Samsung Electronics has announced that sales have sharply declined due to the slowing global economy and reduced demand after the Covid-19 pandemic, resulting in a predicted 96% drop in quarterly operating profits. Preliminary figures for the January-March period showed that operating profit fell by 600 billion won (£366m), compared to 14 trillion won the previous year. However, despite the decision to slow down chip production, the company’s shares rose by over 4%.
The South Korean tech giant said, “We are meaningfully reducing production of products supplied to our customers.” During the Covid-19 pandemic, demand for memory chips increased as consumers purchased new electronic devices for home use. However, following a chip shortage that has lasted for several years, the industry is now struggling to find a balance between inventory and existing demand, with many semiconductor manufacturers.
“When the overall economy slows down, demand for these end products suddenly slows down as well. As a result, the end-product manufacturers stopped placing orders for chips and sold off the inventory they had on hand,” says management consultant Peter Hanbury from Bain & Company.
As the largest producer of televisions, tablets, and smartphones, Samsung had resisted reducing memory chip production compared to its competitors. Analysts say the company’s production cut announcement is rare. Last month, it announced plans to invest 300 trillion won in developing a mega semiconductor center in South Korea.
“Samsung faces a double whammy of DRAM and NAND [memory chips] losing money and needing to update the process technology their [factories] use due to falling behind over the last couple of years,” said Dylan Patel, chief analyst at SemiAnalysis.
Investors are hopeful that Samsung’s announcement is a sign of a market recovery in the semiconductor industry.
“We expect this inventory ‘digestion’ phase to complete its course over the next 3-6 months. At that point, the end markets will have worked through their inventory and returned to a more normal purchasing pattern,” said Peter Hanbury.
The company is scheduled to release detailed earnings later this month.