January 8, 2020 / 3:19 AM / 12 days ago

Breakingviews - Samsung signals memory-chip cycle’s new normal

FILE PHOTO: Samsung Electronic's Galaxy A90 is seen on display at a Samsung store in Seoul, South Korea, November 14, 2019. REUTERS/Kim Hong-Ji/File Photo

HONG KONG (Reuters Breakingviews) - A shorter memory-chip cycle is emerging. Samsung Electronics ended 2019 with a 34% slump in quarterly operating profit – grim but better than analysts expected. With fewer competitors, prolonged downturns are less of a worry, though, and supply cuts hint at an unusually quick recovery. Samsung can focus on innovation and managing regulatory risks.

A glutted memory-chip market is to blame for the poor results. In guidance released on Wednesday, South Korea’s $318 billion technology champion said operating profit in the three months to December was likely 7.1 trillion won, or roughly $6 billion, the fifth consecutive year-on-year decline. Samsung, which will release detailed earnings at the end of the month, is expected to post its steepest percentage drop in annual net profit in at least a decade, analyst estimates from Refinitiv show.

There are reasons to hope a recovery is imminent. After more than halving from a mid-2018 peak, contract prices for so-called DRAM memory chips may stop falling by the first quarter of 2020, and even start ticking up by the second quarter, predicts industry tracker DRAMeXchange.

One reason is consolidation. Samsung, compatriot SK Hynix, and U.S.-based Micron make all the world’s so-called DRAM chips used in smartphones, PCs, and data centres. The triopoly – culled from a herd of roughly 10 rivals a decade ago – is able to slash output and capital spending aggressively. Bernstein estimates industry DRAM memory capex for 2019 fell by as much as a quarter. As a result, supply growth for this year may be at a record low.

A shortage would bode well for Samsung, whose shares have surged some 48% over the past year. New smartphones running on next-generation 5G technology, and a possible easing in the U.S.-China trade war, may help lift global demand for semiconductors. Despite legal troubles plaguing company leadership, including possible jail time for de facto boss Jay Y. Lee, a chip boom could buy time for the group to invest in new sources of growth.

This pricing power has attracted unwelcome official attention. Chinese antitrust watchdogs launched a price-fixing investigation into Samsung and its two rivals, Reuters reported in 2018. Even so, a quicker, softer turnaround in a notoriously cyclical industry would be a welcome new normal.

Breakingviews

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