Samsung’s cutting chip production due to low demand

The world's biggest memory chip maker Samsung has had a challenging quarter.

Samsung’s cutting chip production due to low demand
A view shows Samsung Electronics' chip production plant at Pyeongtaek, South Korea. Samsung Electronics/Handout via REUTERS.

The backstory: So, you know how COVID made us stay home and rely on our gadgets more than ever? Well, it turns out that led to a global chip shortage. With everyone purchasing new electronics like personal computers and smartphones, the demand for memory chips skyrocketed. But with the rising cost of living, people are now cutting back on spending, leading to a decreased demand for chips. Now, semiconductor manufacturers are facing the challenge of balancing their inventories with the current demand.

More recently: The world's biggest memory chip maker Samsung has had a challenging quarter, with the tech giant reporting its lowest profit in 14 years. The company's operating profit for the January-March period was just 600 billion won (US$455.5 million), a shocking 96% drop from the first quarter. Plus, its chip division is expected to suffer even more losses.

The development: The company has announced a "meaningful" cut in chip production because there's not much demand for semiconductors lately. This is the first time Samsung's made a public announcement like this. Although it's unknown how much Samsung is reducing its production, analysts believe this decision will help its finances in the short term.

Samsung said it's still committed to the long-term game and plans to continue investing in infrastructure and research. Investors aren't too concerned about this move, as they predicted it could help boost chip prices that have dropped over 70% in the past nine months.

Key comments:

"We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured," said Samsung, in reference to those with sufficient inventories.

"The fact that the No. 1 market share firm is joining production cuts lifted shares... SK Hynix and Micron have declared production cuts, but only Samsung had not, so the market was watching for it," said John Park, an analyst at Daishin Securities.

"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.