Samsung will continue to reduce production due to a $7 billion chip loss in the first half of the year.

Samsung will continue to reduce production due to a $7 billion chip loss in the first half of the year.

Samsung Electronics Announces Plans to Extend Production Cuts as Demand Recovery Remains Limited to High-End Chips

Samsung Electronics

Samsung Electronics, the world’s biggest memory chip maker, has announced plans to extend production cuts in response to the ongoing challenges faced by the global memory chip market. While the company believes that the worst is over, it acknowledges that the demand recovery is primarily limited to high-end chips used in artificial intelligence (AI). This move comes in the wake of an unprecedented semiconductor downturn, which has led Samsung to incur a record operating loss of 8.9 trillion won ($7 billion) from its chip business in the first half of this year.

The Semiconductor Downturn and its Impact on Samsung

The global economic slowdown, combined with high interest rates, has resulted in dampened demand for most consumer goods. As a result, production cuts across the industry are likely to continue in the second half of the year, as clients continue to destock their chip inventory. Samsung expects demand to gradually recover as a result of this destocking process. The company’s memory chip stocks have been rapidly decreasing since reaching their peak in May, a trend that has eased concerns about chip oversupply.

Market Share of Chip Companies

Positive Outlook for Samsung and SK Hynix

Samsung’s announcement has had a positive effect on the market, with Samsung shares rising by 2% and smaller rival SK Hynix’s shares surging by 9% to their highest level since March 2022. SK Hynix, which recently announced a further 5% to 10% cut in NAND output, is expected to benefit more from these concerted efforts due to its heavy exposure to those chips. Analysts believe that supply cuts could stabilize NAND prices, which would be good news for SK Hynix.

Samsung’s Efforts to Catch Up in the AI Chip Market

Samsung’s chip division experienced an operating loss of 4.36 trillion won in the April-June quarter, compared to a 9.98 trillion won profit a year earlier. Despite the losses, Samsung has reported an increase in demand for dynamic random-access memory (DRAM) chips, which are used in AI applications. This unexpected increase in demand has led to higher-than-anticipated shipments of DRAM chips. However, analysts note that Samsung is playing catch-up to SK Hynix, which leads the market in high-end DRAM chips such as high bandwidth memory (HBM) and premium DDR5 products used for AI. Samsung has plans to release its own HBM3 chips later this year, but SK Hynix has already become the sole supplier of HBM3 chips to Nvidia.

AI as a Key Driver for Chip Demand Recovery

While a broader chip demand recovery is expected next year, AI remains a rare bright spot in the global tech sector. The successful launch of the chatbot ChatGPT has ignited significant investment in AI, contributing to the increased demand for high-end chips. Samsung has reported having orders for more than 1.5 billion gigabytes of HBM products this year, double the number from last year, and is working to increase its supply capabilities.

Samsung’s Overall Performance and Future Outlook

Samsung reported a 95% plunge in operating profit for the June quarter, with profits amounting to 669 billion won. This figure is broadly in line with the company’s estimates and represents the second-lowest quarterly profit in the past 14 years. On a positive note, Samsung’s mobile business reported a 16% rise in operating profit to 3.04 trillion won. The company expects sales growth in the second half, driven by its premium products.

On a separate note, Samsung recently unveiled its latest foldable smartphones, keeping prices at a similar level to challenge Apple’s dominance in the high-end market.

Overall, Samsung remains optimistic about its future, with the belief that the worst is behind them for the memory chip market. While challenges persist, the company’s focus on high-end chips used in AI applications positions it well for future growth and recovery.

(Note: All images used in this article are sourced from Reuters)

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