Samsung Electronics is expected to forecast a 21% drop in the first quarter profit on Tuesday, hurt by sluggish sales of artificial intelligence chips and continued losses in its contract chip manufacturing business.

The world's biggest maker of memory chips, in the midst of a management reshuffle following the sudden death of co-CEO Han Jong-Hee in late March, is due to report preliminary first-quarter earnings on Tuesday.

Samsung has been grappling with falling chip profits since the middle of last year as it fell behind key rival SK Hynix in supplying high-performance memory chips to AI chip leader Nvidia.

Its struggle in the high-end market has left the South Korean tech giant heavily reliant on customers in China looking for less advanced products that are not subject to U.S. export restrictions.

Ryu Young-ho, a senior analyst at NH Investment & Securities, estimated that AI chip demand from Chinese customers dropped in the first quarter after front-loading in the previous quarter in anticipation of more U.S. sales restrictions.

"The share of HBM chips in Samsung's overall DRAM shipments may have declined slightly in the first quarter, leading to an expected decrease in DRAM profitability," he said, referring to high bandwidth memory (HBM) chips used to make AI chipsets.

Samsung is projected to report 5.2 trillion won ($3.62 billion) in the January-March quarter operating profit, according to LSEG SmartEstimate.

It reported a 6.6 trillion won profit in the same period a year ago.

While Samsung is working on a redesigned version of its most advanced HBM chips to supply key clients, its relatively heavy exposure to commodity chips has made its profitability more vulnerable to volatile prices, analysts said.

Prices of some DRAM memory chips, widely used in smartphones and PCs, fell by about 25% in the first quarter over the year, and prices for NAND flash chips, used in data storage, fell around 50% during the same period, according to TrendForce data.

As a result, Samsung is again expected to underperform SK Hynix, whose profit is expected to more than double from a year earlier, LSEG data showed, benefiting from robust AI chip demand.

Sweeping reciprocal tariffs imposed by U.S. President Donald Trump on its trading partners are also set to raise costs for Samsung's various products ranging from smartphones to TVs, laptops and home appliances.

"Samsung could look to diversify its production base ... as part of its mid-to-long-term strategy. However, that isn't something that can be done within a year or two," said Jeff Kim, head of research at KB Securities.

"If tariffs on consumer electronic devices, such as smartphones, persist, they will inevitably impact consumer demand."

In its contract chip manufacturing business, Samsung is likely to further delay the start-up of its new U.S. factory to 2027 from 2026, as it has yet to win major production orders, keeping its foundry business in the red, analysts said.

Samsung originally planned to open the plant in 2024.

Estimated Q1 operating profit at Samsung's chip division was 1.7 trillion won, according to LSEG data, versus 1.9 trillion won a year ago.

Samsung's mobile and network business is likely to report 3.7 trillion won in profit, up from from 3.5 trillion won a year ago, helped by increased smartphone shipments and a plunge in local currency that increases repatriated earnings.

($1 = 1,435.9000 won)