'Cutting Production is Cutting Production, Investment is Investment'... Samsung Electronics' Decision to Overcome the Earnings Slump

Samsung Electronics posted an operating loss of over 4 trillion KRW in its DS division alone due to the ongoing semiconductor downturn. The company's overall operating profit also fell below 1 trillion KRW. However, Samsung Electronics made a bold decision to carry out the largest-ever quarterly investment in research and development (R&D). The plan is to prioritize increasing the proportion of advanced processes and high value-added products and to continue investing in securing future technologies rather than focusing on immediate earnings.

On the 27th, Samsung Electronics announced that it recorded consolidated sales of 63.7454 trillion KRW and an operating profit of 640.2 billion KRW for the first quarter of this year. Compared to the same period last year, sales decreased by 18.05%, and operating profit dropped by 95.47%. This is the first time in 14 years that Samsung's operating profit has fallen below 1 trillion KRW, since the first quarter of 2009 (590 billion KRW) during the global financial crisis. The DS division posted sales of 13.73 trillion KRW and an operating loss of 4.48 trillion KRW. Compared to the same period last year (sales of 26.87 trillion KRW, operating profit of 8.45 trillion KRW), sales were halved, and operating profit evaporated by a staggering 13 trillion KRW.

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Samsung Electronics cited the overall demand decline as the cause of the poor performance. This was due to weakened customer purchasing sentiment amid a slowdown in the external economy and ongoing inventory adjustments centered on client companies.

Kim Jae-jun, Vice President of Samsung Electronics' Memory Business Division, stated during a conference call following the earnings announcement, "The bit growth (production increase rate converted to bit units) of DRAM in the first quarter fell by about the low teens, while NAND flash bit growth grew by the low single digits." He added, "Regarding ASP (average selling price), DRAM fell by about the mid-teens percentage, and NAND dropped by about the high teens percentage."

To reduce memory inventory, Samsung Electronics joined SK Hynix and Micron in production cuts and forecasted that inventory would decrease starting from the second quarter. Vice President Kim said, "Production cuts are being made mainly on legacy semiconductor products with sufficient volume. Inventory is expected to start decreasing from the second quarter, with the reduction expanding further in the second half."

Photo by Hyunmin Kim kimhyun81@

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Separately from production cuts, Samsung Electronics announced that it would continue facility investment and R&D investment. This is because mid- to long-term investments must precede to strengthen future competitiveness. Samsung Electronics plans to invest a record 6.58 trillion KRW in R&D in the first quarter and pour 10.7 trillion KRW, the largest scale for a first quarter, into facility investment.

Vice President Kim explained, "We judged that we must proactively focus investment capabilities now to secure future competitiveness. We will maintain capital expenditures (capex) at levels similar to last year while continuously expanding the R&D proportion." He added, "We will continue infrastructure investment mainly in the Pyeongtaek 3rd and 4th lines to secure essential clean rooms and respond timely to mid- to long-term demand growth."

He also expressed confidence in the sales of DDR5, a high value-added product among PD and server DRAM. Since DDR5 is a new product and customers currently have low inventory levels, demand is expected to increase further in the second half. Vice President Kim emphasized, "As of now, the adoption rate of DDR5 among customers' PC and server DRAM is in the low 20% range and is showing an upward trend. We will accelerate the transition to DDR5 leading-edge processes in the second half and continuously expand product competitiveness."

Meanwhile, regarding concerns about damage to domestic companies following the recent implementation of the U.S. CHIPS Act, Vice President Seo Byung-hoon said, "The U.S. government has stated that it will gather industry opinions and negotiate with individual companies to specify details. Samsung Electronics also plans to participate in this process." He added, "We are reviewing various possibilities and scenarios and will strive to minimize geopolitical risks as much as possible."

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