Poor profits for Samsung resulted from an overproduction of memory chips for consumer electronics that far outweighed demand.
Samsung recently announced that its first-quarter profits had fallen by 96% compared to Q1 2022. At just Won600bn ($455m), this is Samsung’s lowest recorded quarterly profit in 14 years.
Snowballing from the global chips shortage of 2020, a weakening global economy has reduced the spending power of potential buyers, consequently turning a shortage into a surplus of certain types of chips. The Korean electronics giant has since decided to substantially reduce its production to mitigate the impact.
Clearly, Samsung overestimated today’s market demand for consumer electronics and it is not alone. Intel has not yet published its first quarter results, but recent filings indicate the company has also struggled to navigate the economic downturn.
What does the economic downturn mean for the chips industry?
While companies in the Asia Pacific (APAC) region are responding by slashing capital expenditure, the West is planning to invest heavily in its domestic chip manufacturing capabilities.
The European Union has proposed a €43bn ($47bn) plan to rejuvenate its domestic chip manufacturing as part of the European Chips Act. Numerous subsidies and financial incentives will be awarded to encourage domestic manufacturing to make the EU competitive with APAC, particularly for advanced leading-edge chips. Motivated by similar sentiments, the US has signed off its own CHIPS and Science Act that will see approximately $280bn invested in US semiconductor research and manufacturing over the next 10 years.
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By GlobalDataSamsung’s predicament casts a shadow over these lofty aspirations. It can take several years and billions of dollars to bring a new factory online. If demand is low and the market precarious, companies may be hesitant to invest in new manufacturing facilities in the West as they temporarily cut back on spending.
On the flip side, while demand for consumer electronics has plummeted, demand remains high within the automotive sector where the chip shortage continues. Redirecting production to meet automakers’ demands could be the key to enduring the current market. However, the solution is not as simple as that. The threat of recession combined with the shortage of chips has led to many automakers announcing cuts to the production of cars, thus potentially provoking another chip surplus in the future.
The US-China trade war increases market volatility
In addition to a slow economy, manufacturers at every step of the supply chain must deal with increasingly complex geopolitics. Samsung itself was an early victim of the ongoing trade war between the US and China, with profits halving in Q2 2019 following the US boycotting Huawei, a key customer for Samsung components.
More recently, in late 2022, the US imposed trading restrictions to prevent exports of key semiconductor technology to China. In addition to domestic export bans, the US recently made a successful agreement with two key countries—Japan and the Netherlands. These two countries dominate the supply of lithography equipment that is a necessity for chip-making. By restricting China’s access to such essential tools, the US has effectively thrown a spanner in the works.
GlobalData’s recent report predicts that China is at least 10 years away from developing its alternative equipment. The combination of a slow economy and geopolitical volatility has obscured the validity of any long-term forecasting. The likely consequence is that many companies throughout the supply chain will disengage themselves from heavy spending and risky markets while waiting for clarity. In the long term, it is expected that both countries and manufacturers will aim for greater vertical integration to reduce reliance on the imports of intermediate products and eliminate weak trading links.
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