Samsung Electronics gaining attention on whether it will cut output

Samsung Electronics Co. headquarters [Photo by Yonhap]

As Samsung Electronics Co. will announce preliminary first-quarter earnings Friday, all attention are on whether the world’s biggest memory chip maker will change its stance on an earlier comment that there will be no artificial production cut as the industry struggles with high inventory due to a slump in demand.

The company is expected to post an operating loss of around 4 trillion won ($3.03 billion) at its chip division due to sluggish demand in the memory industry, according to industry sources on Monday. There are conflicting views in the company with those calling for production cuts in consideration of a deeper-than-expected industry slowdown and current stock prices while others are calling to maintain the current production level to widen the gap with rivals for the company’s future, according to sources.

Samsung Electronics is expected to release only tentative sales and operating profit figures during the upcoming preliminary earnings guidance, but it seems inevitable for the company to make an additional statement regarding production cuts at a conference call to be held following the announcement of its actual earnings at the end of this month.

Earlier, the company reaffirmed in its fourth-quarter earnings call that its capital expenditure plan this year would be similar to previous years and that there would be no artificial production cut, contrary to market expectations. The company, however, left room for natural production reduction by optimizing production lines, such as facility relocation, and conversion of microprocesses.

The market is already seeing a natural production cut of about 20 percent.

“Some test and parts companies said that orders from Samsung Electronics dropped by more than 30 percent in the first quarter,” said Doh Hyun-woo, an analyst from NH Investment & Securities Co. “In addition, Samsung Electronics’ current DRAM inventory exceeds 21 weeks, which is higher than its rivals. In order to overcome this situation, the company may increase its production cuts.”

According to Samsung Electronics’ business report for 2022, the inventory in the Device Solutions Division in charge of semiconductors jumped 76.6 percent to 29.58 trillion won at the end of last year from a year ago. The problem is that the chip industry outlook has become worse than expected in January, when the company announced its fourth-quarter earnings.

[Photo by Yonhap]

According to data from Yonhap Infomax Co., a financial news and data providing company in Korea, Samsung Electronics’ first-quarter operating profit this year is expected to plunge 94.9 percent to 720.1 billion won and sales to fall 17.34 percent to 64.3 billion won.

“Samsung Electronics’ DRAM Inventory would have increased further in the first quarter as its shipments continued to be sluggish and no production cut,” said Kim Rok-ho, an analyst at Hana Financial Investment Co. “It is time to think about conservative production capability management policies.”

Micron Technology Inc., a U.S. producer of computer memory and computer data storage that already cut production, has also hinted at additional reductions. In its recent earnings announcement, Micron revised down the amount of facility investment for fiscal year 2023 to up to $ 7 billion from up to $ 7.5 billion.

According to Taiwanese market research firm TrendForce, the average selling price of DRAM in the first quarter plummeted by 20 percent.

“Price decline is predicted to slow down to 10 percent to 15 percent next quarter,” TrendForce said in a March 28 report. “It’s uncertain whether or not demand will recover in the second half of 2023. Therefore, the ASP of DRAM has continued to fall as inventory levels are high from the suppliers’ side and prices will only rebound if there is a significant decrease in production.”

Given the market outlook and the company’s strategies so far, however, some predict that Samsung Electronics is unlikely to revise its existing position on production cuts this year as memory chip shipments are expected to recover from the second quarter and inventory levels to gradually drop on a recovery in demand following its mass production of new server CPUs.

“There is a movement to reduce investment across the industry, but Samsung Electronics is not reducing investment for the future,” said Kye-hyun Kyung, the head of Samsung Electronics DS Solutions Division at a management briefing for executives and employees in February. “We must make good use of this opportunity to maintain our edge in the memory business.”

SK hynix Inc. is also in the position that there will be no additional production cuts other than its previously announced plan.