Samsung cuts chip output to get out of recession; Stocks rally

  • It’s highly unusual for Samsung to signal a cut in chip production
  • Samsung shares rose 4.5%, while rival SK Hynix rose 5.6%
  • The Q1 chip loss could be the biggest since at least 2009—analysts say

SEOUL, April 7 (Reuters) – Samsung Electronics Co Ltd ( 005930.KS ) said on Friday it would follow the lead of smaller rivals by making “meaningful” cuts in chip production as it grapples with a sharp global drop in semiconductor demand. That has pushed prices down.

The unusual release from the world’s largest memory chipmaker — which Samsung officials and analysts recalled no previous announcement about — came after it flagged a worse-than-expected 96% decline in first-quarter profit.

Investors bucked the profit margin by betting that the industry leader’s move would support chip prices, which have fallen about 70% in the past nine months.

Samsung rose 4.5% in early trade in its biggest one-day gain since September, while shares of rival SK Hynix Inc ( 000660.KS ) rose 5.6%.

Smartphone and personal computer makers stockpiled chips during the pandemic when demand for consumer devices surged, but they are now reducing inventories as buyers cut back on purchases amid rising inflation.

Samsung said memory demand has fallen sharply as a weak global economy slows purchases as customers focus on using up their stock.

“We are reducing the production of memory chips to a meaningful extent, especially the supply-backed products,” he said, referring to those with sufficient inventory.

Samsung did not disclose the extent of the planned production cuts, but it sent a strong signal to a company that it would make small changes, such as pauses to renew production lines, but not full-scale cuts.

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“The fact that the No. 1 market share company is joining the production cuts lifted stocks… SK Hynix and Micron ( MU.O ) have announced production cuts, but Samsung is not the only one, so the market was watching,” he said. John Park, analyst at Daishin Securities.

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

Despite short-term production cuts, Samsung said it is making long-term investments in infrastructure and research to secure the clean rooms needed for chip production and expand its technology lead.

Traffic passes a Samsung Electronics Co digital billboard in Manhattan’s Times Square on March 2, 2023 in New York City. REUTERS/Chris Helgren

While it has flagged capital spending at 53.1 trillion won in 2022, it did not say how its 2023 investment plans would be affected.

SK Hynix said in October it would halve its capital spending in 2023 and 2022, while Micron cut fiscal 2023 investment plans by more than 30% in September.

Reuters Graphics

Record the chip loss

Samsung said its operating profit fell to 600 billion won ($455.5 million) in the January-March period from 14.12 trillion won a year earlier, according to a brief preliminary earnings report. This was the lowest profit for any quarter in 14 years.

First-quarter profit fell short of the Refinitiv SmartEstimate of 873 billion won. Several ratings were revised earlier this week.

Analyst forecasts averaged a loss of 2.1 trillion won ($1.6 billion) for its chip division, and a further 2 trillion won in the current quarter, a stark contrast to what has been Samsung’s most important money maker. The cow makes half of its profits in the best years.

Analysts said Samsung’s production cuts could slightly improve its performance in the current quarter and stabilize or accelerate memory chip prices.

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“Samsung talking about production cuts is evidence of how bad the current slump really is,” said Greg Roh, head of research at Hyundai Motor Securities.

The company is set to release detailed earnings, including segment breakdowns, later this month.

($1 = 1,319.0000 won)

Joyce Lee and Heekyong Yang report; Additional reporting by Yoon Ah Moon; Editing by Myeong Kim and Jamie Freed

Our Standards: Thomson Reuters Trust Principles.

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