It is the first time in 14 years that Samsung Electronics‘ DS division recorded a quarterly loss. Samsung Electronics’ DS Division posted consecutive losses in the fourth quarter of 2008 and the first quarter of 2009, when it was reeling from the aftermath of the global financial crisis. Samsung Electronics‘ DS division recorded a loss in trillions.

But the market is calm. It must be because the outlook for Samsung Electronics’ DS division has already been sufficiently discussed. In fact, on the 27th, when Samsung Electronics announced its earnings, the stock price rose 0.78% from the previous day to 64,600 won.

DS division, the cause of the trillion-level deficit

The reason for the large-scale deficit in the DS division is sluggish demand. Since the second half of last year, demand for memory semiconductors has been sluggish in earnest. The price of general-purpose DRAM products, which were over $3 per unit in the first half of last year, has fallen to the $1 range this year. The price of NAND general-purpose products also fell from the high $4 range to the high $3 range last month. Demand goes down and prices go down, so inventory builds up.

In fact, Samsung Electronics must have been thinking about the timing of production cuts. Earlier this year, when SK Hynix or Micron pulled out production reduction cards, Samsung Electronics said, “There is no artificial production reduction.” When everyone was talking about production cuts, the idea was to increase market dominance through a strategy to hold on and to overcome the technological super-gap. The industry was deeply disappointed. This is because the plan to recover the fallen memory price as quickly as possible by having Samsung Electronics participate in artificial production cuts has failed.

At the time, the industry believed that Samsung Electronics would adjust the market situation internally through ‘technical production cuts’ instead of mentioning artificial production cuts. However, Samsung Electronics mentioned ‘production cuts’ through a conference call after the announcement of this performance. It is a judgment that the current market situation has fallen to a level where it is difficult for Samsung Electronics to endure any longer.

Why the market expected the second half

Samsung Electronics said, “In addition to technical production cuts through production line optimization such as facility relocation and microprocess conversion, etc., we are lowering memory production to a meaningful level, focusing on products with additional suppliers secured.”

The decline in memory semiconductor prices was faster than Samsung Electronics predicted, and the reason was that it failed to prevent an increase in inventory due to a decrease in demand. This proves that Samsung Electronics was also unable to withstand the large flow of the market.

Jaejoon Kim, vice president of Samsung Electronics’ memory business division, said, “We decided to lower production volume after determining that we had secured enough quantity for a specific product to respond to future demand fluctuations.” We are in the process of reducing production significantly by adding branch line optimization, etc. As we plan to operate production flexibly in the second half, normalization of inventory levels will accelerate.”

The industry expects that a meaningful level of supply control will be achieved from the second quarter thanks to Samsung Electronics’ participation in artificial production cuts. In addition, it is expected that earnings will recover in the second half of the year as inventory is depleted and memory prices normalize. SK Hynix also said, “All suppliers are now starting to cut production, and the resulting impact is expected to begin in earnest from the second quarter, so inventory will be normalized this year.”

Creating atmosphere through production cuts and maintaining leadership through investment

In particular, what stands out in Samsung Electronics’ earnings announcement is investment. Samsung Electronics invested a total of 10.7 trillion won in facility investment during the first quarter. This is a 36% increase over the previous year. Even last quarter’s facility investment is the largest ever in the first quarter. We also spent 6.58 trillion won on R&D. This is the largest ever since last quarter. Samsung Electronics plans to increase its investment in the second quarter according to market conditions.

The industry analyzes that a significant portion of the investment will be in the semiconductor business. It is usually not easy for a loss-making division to make bold investments. Why is Samsung Electronics maintaining this trend of expanding investment?

First of all, it is a strong basic physical strength. Samsung Electronics Semiconductor is not strong enough to be shaken by a quarterly deficit. The amount of cash holdings is also significant. Even in difficult times, we have the pride to lead the market. The future-oriented management philosophy built on this basic physical strength is the driving force behind Samsung Electronics Semiconductor. Semiconductor is a cycle industry. It is important to predict the up-down cycle and lead with technology investment one beat faster than others. Jaejoon Kim, vice president of Samsung Electronics, also said, “As demand is expected to remain strong in the mid- to long-term, we must invest in infrastructure in advance to have a stable supply that can respond to this.”

Samsung Electronics’ performance in the first quarter suggests a lot. At first glance, it may seem that Samsung Electronics has surrendered to the market situation. The policy of artificial production cuts, which had been endured until the end, was also withdrawn. However, if you look carefully, Samsung Electronics’ response is ‘one step backward for two steps forward’. It is to accept the market situation flexibly, but look for opportunities to make up for it in the future. Samsung Electronics’ next move is expected.