Semiconductor Inventory 'Uncomfortably' High

Is the semiconductor industry headed for another stinging inventory write-down?

That apparition has not haunted the market for awhile, but research firm IHS Corp. raised the possibility in a recent report in which it warned of the possibility of oversupply due to slowing demand for key products amidst continuing uncertainty in the global economy.

Several factors are combining to ignite fears that rising chip inventories are indicative of deeper problems in the electronics supply chain. The PC segment, which despite recent challenges remains the biggest end-market for semiconductors, declined in 2012 and is forecast to either fall again this year or at best record tepid growth. IHS is projecting sales for mobile computers declined in 2012 and said ultrabooks and ultrathin PCs did not take up the slack as expected. Also, demand in the data networking equipment market has been weaker than expected.

The research company said total semiconductor inventory at suppliers climbed to 49.3 percent of revenue during the third quarter of 2012, rising from 47.5 percent of revenue in the prior quarter. The amount reported by IHS did not include semiconductor parts in the distribution channel or at OEMs and electronics manufacturing services (EMS) providers. If products in the supply chain were added, the total value of semiconductor inventory being held by the industry would be much higher although observers noted that most manufacturers don't carry a lot of inventory anymore.

Sharon Stiefel, an analyst for semiconductor market intelligence at IHS, said in the report:

The uncomfortably high level of inventory among semiconductor manufacturers of nearly all stripes is a result of key demand drivers failing to materialize. Demand for semiconductor devices has typically come from new products that consumers feel compelled to purchase. But going into the holiday season last year, no such new products marshaled enough impetus to overcome consumer fears about lingering economic woes. Two months prior to Christmas, consumer purchases of electronics had grown by only 0.7 percent, the worst performance since 2008.

It wasn't all bleak in the semiconductor market. Several market segments reported positive sales improvements, including smartphones and tablet PCs. However, sales in these segments were not robust enough to offset weakness in other markets, pushing the industry into negative growth.

The outlook for 2013 isn't that heartwarming either. In fact, it is filled with all kinds of warnings related to demand conditions and potential pressures from the general worldwide economy. IHS says semiconductor sales could rise as much as 4 percent in the second quarter of this year and 9 percent in the third quarter. For this to happen, though, the "global economic forecasts [must] perform according to positive expectations," the research firm said. "However, if demand evaporates, semiconductor suppliers will find themselves in a deplorable oversupply situation, which would then lead to inventory write-downs throughout the year."

An inventory write-down in 2013 would be a bitter pill for the semiconductor industry to swallow only one year after initial hopes for strong growth were dashed in 2012. The upper single-digit growth expected by some analysts fizzled into negative territory by the end of the year leading to the inventory excess reported by IHS.