Samsung faces pressure to cut spending as chip demand slackenshttps://indianexpress.com/article/technology/tech-news-technology/samsung-faces-pressure-to-cut-spending-as-chip-demand-slackens/

Samsung faces pressure to cut spending as chip demand slackens

Samsung will probably report a 15 per cent decline in net income to about 10.2 trillion won ($9.1 billion) for the last three months of 2018, according to analyst estimates compiled by Bloomberg.

Memory chips are seen on a Samsung Electronics Co. memory module in this arranged photograph in Seoul, South Korea. Photographer: SeongJoon Cho/Bloomberg

With Samsung Electronics Co. set to report its first drop in quarterly profit in two years, investors are counting on the world’s biggest chipmaker to cut capital spending to keep profits flowing during a supply glut.

Samsung will probably report a 15 per cent decline in net income to about 10.2 trillion won ($9.1 billion) for the last three months of 2018, according to analyst estimates compiled by Bloomberg. That would be the first time earnings have fallen since the third quarter of 2016.

How much a chipmaker spends on its ability to produce the components is currently a hot topic among investors in the $463 billion semiconductor industry, where a handful of manufacturers dominate memory output. Samsung already cut annual capital expenditure last year. Chips make up the biggest portion of income for the Suwon, South Korea-based company, which is struggling with falling sales of Galaxy smartphones and iPhone screens.

“There is strong chance that Samsung will reduce its capex plans for 2019,” said Mike Howard, vice president of memory research at Yole Developpement. “It makes a lot of sense to reduce capex when the market is oversupplied.”

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After falling 24 percent last year, Samsung’s stock has climbed 18 percent this year. A representative for Samsung declined to comment before the release of final figures on Jan. 31.

Its closest rival, SK Hynix Inc., made it clear that spending cuts are coming this year when reporting results last week that fell short of analysts’ estimates. Hynix’s comments in a call with investors helped boost its shares to fresh highs for the year, fueling optimism that Samsung would follow suit.

Memory-chip inventories remain high as customers such as data centers hold off on expansion plans amid the brewing U.S.-China trade war, as well as slower global economic growth. The price of dynamic random-access memory used in servers is projected to fall by more than 20 percent quarter-on-quarter in the first three months of this year, according to TrendForce.

Earlier this month Samsung reported preliminary earnings with operating income slumping 29 percent to 10.8 trillion won.

Samsung will probably spend less than $10 billion on factory equipment this year, down from the $14 billion projected before September, according to Christian Dieseldorff, senior analyst at Semiconductor Equipment and Materials International. Samsung said in October its entire capex would drop 27 percent to 31.8 trillion won in 2018.

The decline may continue this year. Both Micron Technology Inc. and Taiwan Semiconductor Manufacturing Co. trimmed their capital spending forecasts. Hynix said it planned to reduce spending on equipment by 40 percent this year and might even consider additional cuts to capex, depending on demand. It also said it would not produce more memory than it sells.

“Last year demands were very healthy — server demand was a surprise and that continued to be strong, and right now that has been slowing,” said Clark Tseng, director of industry research and statistics at SEMI. “There are more reasons to cut capex compared to 2018.”

Samsung has a long history of forging ahead with aggressive investments in chips to retain a comfortable lead over its rivals. Samsung’s de facto chief, Jay Y. Lee, told South Korean President Moon Jae-in in mid-January that it was necessary to try to invest while “bracing for a downward cycle” in the economy.

Any cut in spending will probably not compromise their lead, which is widening as the U.S.-China trade war makes it harder for Chinese manufacturers to procure equipment, according to Gloria Tsuen, vice president and senior credit officer at Moody’s Investors Service.

“The technological hurdle could actually increase more as trade and political tensions rise,” Tsuen said. “The U.S. may make it more difficult for China to buy the equipment they need.”