Samsung is set to post its lowest profit in 14 years

Due to a sharp decline in tech demand that caused losses in the semiconductor division of Samsung Electronics Co., the company is likely to reach its lowest profit since the global financial crisis, if not longer.

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The South Korean chipmaker, which reports preliminary results for the March quarter on Friday, is expected to announce that operating profit decreased by about 90% to 1.45 trillion won ($1.1 billion), according to analysts' estimates compiled by Bloomberg, which will be released on Friday. The profit would be the lowest it has been since 2009. There are several profit projections that are below 1 trillion won and in some cases are just slightly above the breakeven point. 

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Even though the semiconductor industry has a history of boom-and-bust cycles, the Covid era has been one of the most spectacular cycles in the industry's history. As consumers bought new computers and smartphones during the pandemic, the demand for new chips surged, prompting chipmakers like Samsung to increase production in response to the influx of new orders. The sales plunged as lockdowns lifted, and then the sales were further eroded as soaring inflation, rising interest rates, and other global economic traumas led to more shrinkage. 

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The result of this was a yawning mismatch between supply and demand which left the $160 billion memory chip industry in the dark. The level of inventories spiked. NAND and DRAM prices both tumbled down as a result of these developments. The semiconductor division of Samsung, the world's largest player in memory chips, is expected to suffer a loss of approximately $2.7 billion over the course of the year.  

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“One of the biggest problems at the moment is the fact that chip inventories are too high and the company will have to reduce production in order to reduce them,” said Lee Seung-woo, an analyst with Eugene Investment & Securities. 

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It was reported that the prices for DRAM, which is a type of memory used to process data in computers and phones, fell 20% in the first quarter, and are expected to drop 10% to 15% in the second quarter, according to market research firm TrendForce. Prices for NAND storage chips plunged as much as 15% in the first quarter of the year, and they are expected to fall another 5% to 10% in the second quarter.

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"There was a decline in memory prices that was much greater than the market's expectations in the first quarter due to poor demand," according to Baik Gilhyun, an analyst at Yuanta Securities. "Despite rising prices, the pace of price declines will slow down in the current quarter. It is not likely that DRAM and NAND contract prices will continue to decline for much longer since they are about to reach the level of cash costs." 

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Data released by the country's trade ministry shows a 34.5% drop in exports of chips to the U.S. in March, following a decline of more than 40% in the previous month, according to data released by the ministry. The total exports of Korean goods to China, the world's second-largest economy, fell by 33.4% as the world's second-biggest economy grappled with a slump in its economy. 

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Sanjay Mehrotra, the chief executive of Micron Technology Inc., a rival to Intel Corp. in the memory chip market, said last week he is confident that the market will recover this year with inventory levels declining and demand returning to normal. It remains to be seen whether the major chipmakers will be able to reduce production if they choose to do so. "There is a possibility that the recovery could be accelerated if further supply cuts are made," he said. 

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Samsung has remained the lone holdout among the major players. Micron, SK Hynix Inc., and Kioxia Holdings Corp. have slashed their investment spending and reduced production in the hope of averting further price declines in the memory market, whereas the largest memory manufacturer has maintained its expenditures. 

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The Samsung Group - now led by Jay Y. Lee, grandson of Samsung's founder - has stated that its strategy historically has been to maintain spending during downturns as a way to increase its competitiveness. Using this approach, the company will be able to enhance its position against rivals like Hynix and Micron by developing new technologies that will enable them to compete against them when they do not have the money to keep up with them.

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As Samsung's workers work tirelessly to construct its fourth, gigantic chip production line in Pyeongtaek, the company is planning to add two more lines by the end of the decade. Aside from memory chips, Samsung is looking at expanding its semiconductor foundry business, which is currently dominated by Taiwan Semiconductor Manufacturing Co. Over the next two decades, the Samsung Group will invest 300 trillion won ($229 billion) in a new mega chip campus in Yongin. 

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The company's rivals and investors have called on Samsung to make a similar move to its competing companies, which is to cut production, but it does not seem likely that Samsung will do so. It was back in February that Lee informed the company's executives that they "should not be fazed" by the challenges the industry faces and that they should continue to invest in the future.