In a sharp turnaround, Samsung Electronics is reducing its production of memory chips after decisively ruling out an artificial reduction in supply in recent months.

Patrick Welter

Japan economics and politics correspondent based in Tokyo.

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The surprise announcement on Friday followed the news that operating profit in the first quarter of this year is likely to have fallen drastically by 96 percent to 600 billion won (around 417 million euros). This is shown by an earnings forecast from Samsung. Sales fell by 19 percent to about 63 trillion won (43.8 billion euros). The production cuts and poor business figures highlight the severity of the crisis in the electronics industry following the Covid pandemic.

With the production cut, the world's largest memory chip manufacturer is reacting to the poor prospects in the electronics market, which is cooling significantly after the upswing during the pandemic. Unlike competitors such as Micron and SK Hynix, Samsung had not yet announced any cuts and had also stuck to its investment plans. The South Korean company is known for using times of crisis to gain economies of scale ahead of the competition with strategic investments. Samsung has now moved away from this clear line a bit.

Weak demand as a reason

Samsung will reduce memory chip production to a reasonable level, according to a statement to investors. The company has ensured sufficient volumes to meet future changes in demand. Samsung justifies the adjustment of production with the weak demand in the current macroeconomic situation and the inventory adjustments of many customers. In the medium to long term, however, the company intends to stick to its investment plans.

Investors on the Seoul stock exchange reacted positively to the news. Samsung's shares gained more than 4 percent in morning trading. SK Hynix gained 5.6 percent at times. Behind this is the consideration that Samsung's decision could stabilize the prices for memory chips a little. Samsung has a market share of about 40 percent for volatile DRAM memory and about 33 percent for NAND or flash memory, which is increasingly replacing traditional hard drives in computers or network computers for data storage. In smartphones, the NAND devices store photos or videos.

Reducing supply overhang

The market for memory chips is currently characterized by a supply overhang. Analysts report that volatile DRAM memory prices are expected to fall 10 percent in the current quarter, after dropping 20 percent and more than 30 percent in the previous two quarters. Prices for NAND or flash memory fell by 10 to 15 percent in the first quarter, according to Taiwanese analysis firm Trendforce. Just last week, Trendforce expected a further minus of 5 to 10 percent for the current quarter. The average selling price could rise in the final quarter of the year if demand stabilizes at current levels and does not fall further, Trendforce predicted.

The situation on the market for memory chips has developed worse than Samsung expected in recent months. Samsung will not present detailed business figures for the period from January to March until the end of the month. Analysts estimate, however, that Samsung is likely to have made the equivalent of about 2.7 billion euros in the business with the electronic memory modules. Overall, Samsung expects a quarterly operating profit of 600 billion won (417 million euros), missing analysts' average expectations of 1.4 trillion won. Samsung has absorbed the losses in the semiconductor sector, at least in part, in the smartphone business, analysts suspect.