Samsung announces reduction in chip-making as quarterly profits drop 96%

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Samsung Electronics, the world's largest maker of televisions, smartphones, and tablets, is set to reduce memory chip production due to a projected 96% decline in its quarterly operating profit. The South Korean tech giant cited the slow global economy and reduced demand after Covid as the main reasons for the sales drop. Preliminary data shows that operating profits fell by 600 billion won (£366m) in January-March, compared to 14 trillion won the previous year. Despite the decision to cut back on chip-making, Samsung's shares rose by more than 4%.

"We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured," Samsung said. The demand for memory chips increased during Covid-induced lockdowns as consumers bought new electronics to use at home. However, the industry is recovering from a chip shortage over the past couple of years, and many semiconductor manufacturers are struggling to find a balance between their inventories and current demand.

"When the overall economy slowed down, suddenly the demand for these end products slowed. So, the makers of these end products stopped ordering chips and focused on selling through the inventory they already had," said analyst Peter Hanbury from management consultancy Bain & Company. "This led to a strong 'bullwhip' effect for semiconductor makers further back in the supply chain, where sky-high demand during the chip shortage suddenly dried up," he added.

Samsung had previously resisted the move to cut memory chip production compared to its competitors. Analysts say the company's announcement of a production cut is rare. Last month, it announced plans to invest 300 trillion won over 20 years to develop a mega semiconductor hub 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.

In conclusion, Samsung Electronics is set to reduce memory chip production due to a projected 96% decline in its quarterly operating profit. Despite being the world's largest maker of televisions, smartphones, and tablets, the company is facing a double whammy of DRAM and NAND memory chips losing money and falling behind in process technology. The semiconductor industry is recovering from a chip shortage, and many manufacturers are struggling to find a balance between inventories and current demand. Investors are optimistic that Samsung's announcement is a sign of a market recovery, and the company is set to release detailed earnings later this month.