Samsung's Capital Spending Defies Chip Downturn

Samsung Electronics Co. has decided to keep its capital spending at the same level as last year, in spite of expectations that it would follow its rivals in cutting back to ease pressure on the semiconductor industry.

This aggressive move shows that Samsung is confident in its ability to weather the current market conditions.

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Chipmakers have been struggling with a historic slump in the price of memory, with consumers cutting back on purchases of gadgets months after pandemic-driven production ramp-ups kicked in. Inventory has piled up, forcing double-digit price slides that are erasing profit and forcing Samsung’s smaller competitors to slash both output and spending. This has been a difficult time for the industry, but Samsung has been able to weather the storm better than its smaller competitors.

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Samsung has warned that it expects a recovery in the global chip market to begin only in the second half of the year. The company also expects global demand for smartphones to contract in 2023. Despite pressure on Samsung to slow down spending on new chip capacity, the company has said it will continue to invest in new chip manufacturing capacity. This will put further downward pressure on chip prices. An Hyungjin, chief executive officer at Billionfold Asset Management, said that markets were getting ahead of themselves and expected a cut. He added that Samsung's move to stick to its pace in spending will hit other smaller chip rivals.

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Samsung's shares fell 3.6% on Tuesday, their biggest drop in three months. South Korean rival SK Hynix ended the day down 2.4%.
Samsung's profit is falling faster than its revenue, as the company focuses on market share. Year-on-year growth is a measure of the increase in a company's sales or profits over a one-year period. It is a popular way to compare a company's performance over time.

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Samsung's decision to continue spending even during a downturn is likely to help the company maintain its lead over smaller rivals who are cutting back. However, this strategy comes at the cost of profitability.

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As Samsung's smaller rivals have almost universally hit the brakes on spending, US memory maker Micron Technology Inc. has announced it will cut spending for new plants and equipment, as well as slash output. Hynix has also scaled back investments and output, while Japan's Kioxia Holdings Corp. has said it is cutting output by 30%. Kioxia, which makes NAND, is in merger talks with US production partner Western Digital Corp., Bloomberg News reported.

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Samsung's earnings are already being affected by declining prices for chips. Profit at the company's key chip segment plunged 97% to 270 billion won in the three months ended December, as customers continued to work through piles of inventories. Operating profit fell 69% to 4.3 trillion won in the biggest drop in over a decade, in line with the company's preliminary results earlier this month. Net income rose sharply to 23.5 trillion won in the most recent quarter, thanks to a one-time item related to a change in local tax law. This one-time gain does not mean that there will be a refund.

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The average selling price for homes is falling sharply as inventory levels continue to rise. This is putting pressure on home prices and making it difficult for sellers to get the prices they want for their homes.

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Samsung has said that gadgets with more storage will help drive recovery in the second half of the year. However, the company has warned that earnings are likely to decline in the current quarter, and that factory usage rates in its contract chipmaking business will also fall, executive vice president in charge of the company’s memory division, said that while the business environment deteriorated significantly in the fourth quarter, the company’s stance on chip spending remained unchanged.

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Our approach to capital expenditure this year is to continue making the necessary infrastructure investments to respond to mid- to long-term demand,” he said during an earnings call. “Therefore, we expect this year’s capex plan to be similar to last year’s.” Kim said that the company's line optimization and equipment layout adjustments would "inevitably" impact supply, which means that the pace of memory production would slow down in the next few months.

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Artificial intelligence chatbot services are expected to increase demand for memory chips and high-performance CPUs that generative AI requires, executives said.
Jeff Kim, head of KB Securities' research center, said that a recovery in demand from clients will be key. "The most important factor for the memory sentiment is when clients finish digesting inventory," he said. The historic crash in memory chip prices is threatening to wipe out earnings for many companies in the industry. This is a major problem for the industry, which is already facing challenges from other areas.

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Intel's disappointing earnings forecast has sparked a selloff in chip stocks. The company's shares fell sharply in after-hours trading on Thursday after it announced that it expects revenue and profit to decline in the first quarter. The news weighed on shares of other chipmakers, including Qualcomm, Broadcom, and Micron. Lam Research is cutting 7% of its workforce after issuing a weak forecast. The company said the move is necessary to align its cost structure with current market conditions. Lam Research is the latest chipmaker to announce layoffs amid a slowdown in the semiconductor industry.

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Microsoft's quarterly profit topped analysts' estimates as the company's Azure cloud business showed resiliency in the face of the pandemic. Microsoft's net income rose to $15.5 billion, or $2.03 per share, in the fiscal third quarter ended June 30, from $13.2 billion, or $1.71 per share, a year earlier. Analysts on average had expected earnings of $1.51 per share, according to Refinitiv data.