Samsung Electronics is set to reduce memory chip production as it estimates a 96% drop in quarterly operating profit due to lower sales amid a slow global economy and reduced demand after the Covid-19 pandemic. Preliminary numbers indicate that operating profits fell by 600 billion won (£366 million) in January-March, compared to 14 trillion won the previous year. Despite the decision to slow chip-making, Samsung’s shares rose over 4%.
Demand for memory chips surged during lockdowns as consumers purchased new electronics for home use, but the industry is now grappling with a chip shortage and balancing inventories with current demand. Analysts attribute the production cut to a “bullwhip” effect, where demand suddenly dried up as end product manufacturers sold through their existing inventory. Samsung, known for being the world’s largest maker of televisions, tablets, and smartphones, had been resistant to cutting memory chip production compared to its competitors.
The company’s announcement is seen as rare, as it had recently unveiled plans to invest 300 trillion won over 20 years to develop a mega semiconductor hub in South Korea. Investors are hopeful that this announcement signals a market recovery in the semiconductor industry, with expectations that the inventory “digestion” phase will complete in the next 3-6 months, leading to a return to more normal purchasing patterns in end markets. Samsung is scheduled to release detailed earnings later this month.