DRAM Counters Overall Inventory Trends

One of the ongoing goals for the electronics supply chain is to "even out" the peaks and valleys in demand caused by rapidly changing market conditions. If cycles were moderating, a fever chart of inventory levels, for example, would look like a bumpy flat line. Instead, there are still dramatic peaks and valleys -- only they ebb and flow more quickly.

This particular argument -- that the supply chain is adjusting more quickly to changes in demand -- is often held up as a measure of improvement. An inventory spike that would have taken three quarters to correct can now right itself in a quarter or two. That seems to be true of the overall semiconductor market, according to recent reports from IHS iSuppli. The one glaring exception is DRAM, which, according to IHS iSuppli, is going to face a long period of oversupply before things get better. (See: Semiconductor Inventory Declines .)

First, the overall chip industry. IHS iSuppli reported in a statement this week that semiconductor inventories seem to be correcting themselves nicely:

Chip inventories held by semiconductor suppliers declined in the third quarter of 2011, putting a halt to the steady expansion of the previous seven quarters, as the industry cut production in order to reduce oversupply.
As calculated by the days of inventory (DOI) measure, semiconductor stockpiles in the third quarter stood at 81 days, down a modest 2.5 percent from 83 days in the second quarter, according to an IHS iSuppli Inventory Insider report from information and analysis provider IHS (NYSE: IHS).

Now, IHS iSuppli's take on the DRAM market, in another statement:

In contrast to the overall semiconductor industry, where days of inventory declined slightly in the third quarter of 2011, DRAM stockpiles increased dramatically.
The IHS iSuppli DRAM Inventory Index in the third quarter of 2011 stood at 12.8 weeks. This represents a sharp 31 percent increase from 9.8 weeks in the second quarter of 2011, and more than double the 6.1 weeks seen during the first quarter of 2010, which marked a recent low point for DRAM inventory. It also is significantly higher than the long-term quarterly average of 9.2 weeks.

What's worse, says IHS iSuppli, is that this peak could actually exceed levels seen during the last boom-to-bust cycle in 2008:

The last upheaval occurred over a drawn-out period lasting nine quarters, while the level today from trough to current high has taken only six quarters. Also, the present peak is already higher than all of the data points in the previous cycle save for one -- the previous apex, reached in the first quarter of 2009 -- and there is every possibility that this cycle could surpass the last...

It's still unclear, of course, how long it will take to get DRAM inventory back in balance. In the overall scheme of semiconductors, DRAM has always been treated a little differently than other chips. For example, DRAM is so commoditized that Enron -- yes, Enron -- once toyed with the idea of trading DRAM in the same way it traded oil futures. Even before Enron hit the skids, the idea was abandoned -- DRAM trading is even more risky and less predictable than oil.

Still, should the supply chain be seeing DRAM inventory so out of whack? IHS iSuppli suggests it's not entirely within DRAM makers' control. At the same time production was ramping up, DRAM content in electronics was going down.

Clifford Leimbach, analyst for memory demand forecasting at IHS, said in the statement: "DRAM suppliers are suffering from a multitude of market-depressing factors including the lack of worldwide demand, the arrival of new applications needing less DRAM, and operating systems that do not require an incremental increase in DRAM as previous versions did."

According to IHS iSuppli, "the new applications include tablets, which employ lower densities of DRAM and are slowing sales growth for traditional notebook PCs."

If (and that's a big if) overall conditions improve, DRAM could correct itself fairly quickly. IHS iSuppli's Leimbach says the expectation of a market improvement may be enough. "An example of heightened expectations very quickly reversing the downward path of the DRAM market occurred in 2009, when the Inventory Index recovered from a beleaguered 14 weeks to a desirable six weeks in the space of just three quarters," Leimbach said in the statement.

Still, it's going to be a bumpy ride, regardless of how long it lasts.