Samsung investors brace themselves for worst profit in at least 14 years

SEOUL – Samsung Electronics is heading for its lowest profit since the global financial crisis, if not longer, due to a sharp slowdown in tech demand that triggered losses at its semiconductor division.

The South Korean chipmaker, which reports preliminary results for the March quarter on Friday, is expected to say that operating profit plummeted about 90 per cent to 1.45 trillion won (S$1.46 billion), according to analyst estimates compiled by Bloomberg. This would be the smallest profit since 2009. Several profit projections are below one trillion won, and in some cases, just slightly above break-even.

While the semiconductor industry is known for its boom-and-bust cycles, it endured one for the history books during the Covid-19 era. Demand soared during the pandemic as consumers bought new computers and smartphones, prompting chipmakers like Samsung to crank up production. But sales tumbled as lockdowns lifted and then shrivelled more with soaring inflation, rising interest rates and other global economic trauma.

This left the US$160 billion (S$213 billion) memory chip industry with a yawning mismatch between supply and demand. Inventories spiked. Prices for Dram and Nand tumbled. Samsung, the biggest player in memory chips, is expected to lose about US$2.7 billion in its semiconductor division.

“The biggest problem right now is that chip inventories are too high and, in order to reduce them, the company will have to cut production,” said Mr Lee Seung-woo, an analyst at Eugene Investment & Securities.

Prices for Dram, a type of memory used to process data in computers and phones, slid 20 per cent in the first quarter and are expected to drop 10 per cent to 15 per cent in the second quarter, according to market research firm TrendForce. Nand storage chip prices plunged as much as 15 per cent, and are expected to fall another 5 per cent to 10 per cent in the second quarter.

“Memory prices declined further than the market’s expectations in the first quarter due to poor demand,” said Yuanta Securities analyst Baik Gil-hyun. “Prices will fall but at a slower pace in the current quarter. There is not much further to slide because Dram and Nand contract prices will soon hit their cash-cost level.”

South Korea’s exports of chips slumped 34.5 per cent in March, following a decline of more than 40 per cent in the previous month, according to data released by the country’s Trade Ministry. Total exports to China, the biggest trade partner of South Korea, fell by 33.4 per cent as the world’s second-biggest economy reels from an economic slump.

Mr Sanjay Mehrotra, chief executive of memory chip rival Micron Technology, said last week that he is optimistic about a recovery in the market in 2023 as inventory levels decline and demand recovers. Still, any improvement will depend on whether the major chipmakers throttle back production.

“The recovery could be accelerated if further supply cuts are made,” he said.

Samsung has been the holdout. While Micron, SK Hynix and Kioxia Holdings have slashed their spending on investment and cut production in the hope of stemming further price declines, the largest memory maker has kept up its own expenditures.

Samsung – now led by Mr Lee Jae-yong, the founder’s grandson – has said its strategy historically has been to keep spending during downturns to increase its competitive position. The approach can help the company grab market share – and develop new technologies to wield against rivals like Hynix and Micron when they do not have the cash to keep up.

In the South Korean city of Pyeongtaek, Samsung’s workers are busily constructing the company’s fourth, gigantic chip production line and planning to add two more lines by the end of this decade.

Besides memory chips, Samsung is trying to expand its semiconductor foundry business, which is now dominated by Taiwan Semiconductor Manufacturing Company. Samsung has announced another 300 trillion won investment for a new mega chip campus in Yongin for the next two decades.

While rivals and investors have called on Samsung to follow the path of its competitors and cut production, the company seems unlikely to do so. In February, Mr Lee Jae-yong told Samsung executives that they “should not be fazed” by the industry’s challenges and keep investing in the future. BLOOMBERG