South Korea's largest company has been grappling with a historic plunge in memory prices as consumers cut back on gadget purchases amid soaring interest rates and inflation. Inventories have piled up, forcing double-digit price declines that have exacerbated losses.
The business environment deteriorated significantly in the fourth quarter as demand weakened due to the global economic slowdown," the company said in a press release Tuesday, adding that in the semiconductor business, earnings are expected to fall by a quarter in the first quarter as plant utilization declined.
The world's largest memory chip maker, which supplies displays and semiconductors for Apple's iPhone, said it sees "a potential recovery in mobile demand in the second half of the year" as customers seek gadgets with more storage space. The Galaxy device maker said smartphone market demand could contract in 2023, dragged down by mass-market handsets.
Profit at Samsung's key chip unit plunged 97 percent to 270 billion won ($220 million) in the three months ended December as customers continued to dispose of piles of inventory. Operating income came in at 4.3 trillion won, below analysts' average estimate of 5.8 trillion won.
Net income came in better than expected at 23.5 trillion won, thanks to a one-time item in a local tax law change that did not mean a tax refund.
Samsung shares fell as much as 1.3 percent in early trading after the news. South Korean memory maker SK Hynix Corp. fell 1.1 percent.
The industry is suffering a steep drop in demand for semiconductors due to the war in Ukraine, historic inflation and restrictions on chip exports to China, coming on the heels of one of the industry's biggest capacity boosts to meet pandemic demand.
Memory pricing will likely continue to decline through the first half of 2023, Goldman Sachs analyst Giuni Lee said in a note to investors ahead of Tuesday's announcement. "We expect the company to post losses for both DRAM and NAND starting in the first quarter of 2023."
No reduction in investment
Despite facing the industry's worst recession in recent years, Samsung said the company does not plan to reduce its investments.
Shinhan Securities analyst Choi Yoo-june said, "Samsung may see this as a good opportunity to increase its market share, which should help it in the long run at the expense of SK Hynix and Micron."
Greg Roh, head of research at Hyundai Motor Securities, estimates that Samsung Electronics' market share could reach more than 40 percent for DRAM chips and about 30 percent for NAND flash chips in the second half of this year, from about 43 percent and 32 percent.
Samsung did not cut investment due to slowing demand and falling prices, but said it will organically curb short-term production through line maintenance, equipment adjustments and a shift to advanced chip manufacturing processes. It also said it will increase the proportion of capital investment for research and development.
"In a roundabout way, Samsung said production will decline slightly," said Kim Yang-jae, an analyst at Daol Investment and Securities. "However, investors were hoping for a deeper production cut or comments about a faster market rebound - hence the drop in its stock price."
Samsung said capital spending in 2023 will be similar to 2022, while SK Hynix and Micron Technology said they will cut back on investment. In foundry chip manufacturing, larger rival TSMC also announced spending cuts.
The global technology industry has been battling a sharp downturn in demand since late last year as companies cut spending on technology products and services and consumers reduced spending on discretionary goods amid soaring inflation.
Earlier Tuesday, Samsung reported its lowest quarterly profit since 2014 and said continued macroeconomic uncertainty will lead to a tough first half of the year, but expects demand to start recovering in the second half.
Samsung said sluggish demand and inventory adjustments will continue to affect its chip business in the first quarter, while smartphone demand is likely to fall year-over-year due to economic slowdowns in key regions.
Operating profit from October to December was 4.3 trillion won ($3.49 billion), Samsung's lowest quarterly profit in eight years. Revenue fell 8 percent to 70.5 trillion won.
As memory chip prices fall by double-digit percentages in 2022, Samsung's chip profit plunged to about 270 billion won in the fourth quarter from 8.83 trillion won a year earlier, the lowest level since the first quarter of 2009.
Some analysts expect the chip business to post a loss in the first quarter and overall profits to be lower than in the fourth quarter.
Last week, chipmaker Intel Corp (INTC.O) said it expects to post a loss in the quarter due to a chip glut in the personal computer industry.
In the mobile sector, Samsung said fourth-quarter profit fell to 1.7 trillion won from 2.66 trillion won a year earlier because of a larger-than-expected decline in sales of low- and mid-range smartphones.
Memory chip makers face prolonged price slump
Memory chip prices, which have fallen sharply over the past year, are expected to continue to fall in the first half of 2023, putting more pressure on an industry that has already cut investments and laid off workers, the Wall Street Journal said.
The average price of the two main types of memory chips used in everyday electronics, from smartphones to personal computers and televisions, is expected to see double-digit percentage declines this quarter, industry analysts said. This comes after prices fell more than 20 percent in the last three months of 2022 compared with the previous quarter, according to analysts.
Many memory chip makers carrying large inventories have also issued grim outlooks as demand for them remains sluggish after the pandemic boom.
Micron Technology Co., SK Hynix Corp., Western Digital Corp. and Tokyo-based Kioxia Holdings Corp. have announced plans to reduce investments aimed at expanding capacity or lowering production to address a growing supply glut. Last month, Micron Technology said it would lay off employees and cut full-year expenses to reduce costs after posting a loss in the most recent quarter.
Memory chips are considered a leader in the semiconductor industry because they are largely commoditized and sensitive to changes in supply and demand.
SK Hynix, which reported earnings Wednesday, is expected to report a fourth-quarter loss of about 812 billion won, or about $661 million, according to average analyst forecasts from FactSet.
Companies that make other types of semiconductors are also in a downturn. On Thursday, Intel Corp. reported a fourth-quarter loss and said poor market conditions will continue into the first half of the year.
Memory prices peaked during the early Covid-19 pandemic and began to fall in late 2021 due to strong demand for technology products. With macroeconomic woes and rising interest rates colliding with geopolitical uncertainty due to the Russia-Ukraine conflict and the Covid blockade in China, storage saw a much larger quarter-over-quarter decline in the second half of last year.
Kim Soo-kyoum, vice president for storage semiconductors at technology market research firm International Data, said the memory chip industry has had large inventories since 2023. kim said memory prices are expected to continue to fall throughout the year as demand remains sluggish, though the second-half quarterly decline could narrow or level off, depending on how buyers the timing of their return.
According to Taiwan market TrendForce, the average contract prices for the two main types of memory chips DRAM and NAND flash fell by about 23% and 28%, respectively, between October and December compared to the previous quarter tracking memory price researchers.
DRAM memory enables devices to perform multiple tasks, while NAND flash memory provides the storage capacity on the device.
TrendForce said prices for both products are likely to continue to fall in the first half of the year. On a quarterly basis, DRAM prices are expected to fall 20 percent in the first quarter and 11 percent in the second quarter, while NAND flash prices are expected to fall about 10 percent and 3 percent, respectively, over the same period.
Inflation, high interest rates and a weak economy are expected to continue to drive back corporate and consumer spending on products such as smartphones, personal computers and data servers, which are the biggest users of memory chips, TrendForce said.
DRAM prices are expected to continue to fall in the second half of this year, requiring massive production cuts to support prices, said Avril Wu, senior vice president at TrendForce.
However, NAND flash prices will likely rebound from the second half of the year as prices have fallen more sharply in recent months, prompting suppliers to seek more aggressive supply cuts in 2023, Wu said.
Samsung, the largest producer of both types of memory chips, plans to continue investing in the downturn. Kim Jae-june, executive vice president of global sales, expects capital spending plans for 2023 to be similar to last year's, with the company continuing to make infrastructure investments "that are critical to respond to medium- to long-term demand," Samsung said on Tuesday's earnings call.
However, Kim said Samsung is optimizing its production lines through steps such as equipment maintenance and looking to move to more advanced production technologies, which could have a significant near-term impact on production.
Global demand for technology could recover later this year, thanks to factors such as China's reopening after a period of strict Covid-19 restrictions, which could revive consumer spending on products such as smartphones, said David Tsui, senior credit analyst at S&P Global Ratings.
It is unclear how quickly and to what extent consumer behavior in the country will change, he said.
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