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Samsung plans to reduce chip production following a 96% drop in profits

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Samsung plans to reduce chip production following a 96% drop in profits

Due to a significant decrease in the worldwide demand for semiconductors that has led to plummeting prices, Samsung Electronics plans to reduce its chip production.

Samsung Electronics, the largest memory chip manufacturer in the world, announced that it will implement a “meaningful” cut to chip production due to a sharp drop in global demand for semiconductors, resulting in plunging prices. The company has also reported a worse-than-expected 96% drop in first-quarter profits. Other semiconductor firms such as SK Hynix of South Korea and Micron Technology of the US have also reduced production. According to Greg Roh, the head of research at Hyundai Motor Securities, Samsung’s decision to cut production is a sign of the severity of the current slump.

During the Covid-19 pandemic, smartphone and personal computer manufacturers increased their purchases of chips to meet the rising demand for consumer electronics as people were stuck at home under lockdowns. This led to a global chip shortage. However, demand has decreased due to consumers cutting back on larger purchases in the face of the cost of living crisis, with food and energy costs rising. Samsung attributed the drop in demand to a weaker global economy and companies buying fewer chips as they reduce their inventories.

The company announced that it would significantly reduce the production of memory chips, especially those with secured supply, due to the decrease in demand. Samsung had earlier considered making minor adjustments, such as temporarily stopping production to refurbish production lines.

Samsung has estimated that its operating profit fell to 600 billion won in the first quarter of this year, compared to 14.12 trillion won in the same period last year. This is the lowest profit for any quarter in the past 14 years. The company will release detailed figures later this month, and analysts predict that its chip division, which usually accounts for about half of the company’s profits, will report a record loss of 2.1 trillion won in the quarter.

According to analysts, investors were not concerned about the production cuts instead, they were hopeful that the output reduction would boost chip prices, which have plummeted by 70% over the past nine months. John Park, an analyst at Daishin Securities, stated that the announcement of production cuts by the leading market share firm lifted the shares. He added that SK Hynix and Micron had already declared production cuts, but only Samsung had not, so the market was anticipating it.

Despite announcing a production cut, Samsung stated that it would continue to invest in infrastructure and research, without specifying its investment plans for this year. Meanwhile, analysts remain optimistic about a memory chip rebound in the second half of the year, with John Park, an analyst at Daishin Securities, stating that “today’s production cut signal casts a positive outlook.” However, other chip makers such as SK Hynix and Micron have already reduced their investment plans for this year due to the global chip shortage.

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