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<a href="https://www.samsung.com/us/" target="_blank" rel="noopener">Samsung Electronics</a> says it will cut memory chip production after estimating a 96% drop in its quarterly operating profit, the slimmest since the 2009 financial crisis. The production cut is a significant step toward ending a supply glut that had affected prices across the industry.



Samsung said preliminary numbers showed operating profits fell 600 billion won (£366m) in January-March, from 14 trillion won the previous year. The profit missed the average analyst estimate of 1.4 trillion won. Sales fell 19% to 63 trillion won.&nbsp;



Investors brushed off the profit miss, betting the move by the industry leader would support chip prices that had fallen by about 70% over the last nine months.



Despite the current numbers and the decision to slow chip-making, the firm&#8217;s shares rose more <a href="https://www.cnbc.com/2023/04/07/samsung-electronics-says-first-quarter-profit-likely-plunged-96percent-as-chip-glut-slashes-prices.html" target="_blank" rel="noopener">than 4%</a>, in fact, it jumped 4.5% in early trading in the biggest one-day rise since September, while rival&nbsp;<a href="https://www.cnbc.com/quotes/HXSCL/" target="_blank" rel="noopener">SK Hynix&#8217;s</a>&nbsp;shares surged 5.6%.



<blockquote class="wp-block-quote">&#8220;We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured,&#8221; the South Korean tech giant said.</blockquote>



<figure class="wp-block-image size-full"><img width="960" height="720" src="https://technext24.com/wp-content/uploads/2023/04/image-52.png" alt="Samsung records a 96% drop in profits, plans to cut chip production" class="wp-image-188669"/></figure>



Following a stockpile of inventory that harmed pricing and profitability, Samsung announced it will reduce memory chip output to a &#8220;meaningful level.&#8221; Competitors had been anticipating this move. During Covid-induced lockdowns, demand for memory chips increased as people purchased new electronics for use at home.



The company which is the largest in South Korea had resisted pulling back despite the downturn, in part to grab market share from rivals SK Hynix Inc. and Micron Technology Inc., which have been forced to cut output. Samsung’s cuts could help bolster chip prices, a key step for the industry’s recovery.&nbsp;



<figure class="wp-block-pullquote"><blockquote>“Because it is adjusting production and lowering memory-chip output to a meaningful level, the supply-demand situation can improve much faster,” said Baik Gilhyun, an analyst at Yuanta Securities Co. &nbsp;“Short-term concerns are coming to an end.”</blockquote></figure>



Although the industry has been recovering from a chip shortage over the past couple of years, many semiconductor manufacturers are struggling to find a balance between their inventories and current demand.



Samsung is estimated to have lost about $3 billion in its memory chip division.



<figure class="wp-block-image size-full"><img width="620" height="349" src="https://technext24.com/wp-content/uploads/2023/04/image-54.png" alt="Samsung records a 96% drop in profits, plans to cut chip production" class="wp-image-188671"/></figure>



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<h4 id="samsungs-long-term-plans">Samsung&#8217;s long-term plans</h4>



Although cutting short-term production, Samsung indicated it’s committed to long-term investment in the industry, both in infrastructure and research to secure the needed clean rooms for chip production and expand its technological lead.



<blockquote class="wp-block-quote">“We have cut short-term production plans, but as we project solid demand for the mid-to-long term, we will continue to invest in infrastructure to secure essential cleanrooms and to expand R&amp;D investment to solidify tech leadership,” it said in a statement.</blockquote>



Although it had previously indicated that capital spending would be equivalent to the 53.1 trillion won investment in 2022, it did not specify how its investment plans for 2023 would be impacted. Competitors SK Hynix had stated in October that it would more than half its capital spending in 2023 compared to 2022, and Micron had stated in September that it would reduce its fiscal 2023 investment estimates by more than 30%.



The South Korean giant historically has opted against slowing down during difficult times so that it can take share from rivals. It’s spending hundreds of billions of dollars to build the world’s largest chip complex in its home country and is building a new facility in the US too. The South Korean and US governments are both offering financial incentives to bolster their domestic industries.



<figure class="wp-block-image size-full"><img width="1024" height="576" src="https://technext24.com/wp-content/uploads/2023/04/image-53.png" alt="Samsung" class="wp-image-188670"/></figure>



The company had warned that earnings would fall in the first quarter on slowing sales. But memory prices tumbled more than anticipated because of sluggish demand for a wide range of electronics from smartphones to PCs, as consumers and companies navigated recession risks. Despite its post-Covid re-opening, China’s market has also not bounced back as quickly as some anticipated.&nbsp;



Inventory at Samsung had swelled to 52.2 trillion won at the end of last year after the company maintained production despite a collapse in demand.



Investors are hopeful that Samsung&#8217;s announcement is a sign of a market recovery in the semiconductor industry.



&#8220;We expect this inventory &#8216;digestion&#8217; 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,&#8221; said Peter Hanbury.



Samsung plans to provide a full financial statement with net income and information on divisional performance later this month.&nbsp;



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Samsung to reduce chip production after 96% decline in earnings

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