Summary of the Situation

In the second quarter of 2019, Samsung Electronics, a global leader in memory chips, reported a significant 53% year-on-year decline in net profit. This sharp drop was primarily caused by a severe downturn in the global memory chip market, characterized by falling prices and a supply glut.

Despite this financial pressure, Samsung made a strategic decision that surprised some analysts: it would not artificially cut its production of memory chips. Instead, it chose to maintain output and compete on volume and technology, betting on a future market recovery and aiming to solidify its long-term market dominance.

Why Did Net Profit Fall So Much?

The profit plunge was almost entirely due to problems in the DRAM and NAND Flash memory chip markets, which are Samsung’s cash cows.

1. Falling Chip Prices:

   • Weakening Demand: Key customers, especially in the smartphone and data center sectors, were buying fewer chips. Smartphone sales were stagnating, and major cloud providers like Amazon and Google had built up large inventories of chips and were slowing their purchases.

   • Oversupply: The industry had been expanding production capacity in previous years to meet high demand. When demand slowed, a supply glut emerged, causing prices to crash. DRAM and NAND flash prices fell by over 20% in the first half of 2019.

2. The “Memory Chip Super Cycle” Ending:

   • 2017 and 2018 were boom years for memory chips, a period often called a “super cycle” with record-high prices and profits. The 2019 downturn was the inevitable correction from that peak.

3. Trade Wars:

   • The ongoing US-China trade war created economic uncertainty, disrupted global supply chains, and dampened business investment, further reducing demand for electronics and components.

Why Would Samsung NOT Reduce Production?

This was the key strategic question. Conventional wisdom suggests that when prices fall due to oversupply, you should cut production to balance the market and prop up prices. Samsung’s rivals, like SK Hynix and Micron, were cutting back. Samsung’s refusal was a calculated gamble based on several factors:

1. Market Share Defense: As the market leader, cutting production would mean ceding market share to competitors. Samsung believed it could withstand the price pressure longer than its rivals and potentially force weaker players into a more difficult position.

2. Cost Leadership: Samsung has the industry’s lowest production costs due to its massive scale and advanced manufacturing technology. It could remain profitable even at lower prices that would cause losses for its competitors.

3. Betting on Future Demand: Samsung anticipated that demand would recover, driven by new technologies like 5G networks, new smartphone models (including its own), and the expansion of artificial intelligence and cloud computing. They wanted to have ample supply ready for this expected upturn.

4. Technology Transition: It was using the downturn to aggressively shift its production lines to newer, more advanced chip-making processes (e.g., 1y-nm DRAM and 90+ layer V-NAND). Maintaining high production volume helps in perfecting these new processes and driving down their costs faster.

5. Long-term vs. Short-term Pain: Samsung was willing to endure short-term profit pain to secure long-term strategic advantages, including stronger market dominance and a technological edge.

Consequences and Outcome

Samsung’s “no artificial cuts” stance had significant repercussions:

• Prolonged the Price Slump: Its decision to keep the taps open contributed to the oversupply, causing the memory chip price decline to last longer than some analysts had predicted.

• Intensified Competition: It sparked a brutal price war in the memory chip industry, putting immense financial pressure on smaller competitors.

• Eventual Pivot: While Samsung publicly stated it wouldn’t make “artificial” cuts, it did eventually make more subtle adjustments to its production growth and capital expenditure plans later in the year as the market conditions persisted.

• Proven Strategy (in the long run): Samsung’s strategy of maintaining investment during the downturn positioned it perfectly for the massive demand surge that came just a year later with the COVID-19 pandemic, which accelerated digital transformation and led to a new boom in chip demand.

In conclusion, the statement “Samsung’s 2019 Q2 net profit fell 53% and will not artificially reduce memory chip production” encapsulates a critical moment in the tech industry—a tale of a market leader using a cyclical downturn as a strategic weapon to reinforce its dominance, even at the cost of short-term financial performance.