Samsung to Continue Production Reductions as AI-Driven Rebound Nears

Samsung Electronics Co. has committed to further reducing memory chip production, but remains optimistic about a sales recovery in the latter half of the year. This positive outlook is driven by the increasing demand for artificial intelligence (AI), which is expected to boost global tech spending and revive the industry from the slump caused by the Covid-19 pandemic.

Samsung, which reported a better-than-expected net profit on Thursday, said artificial intelligence will boost demand for memory before the end of the year. Korea’s largest company plans to double its capacity to make high-bandwidth memory (HBM), the next-generation technology used to train artificial intelligence, by 2024.

The outlook and commitment to developing new technology went down well with investors, who raised their shares by 2.7% in Seoul. The focus is now on a race with SK Hynix Inc to develop key tools for artificial intelligence so the world’s two biggest memory chip makers can capitalize on the boom that followed OpenAI’s ChatGPT wowing investors and consumers last fall.

Until that demand emerges, Samsung and Hynix are trying to weather the current economic uncertainty by sticking to their promises to limit production of NAND chips used in computers and phones in an effort to stop prices falling.

“The worst in memory is behind us,” said Sanjeev Rana, an analyst at CLSA Securities Korea Ltd. Hynix’s prices rose in the second quarter, and Samsung’s prices are likely to rise in the third quarter, he said.

Samsung expects generative AI to drive “rapid demand” for high-performance memory that can handle large amounts of data, said Jaejune Kim, executive vice president of Samsung’s memory business. But he cautioned, “Demand for public servers and storage was relatively limited.”

Samsung said it would not issue a small shipment guidance for the full year due to macroeconomic uncertainties. Total memory volume appears to have peaked in May, but there is a tepid post-Covid recovery in China’s battered demand for logic chips, it said.

The company, which tops the industry for its leadership in chips, electronics and smartphones, said its net profit fell 86% to 1.55 trillion won ($1.2 billion) in the quarter ended in June. It continued to beat the average estimate of 925 billion won thanks to a weak won appreciation. Earlier this month, Samsung had reported its worst quarterly revenue decline in more than a decade.

Rival SK Hynix, which already supplies HBM chips to Nvidia Corp., is likely to be the biggest beneficiary of demand for chips that help develop and train generative artificial intelligence platforms, analysts said. On Wednesday, SK Hynix reported faster-than-expected sales and said artificial intelligence will soon ignite the long-awaited rally. Its shares rose by more than 9.7 percent.

“Hynix had an advantage, but I expect Samsung to catch up,” Rana said of the HBM market. “Samsung’s HBM deliveries will accelerate in 2024.”

Samsung is now trying to catch up on two fronts: it is seeking more orders for AI-enabled chips while expanding its foundry business, where it trails Taiwan Semiconductor Manufacturing Co. in Samsung’s entire quarterly investment of 14.5 trillion won. According to it, 90 percent was used for chips.

Samsung’s results came after TSMC cut its outlook last week, delaying production at its Arizona project until 2025 — a warning signal that underscores the extent of uncertainty roiling the global chip arena.

Investors are looking to the technology industry’s biggest companies for clues on when demand for electronics and semiconductors will recover – a challenging task given the uneven global outlook, accelerating inflation and China’s post-coronavirus turbulence.

Samsung, in particular, is a barometer for the $160 billion memory industry, which built capacity too quickly in better times and is now struggling with bulging inventories. Its production cuts are a significant step for a company that previously continued to produce through industry downturns.

Another potential driver of long-term growth is Samsung’s automotive memory chips, which the company expects to grow by more than 30% on average over the next five years.

Apart from semiconductors, Samsung’s smartphone business – the world’s largest – is struggling to attract customers. The Korean company now expects smartphone shipments to rise in the current quarter and the average selling price to improve from the second quarter.

Samsung unveiled its fifth generation of foldable smartphones on Wednesday, aiming to fend off future rivals from Apple Inc. It is also exploring a cheaper alternative to win market share in the increasingly popular foldable phone category.

Executives also said the company is working on a mixed reality device and building an ecosystem to support content development in the nascent arena, which now includes Apple’s Vision Pro headset.