Samsung Electronics chip production cut shakes up industry

The decision by Samsung Electronics to cut chip production has reverberated throughout the industry with the share prices of the company and competitors rallying on the news.

A Samsung Electronics chip complex in Hwaseong, Gyeonggi [YONHAP]

The decision by Samsung Electronics to cut chip production has reverberated throughout the industry with the share prices of the company and competitors rallying on the news.

Micron and SK hynix both benefited from the surprise move.

The cuts are seen possibly easing the supply glut and fueling recovery in the prices of memory products that hit lows in the first quarter.

Since the announcement was made on April 7, Samsung Electronics stock has jumped 5.9 percent as of Wednesday compared to the closing price on April 6. It closed at 66,000 won Wednesday, up 0.15 percent.

Peers are enjoying bigger bounces, as Boise, Idaho’s Micron gained 8 percent on Monday and another 0.47 percent Tuesday.

The price of SK hynix, the second largest memory chip maker, rose 7.8 percent as of Wednesday compared to the pre-announcement closing.

Both SK hynix and Micron made it clear that they are slashing capital expenditures with the aim of lowering production.

The industry has long awaited a signal from Samsung Electronics about a production cut, since the world’s largest memory chip maker's move could hasten the end of the current supply glut.

The key question is how much it will reduce production capacity, an issue that can be covered during a first quarter conference call set for the end of this month.

Estimates vary on the production cuts, from 7 percent to 30 percent in some memory chip products.

One thing more clear is that chips manufactured with relatively old manufacturing processes will be subject to production cuts, as the company said that the manufacturing of products with sufficient supply will be reduced “to a meaningful degree.”

Kim Dong-won, an analyst at KB Securities, said that Double Data Rate 4s (DDR4), a type of dynamic random access memory (DRAM) and the predecessor of newly-released Double Data Rate 5s (DDR5), will be among the affected products.

“The production cut will be centered around DDR4,” he said in a note, released last week. “At the same time, the company will migrate into DDR5s and LPDDR5s while increasing the portion of chips made with advanced manufacturing processes.”

The cut will primarily take place at a manufacturing complex in Hwaseong, Gyeonggi, according to a source with knowledge of the company's production plans.

“Samsung Electronics plans to cut production at Hwaseong Campus DRAM lines rather than at its Pyeongtaek site,” the source said.

“At the DRAM production line in Hwaseong, the planned cut will last at least three months,” the source said, adding that wafer input already decreased by 5 to 7 percent in February and March.

With Samsung Electronics more aggressively acting on production cuts, analysts expect the current oversupply to subside in the second half.

“It will play a positive role in easing the supply glut entering the second half,” said Kim Yang-Jae, an analyst at Daol Investment & Securities, although he warned of persistently low demand for electronic devices that could possibly derail the improvement.

High inflation and weak consumer sentiment weighed on the sale of electronic devices, leaving manufacturers with high levels of inventory.

The average selling prices of DRAMs plunged 20 percent in the first quarter and will likely go down by 10 to 15 percent in the second quarter, according to Taiwan's TrendForce.

BY PARK EUN-JEE, KO SUK-HYUN [park.eunjee@joongang.co.kr]