Samsung to cut chip output to avoid downturn; shares rally

SEOUL, April 7 (Reuters) – Samsung Electronics Co Ltd ( 005930.KS ) said on Friday it would make a “meaningful” cut in chip production, following the lead of smaller rivals, as it grapples with a sharp global slowdown in demand for semiconductors that have caused prices to fall.

The unusual production cut by the world’s largest memory chip maker – without any prior announcement recalled by Samsung officials and analysts – came after it reported a worse-than-expected 96% drop in first-quarter profit.

Investors brushed off the profit miss, betting that the industry leader’s move would support chip prices that had fallen by about 70% over the past nine months.

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

Smartphone and PC makers had stocked up on chips during the pandemic as demand for consumer devices surged, but are now running down inventories as shoppers cut back on purchases amid rising inflation.

Samsung said demand for memory had fallen sharply due to a weak global economy and customers slowing purchases as they focused on using up their stocks.

“We are lowering the production of memory chips by a meaningful level, especially for products with assured supply,” it added, in reference to those with sufficient inventories.

Samsung did not disclose the size of the planned production cut, but it sent a strong signal to a company that had previously said it would make small adjustments such as pauses for refurbishing production lines, but not a full cut.

“The fact that the No. 1 market share firm is joining production cuts lifted shares… SK Hynix and Micron ( MU.O ) have declared production cuts, but only Samsung had not, so the market was looking for it,” John said Park, an analyst at Daishin Securities.

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

Although cutting short-term production, Samsung said it is still making long-term investments in infrastructure and research to secure necessary clean rooms for chip production and expand its technological edge.

It did not say how investment plans for 2023 would be affected, after flagging investments equivalent to the 53.1 trillion won investment in 2022.

SK Hynix said in October that it would more than halve its investments in 2023 versus 2022, while Micron cut its 2023 investment plans by more than 30% in September.

RECORD PIECE LOSS

Samsung estimated operating profit fell to 600 billion won ($455.5 million) in January-March, from 14.12 trillion won a year earlier, in a brief preliminary earnings statement. It was the lowest result for any quarter in 14 years.

First-quarter profit fell below a Refinitiv SmartEstimate of 873 billion won, weighted against analysts who are more consistently accurate. Several estimates were revised down earlier this week.

The chip division is likely to report a record loss of 2.1 trillion won ($1.6 billion), according to an average of analyst forecasts, and post another 2 trillion won loss in the current quarter, a big departure for what had been Samsung’s main cash cow, which generates about half of the profits in better years.

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

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

The company is due to release detailed earnings, including divisional breakdowns, later this month.

($1 = 1,319,0000 won)

Reporting by Joyce Lee and Heekyong Yang; Additional reporting by Youn Ah Moon; Editing by Miyoung Kim and Jamie Freed

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