Samsung defies pressure to rein in chip investment through downturn

Samsung Electronics is defying pressure to rein in spending on new chip production facilities, saying it expects demand to recover in the second half of this year.

While rivals in the semiconductor sector have cut production and capital expenditure plans to counter oversupply, the world’s largest memory chip maker said on Tuesday it was committed to “a similar amount of capital spending this year to last year’s”. Its capex reached Won53.1tn ($43.1bn) in 2022, including Won47.9tn for semiconductors.

The Korean company is sticking to its strategy of investing in a downturn in order to gain market share when demand picks up. In the meantime, its fourth-quarter revenues fell 8 per cent year on year to Won70.5tn and operating profit fell 69 per cent to Won4.3tn — an eight-year low, with the company also taking a hit from falling smartphone sales. Samsung expects handset demand to decline this year, due to the global economic slowdown.

In the semiconductor division, operating profits plunged to Won270bn in the fourth quarter from Won8.83tn a year earlier.

Memory chips are key components for consumer electronics including smartphones, televisions and personal computers. Following a surge in global demand during the coronavirus pandemic, the sector is now wrestling with a crisis of oversupply as customers pull back in a period of high inflation and rising interest rates.

“The market conditions this year are not favourable as consumer sentiment weakens and companies prioritise financial soundness amid inflation and higher interest rates,” Jaejune Kim, the company’s executive vice-president, told analysts during a fourth-quarter conference call.

“But this gives us a good opportunity to thoroughly prepare for the future. We will continue to invest in infrastructure to meet mid-to-long-term demand,” he said.

The tech giant had been widely expected to cut chip output to ease oversupply, with the company heading towards losses in its chip division in the first quarter. Analysts said Samsung had begun to reduce output in December.

“Their inventories are getting bigger than expected as customers are not buying chips despite lower prices,” said Daniel Kim at Macquarie. “This is delaying a price recovery. Given the extent of chip price falls and their losses, the current downturn could be worse than 2008.”

He predicted that Samsung could slash chip output by 20 per cent by the end of June, compared with its production in the third quarter last year. Analysts estimate Samsung’s operating loss in its chip division could balloon to around Won1tn in the first quarter and Won1.5tn in the second quarter.

“Its Nand [memory chip] business already posted losses in the fourth quarter and both Dram and Nand are suffering losses in the current quarter, with chip prices falling to below production cost,” said Kim.

With leading purchasers of their products sitting on record levels of inventory, rivals SK Hynix, Japan’s Kioxia Holdings and Utah-based Micron Technologies have already announced plans to slash production.

Microprocessor maker Intel is also bracing for one of its worst quarters, with executives warning that the company is likely to remain in the red in the first three months of 2023.

The global memory chip sector endured a 10 per cent decline in revenues in 2022, according to research firm Gartner. Samsung remained the overall market leader in semiconductors with a 10.9 per cent global share, followed by Intel with 9.7 per cent and Korean rival SK Hynix with 6 per cent.