Samsung extends output cuts in anticipation of AI-driven recovery

Samsung’s recent financial report showed net income surpassing expectations. The company expressed confidence that AI-related applications would fuel memory demand growth by the end of the year. As part of its plans to capitalize on this trend, Samsung, South Korea’s largest company, aims to double its capacity for producing high-bandwidth memory (HBM) by 2024. HBM is a cutting-edge technique crucial for AI training.

Investors responded positively to Samsung’s strategic focus on AI-related technologies, leading to a 2.7% increase in its shares in the Seoul market. Notably, this move sets the stage for a competition with SK Hynix Inc. to develop essential tools for AI, enabling the world’s two largest memory chipmakers to leverage the growing interest in AI applications since the success of OpenAI’s ChatGPT in the previous year.

While waiting for the AI-driven demand to take effect, both Samsung and Hynix have committed to limiting the production of NAND chips, commonly used in PCs and phones, to stabilize sliding prices amid ongoing economic uncertainties.

Sanjeev Rana, an analyst with CLSA Securities Korea Ltd., expressed optimism about the memory market, stating that the worst is likely behind them. Hynix experienced price rebounds in the second quarter, and Samsung is also expected to gain ground in the third quarter.

Samsung anticipates a surge in demand for high-performance memory to support generative AI applications capable of processing substantial amounts of data. However, the company acknowledges that the demand for general servers and storage is relatively limited.

Amid macroeconomic uncertainties, Samsung refrained from providing a bit shipment guidance for the full year. The company noted that overall memory inventory seemed to have peaked in May, but a slow post-Covid recovery in China has impacted demand for logic chips.

Despite facing challenges, Samsung remains a bellwether for the tech industry due to its leading position in chips, electronics, and smartphones. In the quarter ending in June, the company reported a net income decline of 86% to 1.55 trillion won ($1.2 billion), which still exceeded the average estimate of 925 billion won, thanks to support from a weak won. Earlier in the month, Samsung had reported its worst quarterly revenue decline in over a decade.

Analysts believe that SK Hynix, already supplying HBM chips to Nvidia Corp., stands to gain significantly from the demand for chips in generative AI platforms. Nevertheless, they expect Samsung to catch up in the HBM market, projecting an acceleration of Samsung’s HBM shipments in 2024.

Samsung is now actively trying to increase its orders for AI-supporting chips and is also expanding its foundry business, though it currently lags behind Taiwan Semiconductor Manufacturing Co. More than 90% of Samsung’s quarterly capital expenditure of 14.5 trillion won was allocated to chips.

These developments come at a time when TSMC has reduced its outlook and delayed production at its Arizona project until 2025, reflecting the uncertainty prevailing in the global chip industry.

Investors are closely watching major tech companies for indications of when demand for electronics and semiconductors will rebound, amid the challenges posed by an uneven global outlook, surging inflation, and post-Covid turbulence in China.

Samsung, being a key player in the $160 billion memory industry that faced excess capacity during prosperous times and is currently grappling with inventory issues, serves as an important barometer for the sector’s recovery. Notably, Samsung has taken significant steps by cutting its production in response to the industry downturn, whereas it previously continued production during similar periods.

Additionally, Samsung’s automotive memory chips are expected to be a potential long-term growth driver, with the company projecting more than 30% growth on average for the next five years.

Apart from its semiconductor business, Samsung’s smartphone division, the world’s largest, is actively competing for customers. The company anticipates increased smartphone shipments and improved average selling prices in the current quarter. To counter rival products from Apple Inc., Samsung recently unveiled its fifth-generation foldable smartphones. Moreover, the company is exploring a lower-cost option to gain market share in the increasingly popular foldable phone category.

Furthermore, Samsung executives have revealed their work on a mixed-reality device and their plans to build an ecosystem supporting content development in this nascent arena, which now includes competition from Apple’s Vision Pro headset.

(With inputs from Bloomberg)

Updated: 27 Jul 2023, 03:22 PM IST