Exploring Strategies for Samsung to Overcome Chip Price Decline

South Korea's Samsung is one of the world's leading electronics companies. It produces a wide range of products, from smartphones and tablets to TVs and home appliances. Samsung is also a major player in the semiconductor industry, making chips for its own products as well as for other companies.

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Electronics giant Samsung has recorded an unexpectedly steep profit plunge, as the memory-chip market wilts. It is not yet clear how long the market slump will last, but it will depend in part on how quickly Samsung changes its tune on its ambitious output growth plans.

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Samsung's operating profit for the quarter ending in December dropped sharply from a year earlier, falling to its lowest level since 2014, according to the company's preliminary results released Friday. That was also well below analysts' estimates on S&P Global Market Intelligence. The company will report full earnings later this month. It's no surprise that Samsung is seeing profits slide, but the downturn is deeper than expected. The pullback in demand for consumer electronics has led to a buildup in inventories and crushed memory-chip prices—a major profit driver for Samsung. Morgan Stanley estimates that Samsung's selling price for both DRAM and NAND dropped more than 20% last quarter. Production delays in China for Apple, a major customer for Samsung's memory chips and displays, probably contributed to the worse-than-expected profit shortfall.

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It doesn't seem like consumer demand will pick up anytime soon, as a recession is looming in the US and Europe. Counterpoint Research expects smartphone shipments to grow by only 2% year-over-year in 2023. Sales of personal computers, which got a boost during the pandemic from people working from home, are also expected to be sluggish.

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The real hope for a near-term bottom for memory-chip prices comes from the supply side. Most large chip makers in the sector are cutting back production and investment plans. Memory-chip heavyweight Micron said in November that it has scaled back production: Its DRAM output will decline and its supply of NAND to the market will only grow at single-digits in 2023. The U.S. chip maker has already cut capital expenditures and expects to more than halve its spending on chip-making equipment in this fiscal year ending in September, compared with the previous one. South Korea’s SK Hynix said in October that it will slash its capital spending in 2023 by more than 50%.

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Samsung has been the outlier in the DRAM and NAND markets, standing firm in its production and investment plans. The company has a history of investing through market troughs to gain market share from its rivals, which is easier to do as an enormous, well-diversified company. However, an increasingly difficult memory market may eventually force Samsung to cut back production. Samsung’s shares gained slightly Friday despite the dismal results, probably in part because the market hopes looming production cuts will bring demand and supply back into balance quicker. SK Hynix’s shares also rose Friday. The DRAM market is essentially an oligopoly dominated by Samsung, Micron and SK Hynix.

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Samsung is facing a deep decline in the memory market, but it could also help lift the company back up. Only if it stops playing chicken with its rivals and starts scaling back its expansion plans – which is still an uncertain prospect.