Samsung profits fall 69% as demand for semiconductors slumps

Samsung Electronics’ operating profit slid nearly 70 per cent in the fourth quarter to an eight-year low, according to its preliminary numbers, highlighting how a slowing global economy is crushing demand for semiconductors and electronics products.

The world’s largest producer of memory chips, smartphones and TVs said customers were clearing their inventories and the decline in demand for its chips and their fall in price were greater than expected.

Consumer interest in its handsets also waned. “Smartphone sales and revenue decreased due to weak demand resulting from prolonged macro issues,” it said.

The South Korean company said its operating profit dropped 69 per cent to €3.3 billion the past three months, from €10.5 billion a year earlier. It marked the company’s worst profit decline since the third quarter of 2014 and fell short of a €4.4 billion estimate by Refinitiv. Sales were likely to have declined 9 per cent to €52.4 billion, the company said.

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Analysts say Samsung has been contributing to the current supply glut with its increased spending on chip manufacturing, as it pursues a strategy of investing in a downturn to gain market share.

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Oversupply problems have been exacerbated by US sanctions on chip exports to China and iPhone production delays at Foxconn’s Chinese plant due to a massive outbreak of Covid-19. Apple is Samsung’s smartphone rival but also a big customer for its chips and displays.

Analysts expect the memory downturn to worsen in the current quarter before a recovery in the second half. “Memory chip inventories are likely to peak in the second quarter, but Dram and Nand chip prices are likely to rebound in the second half,” said Kim Dong-won, an analyst at KB Securities.

Memory chipmakers including Micron Technology, Kioxia Holdings and SK Hynix are slashing their capital expenditure to adjust to the oversupply, as higher interest rates and cost-of-living increases damp global tech demand, following a two-year boom during the coronavirus pandemic.

The deepening slump has sparked speculation that Samsung may have to cut capex after all

Chips sales in South Korea dropped nearly 30 per cent in December from a year earlier – a fifth consecutive monthly drop and a reversal from when manufacturers ramped up output to record levels to meet the pandemic-era surge in demand.

US chipmaker Micron has said it does not expect a recovery until the second half of this year and in December announced a 10 per cent cut in its workforce, as it expects to remain in the red this year. SK Hynix said in October it would halve its capex this year.

But Samsung is not considering an output cut and began production in July at its new domestic chip factory in Pyeongtaek, one of the world’s largest semiconductor production facilities. The company increased memory output by about 10 per cent in the fourth quarter, according to eBest Investment & Securities.

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However, the deepening slump has sparked speculation that Samsung may have to cut capex after all, with analysts warning its strategy could lead to the company’s first quarterly chip losses since the global financial crisis.

“We think Samsung is likely to modify its 2023 capex strategy to a more dovish stance and refrain from a capex increase,” Peter Lee, an analyst at Citigroup, said in a recent report, noting that Nand flash memory chip prices were approaching or nearing the company’s production cost, meaning manufacturing would no longer be profitable.

“Without production cuts, it is inevitable that its memory division will suffer losses in the second quarter,” Kim Yang-jae, an analyst at Daol Investment & Securities, said in a note. – Copyright The Financial Times Limited 2023