[Editorial] Beyond chip glut

Samsung’s increased profit decline shows need to rethink cycles of chip industry

Samsung Electronics, the world’s largest memory chip and smartphone maker, said its operating profit in the January-March period would likely be at the lowest level in 14 years, a clear sign that its earnings are suffering from a setback in its core chip business.

Samsung’s woes, however, cannot be brushed off as a temporary drop in profits, as its memory chip business has significant implications for the South Korean economy, particularly concerning semiconductor exports.

Samsung’s woes coincide with the intensifying protectionist competition among the US, China, Taiwan and South Korea to strengthen and expand the crucial semiconductor sector that powers a wide arrange of industries.

Given the chip sector’s impact on the national economy, Korean policymakers seem to be aware of potential pitfalls if the domestic chip sector loses its competitive edge. Coming up with policies to shore up the embattled sector, however, is no easy task.

Samsung projected Friday a first-quarter operating profit of 600 billion won ($455.7 million), down a whopping 95.8 percent from 14.12 trillion won in the year-earlier period.

Even though Samsung did not break down the results by business unit, analysts speculated that poor earnings were largely affected by its chip business division’s deficit, which is estimated at around 4 trillion won. That would be the division’s first financial loss since the first quarter of 2009, one year after the world was hit by the global financial crisis.

It came as no surprise that Samsung’s semiconductor business has been hurt in consideration of a shrinking global demand that pushes up the volume of a surplus chip inventory.

What surprised analysts and investors alike is that Samsung is now planning to cut chip production in the short term to grapple with the inventory glut and a drop in memory chip prices.

In a regulatory filing, Samsung said it would adjust memory output to a “meaningful level” for products whose inventory is enough for future demand, but the company did not explain how much it would cut.

Perhaps Samsung’s vague comment has to do with the growing uncertainty shrouding the chip market. In its own forecast, Samsung said the global chip market would shrink 6 percent on-year to $563 billion in 2023. This can be interpreted as an ominous sign that a quick, dramatic recovery in demand is unlikely throughout the year. But some brokerages hold an optimistic outlook that memory chip prices could hit the bottom in the second quarter and start rebounding in the following quarters.

Either way, Korean policymakers are required to take action for the crucial chip industry -- or at least do some cheerleading. On Friday, Finance Minister Choo Kyung-ho made a visit to Samsung’s production facility and pledged to support local chipmakers through tax cuts and other incentives.

Choo’s enthusiasm for support is understandable. Chips are seen as Korea's most important export item, and exports of them dropped 34.5 percent on-year in March.

But on a closer look, ups and downs in the chip industry seem inevitable, since demand and supply tend to go through big cycles. This is the very nature as well as limitation of the memory chip business. In other words, a slight miscalculation in sizing up investment in line with cyclical shifts could translate into big losses.

Samsung has been at the forefront of the memory chip market over the three decades thanks largely to its timely and aggressive investment, even when faced with a cyclical crisis, that helped widen the gap with its rivals by a wide margin.

But there is no guarantee that Samsung’s strategy will continue to work in the future. This is why policymakers should encourage and help local chipmakers to diversify their chip product portfolios, especially those related to artificial intelligence and driverless mobility.

The National Assembly passed a bill dubbed the K-Chips Act, in a bid to support chipmakers through bigger tax credits last month. But this is a limited measure compared with what the United States has done with Chips and Science Act. More systematic and long-term policies are needed to help the domestic chip industry weather the cutthroat global races for cutting-edge technology.

By Korea Herald(khnews@heraldcorp.com)