Samsung warns of worst quarterly profit since 2009 as it cuts chip production

Profit is forecast to drop 96% amid the company’s move to reduce semiconductor production to ‘meaningful levels’

Samsung Electronics' headquarters in Seoul. The company benefitted from a rise in demand for chips in 2021, but this has since taken a sharp downturn. EPA

Samsung Electronics, the world’s largest mobile phone manufacturer, is expecting its worst quarterly profit since 2009, as it cuts production of semiconductors in a move aimed at helping the industry’s recovery.

Profit for the first quarter of 2023 is estimated at 600 billion won ($455.6 million), a nearly 96 per cent drop from the 14.12 trillion won Samsung posted a year ago, the Seoul-based company said in a guidance statement on its website on Friday.

Samsung last posted a similar profit in the first quarter of 2009, at the height of the global financial crisis.

Revenue is forecast to decline almost 20 per cent to 63 trillion won in the first quarter of 2023, from 77.78 trillion won a year ago Samsung said. Analysts had estimated revenue of about 65.1 trillion won, data from Investing.com shows.

The projections are based on Korean disclosure regulations and represent the median of estimate ranges, Samsung said. The company is due to release its full first-quarter financial report on April 27.

Samsung said its decision to scale down its chip production is “under the assessment that the company has secured enough volume to respond to future memory demand changes”, it said in a statement, according to Bloomberg.

“Samsung is adjusting to lower memory production to a meaningful level centring on products that have secured additional supply as well as optimising line operations that’s already under way,” the company said.

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Shares of Samsung surged on the news, rising 4.5 per cent to post its biggest single-day increase on Friday. They were up about 4.33 per cent in after-hours trading in Seoul.

The Covid-19 pandemic caused an unprecedented surge in demand for consumer electronics, catching the industry by surprise and upending supply chains, which led to shortages.

The semiconductor industry had a record 2021, with sales rising 26 per cent to $556 billion, its highest annual total up to that point, the Semiconductor Industry Association said. A record 1.15 trillion semiconductor units were shipped last year, it said.

The sector’s revenue in 2022 rose 1.1 per cent to $601.7 billion, up from $595 billion in 2021, US research company Gartner reported earlier this year.

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However, revenue is projected to drop 3.6 per cent to $596 billion, from an earlier prediction of $623 billion, on poor consumer demand and a weakening economy, it previously said.

Samsung’s semiconductor businesses benefitted from that, as profit surged nearly 130 per cent annually to 8.84 trillion won and revenue jumped 43 per cent to more than 26 trillion won in the fourth quarter of 2021.

However, it took a sharp turn for the worse at the end of the fourth quarter of 2022, as the units recorded 270 billion won in profit and 20.07 trillion won in revenue in the fourth quarter of 2022, annual declines of 97 per cent and 23 per cent, respectively.

The overall chip industry has battled a downturn following its meteoric rise, resulting in a glut of supply that has affected prices. Samsung’s Korean rival SK Hynix and Micron, the top US chipmaker, have announced production cuts to ease the squeeze in the industry.

Samsung scaling down its semiconductor operations on a large scale is an unusual move, given that it had only previously committed to making minimal adjustments in an attempt to maintain its market share.

The company had acknowledged the dip in performance, with demand weakening because “customers continued to adjust their inventories amid deepening uncertainties in the external environment”, it said in its fourth-quarter report.

“Due to worsened consumer sentiment caused by deepening macro issues, the price fell further and with the effect of a meaningful amount of inventory valuation loss, the result decreased significantly,” Samsung said.

Among those factors are persistently high inflation, worries of an economic recession and the continuing conflict between Russia and Ukraine that has roiled supply chains.