Samsung Is First to Succumb to a Slowing Economy That Is Crushing Semiconductors

On Friday, Samsung Electronics Co. Ltd (KSE: 005930.KS) flagged its October-December operating quarterly profit has tumbled by two-thirds to an eight-year low as a sluggish global economy hammered memory chip prices and weakened demand for electronic devices. Lee Min-hee, analyst at BNK Investment & Securities, said in a note that all of Samsung’s businesses had a hard time, but chips and mobile especially, causing analysts to expect profits to shrink again in the current quarter.

Forecast

The world's biggest maker of memory chips, smartphones and TVs expects its profits for the last three months of 2022 to fall by 69% to the lowest level in eight years, or more precisely to 4.3 trillion won which translates to $3.37 billion, down from last year’s 13.87 trillion won. The forecast also missed investor expectations of 5.9 trillion won, as reported by Refinitiv. Besides the company’s worst operating profit decline since the third quarter of 2014, Samsung also forecasted sales have also declined 9 percent to 70 trillion won.

Why?

Disappointing fourth-quarter results have been caused by rising global interest rates and cost of living that weakened demand for smartphones and devices that the South Korean company makes and pressured prices of semiconductors the company supplies to rivals including Apple Inc AAPL. Besides smartphones, demand for handsets also weakened. According to Financial Times, analysts find Samsung has been contributing to the current excess in supply with its increased spending on chip manufacturing. 

Additional Difficulties
US sanctions on chip exports to China and Apple’s iPhone production delays caused by a massive outbreak of Covid-19 in China further amplified the problem of abundant oversupply. Although it is its smartphone rival, Apple is also Samsung’s big customer in terms of chips and displays.

Tech firms, not just competitors, are struggling with dampened tech demand
In response to the excess supply that came after a two-year pandemic book, chipmakers including US Micron Technology Inc MU, Kioxia Holdings and SK Hynix (KSE: 000660.KS) are slashing their capital expenditure.

Even the e-commerce giant Amazon.com Inc AMZN is struggling as it plans to cut more than 18,000 jobs which is the largest cut in its history. Back in November, Meta Platforms Inc META announced that it would cut 13% of its workforce after Twitter announced it will cut about half its staff, shortly upon Tesla Inc’s TSLA Elon Musk taking charge.

The Global Climate
In December, chips sales in South Korea dropped nearly 30 percent compared to a year earlier, marking a fifth consecutive monthly drop and a sharp reversal from the pandemic when manufacturers ramped up output to record levels. Back in October, SK Hynix announced it will halve its capex this year. Micron is not expecting a recovery until the second half of this year as it announced 10 percent cut in its workforce back in December. The US chipmaker expects to remain in the red this year. 

Samsung Was Not Considering Cuts At All
Samsung pursued a strategy of investing in a downturn to gain market share. It began production in July at its new local Pyeongtaek facility, which is one of the world’s largest semiconductor production sites. According to eBest Investment & Securities, Samsung increased memory output by about 10 percent in the fourth quarter.

But the worsening situation might force the South Korean chipmaker to cut capex after all, as analysts warn its strategy could lead to the company’s first quarterly chip losses since the global financial crisis, according to Kim Yang-jae, an analyst at Daol Investment & Securities who warned that without production cuts, memory division will inevitably suffer losses in the second quarter.

Shares Rose Despite The Bad News 

Samsung shares closed 1.4% higher on Friday, versus a 1.1% rise of the wider market. Shares of rival memory chip maker SK Hynix rose 2.1%.

Eo Kyu-jin, an analyst at DB Financial Investment. Believes investors are hoping Samsung will need to reduce production, like Micron or SK Hynix said they would, which would help the memory industry overall, adding that as Samsung does not have a policy of announcing chip production cuts, it is more likely to delay bringing in equipment or organically finetune its investment in another way. 

Tough Times Ahead

Tens of thousands of jobs are being shed across the global tech industry in a climate of slowing sales and intensifying concerns of an economic downturn. Demand for gadgets has slowed down, causing Samsung’s profits to plunge and its dismal results have set a bad tone for other tech firms’ upcoming results. Even Amazon is aware that there is more pain ahead, so this kind of news shouldn’t come as a surprise as many cost-cuts seem to be in the cards.