting chipmakers like Samsung to increase production.
However, sales plummeted as lockdowns were lifted, and decreased even more due to soaring inflation, rising interest rates, and other global economic hardships.
Consequently, the $160 billion memory chip sector encountered a significant mismatch between supply and demand. Inventories rose, and prices for DRAM and NAND fell.
Samsung, the leading player in memory chips, is anticipated to suffer losses of approximately $2.7 billion in its semiconductor unit.
“The biggest problem right now is that chip inventories are too high and, in order to reduce them, the company will have to cut production,” said Lee Seung-woo, analyst at Eugene Investment & Securities.
The cost of a kind of memory called DRAM, which helps computers and phones work, went down by 20% in the first part of the year.
A group called TrendForce says it might drop 10% to 15% more in the second part of the year. Another type of memory, called NAND storage-chip, went down as much as 15%, and might go down another 5% to 10% in the second part of the year too.
“Memory prices declined further than the market’s expectations in the first quarter due to poor demand,” said Baik Gilhyun, analyst at Yuanta Securities.
“Prices will fall but at a slower pace in the current quarter. There’s not much further to slide because DRAM and NAND contract prices will soon hit their cash-cost level.”
According to the latest data released by South Korea’s trade ministry, the country’s chip exports witnessed a slump of 34.5% in March, following a decline of over 40% in the previous month. Exports to China, South Korea’s primary trading partner, also fell by 33.4%, given the economic downturn experienced by the second largest economy in the world.
Sanjay Mehrotra, the CEO of Micron Technology Inc., a competitor in the memory-chip industry, expressed optimism about a recovery in the market this year as inventory levels decline and demand recovers. However, any improvement will depend on whether the significant chip manufacturers throttle back production. “The recovery could be accelerated if further supply cuts are made,” he said.
Unlike its counterparts Micron, SK Hynix Inc., and Kioxia Holdings Corp., Samsung, the largest memory maker, has kept up its expenses and investments, stating that its historical strategy has been to increase its competitive position during economic downturns. This approach enables the company to grab a larger market share and develop new technologies to wield against rivals like Hynix and Micron when they lack the funds to keep up.
In Pyeongtaek, Samsung’s employees are building the company’s fourth, enormous chip production line, and planning to add two more lines by the end of the decade. Besides memory chips, Samsung is seeking to expand its semiconductor foundry business, which is currently dominated by Taiwan Semiconductor Manufacturing Co. Samsung announced another investment of 300 trillion won ($229 billion) for a new mega chip campus in Yongin over the next two decades.
Despite being urged by its competitors and investors to reduce production, Samsung has shown no signs of doing so. Samsung’s CEO, Lee, reportedly advised the company’s executives in February to continue investing in the future and not be daunted by the challenges faced by the industry.