Let's check in with Samsung to see how it's riding out the memory glut. Operating profit down 56%. Oops. Samsung Electronics has estimated that operating profit for its second calendar quarter of 2019 will fall by a whopping 56 per cent due to continued crappy demand for memory chips. The preliminary numbers were outlined today: revenue is projected to fall 4.2 per cent to ₩56 trillion ($47.6bn) and income from operations is …
Not sure why the Reg continues to misunderstand how memory markets (and basic economics) work and keep writing stories claiming Samsung's falling profit is to due to "crappy demand" for memory chips. It is due to oversupply causing low prices. I'll bet they are selling more gigabytes of flash and RAM than ever before, demand is fine.
But where does the overproductin come from? You have to provision for the expected demand and this has been lower than expected across the industry.
It's one of the reasons for conglomerates who hope that aggregate demand across a range of industries is less fickle than any individual industry.
It can be more expensive to leave fabs idle than to overproduce and sell at a loss - so long as the loss you make selling them is less than the amortization on the $10+ billion fab.
And there are so few competitors now that oversupply isn't causing memory makers to lose money like they used to, now they still make money just a lot less than they do when in undersupply.
"Basic Economics" is easy when looking at historical supply and demand. Reliably extrapolating those trends into the future is not quite so simple....
Also, operating a fab at a loss and flooding the market could work in Samsung's favour if it manages to bankrupt a weaker competitor. Who knows if they are an innocent victim of market forces or if they are actually manipulating the market....
That's been done before which is why there are only 3-4 memory vendors now. They are all massive, so flooding the market and selling below cost isn't going to drive anyone out of business anymore. They will however invite trade actions for dumping, which is illegal for this very reason. When there were 20 competitors it was easy to fly under the radar, but no longer.
"But where does the overproductin come from? You have to provision for the expected demand and this has been lower than expected across the industry."
A big issue is the future. As DougS' notes, everyone is almost certainly selling more memory than ever before. But production is quantised to a large extent - if you expect demand to increase by 1% each year, you can't build a small factory every year to meet exactly that expected demand. Instead, you build a massive fab that will add 20% to your overall production. And once that starts operating, you're now producing more than there is demand for for at least a couple of years until demand catches back up again.
This is why there's been a consistent pattern of oversupply and low prices, followed by undersupply and high prices. Demand increases more-or-less continuously, but supply can only follow it in sudden jumps - supply falls behind until it's enough to justify the cost a new factory, at which point it leapfrogs demand and has to wait for it to catch up again. As long as demand for chips keeps increasing and fabs remain multi-billion pound investments, there's no real way for that to change.
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