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Samsung Crops Capital Expenditures as Chips Cool Down

Samsung’s semiconductor unit has been booming for much of the last three years as demand for long-term storage and short-term memory has soared, causing average selling prices to rise. The business, which accounted for 77 percent of the South Korean conglomerate’s profit last quarter, has ramped up DRAM production and continued increasing the density of 3D NAND to meet demand.

Other companies, including Micron Technology, SK Hynix, Toshiba, Western Digital and several state-funded Chinese manufacturers, have similarly boosted DRAM output and moved to higher capacity 3D NAND. But amid concerns that the company is endangering profit margins by adding too much manufacturing capacity too fast, Samsung has started reigning in capital expenditures. 

In its third quarter earnings results, Samsung said it would trim annual capital spending to $28 billion, down from $38 billion in 2017. From the second to the third quarter, the company said that it had curtailed capital expenditures almost 30 percent. The change came amid concerns that too much new memory and storage capacity has been driving down prices for DRAM and NAND, which fluctuate based on supply and demand.

Samsung’s move to clip its capital expenditures came as the company reported $57.5 billion of revenue in the third quarter, an increase of more than five percent since the third quarter last year. Operating profits grew 21 percent annually to $15.5 billion. Profits from its semiconductor division jumped 37 percent over the last year to more than $12 billion in the third quarter, with operating margins rising to 55 percent.

Despite the increasing oversupply of memory and storage, Samsung said that capital expenditures would still be $6.2 billion in the current quarter, up 55 percent from the same quarter in 2017. Cloud computing vendors such as Google, Amazon and Microsoft are building out data centers to accommodate more customers and their data. Capital spending in the largest data centers jumped nearly 20 percent to $75 billion last year, including the cost of NAND and DRAM.

NAND prices are expected to decline 25 to 30 percent next year as higher density flash memory enters production amid flagging demand, according to market researcher DRAMeXchange. DRAM prices are also projected to fall 15 to 20 percent. Many companies contend that the growing use of memory chips in cars and factories—not only in phones and personal computers—protect them from the shifting sands of supply and demand.

“Looking to 2019, while the memory market may slow down in the first quarter due to seasonal effects, supply and demand dynamics are forecast to stabilize from the second quarter thanks to an increase in overall demand from server and mobile,” the company said in a statement. Samsung added that it would “solidify its technology leadership by expanding sales of differentiated products.”

The South Korean conglomerate and its competitors are projected to spend $54 billion on building and upgrading factories to boost memory chip output, according to market researcher IC Insights. That represents a $10 billion jump in capital expenditures over the last year. Samsung, which holds around 40 percent of both the NAND and DRAM markets, has not disclosed its 2019 capital expenditures.

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