Inventory Spike Haunts Semiconductor Market

The dreaded word “overage,” also known as oversupply, excess supply, or the bane of the electronics industry, is patrolling the hallowed halls of semiconductor vendors again and making analysts nervous about the strength of the ongoing market expansion. After a two-year hiatus, during which the market went from stalled sales to oversupply and then to double-digit demand growth, inventories have risen again at chip vendors, adding to concerns about performance for the year ahead.

Research firm {complink 7427|iSuppli Corp.} estimates total semiconductor stocks rose in the fourth quarter of 2010 to levels last seen in the second quarter of 2008, and it warned that the sharp increase, which could have resulted from anticipations for solid growth this year, could result in a major headache for suppliers if the expected strong sales failed to materialize.

“Inventory levels arguably now are high by any standard, illustrating the difficulty of controlling chip stockpiles even with semiconductor suppliers' arduous efforts to keep them in check,” says Sharon Stiefel, semiconductor market intelligence analyst at IHS's iSuppli. “The sharp increase of semiconductor inventory during the fourth quarter defied expectations of a decline for the period. This inflated level of inventory could become a concern if semiconductor industry growth falls short of expectations in 2011.”

How bad is it? Total days of inventory (DOI) increased to 83.6 in the fourth quarter, up almost six days from 78.1 in the third quarter of 2010. DOI have not risen this high since the industry slump of 2008 when it reached 84 days, according to iSuppli. The research firm said it was surprised by the increased inventory level, noting that it “had predicted stockpiles would decrease by 2.5 DOI in the fourth quarter.”

Put the phone down. Don't cancel that last delivery order yet, as it's not that clear the additional inventories won't be needed later. Although the industry built chip stocks over the last few months, the increase was not altogether unnecessary. Remember, only one year ago, suppliers were facing shortages, and lead times, especially for analog products, had extended out months. Rather than the typical six to eight weeks delivery period, some analog vendors were seeing lead times as long as six months for some products.

Also, the higher inventory level reported by iSuppli is not necessarily a negative development. Sure, it would knock the industry off its perch if demand stalled, but that's not on the cards right now. Certain industry segments are forecast to remain buoyant throughout the year and they will most likely lift total chip sales for several more quarters. “Hot segments like smart phones and media tablets continue to generate strong growth for semiconductors,” iSuppli said in its report. “Furthermore, other segments like the automotive and industrial markets, which tend to get less visibility, also are generating encouraging chip sales.”

A sharp drop in sales is unlikely this year. Most industry forecasts call for strong upper single-digit to low double-digit expansion for 2011, and even the global economy, which is being wracked by political disturbances in certain parts of the world, is seen strengthening this year over 2010. So, don't panic. Keep a close eye on demand on the customers' customers, though, and keep more inventories in semiconductor wafer die banks, or in work-in-progress status, rather than in ready-to-ship form.

For OEMs, the news of higher semiconductor inventories is actually a positive development. Many observers were concerned that strong shipment of smartphones and tablet computers could crimp supply for parts, spark hoarding and double-ordering, and result in higher prices. (See: MWC: Parts Challenges Ahead for Mobile Vendors) and (China Costs Prompt Price Hikes.) Any likelihood of higher pricing will cool down over coming months with the news of higher inventories.

2 comments on “Inventory Spike Haunts Semiconductor Market

  1. Taimoor Zubar
    February 17, 2011

    It does seem a pretty interesting scenario in the semiconductor market. Given the excess supplies, it's likely that prices will go down in near future.

    With this situation, I am not sure if I agree with you when you say “Don't cancel that last delivery order yet, as it's not that clear the additional inventories won't be needed later”. The reason being the fact that if prices will go down due to excess supplies, companies may be better off buying the products later at cheaper prices rather than buying them now at higher prices and locking their liquidity.

  2. Ken Bradley
    February 17, 2011

    Bolaji, this increase in inventory is disturbing particularly given that the December 2010 SEMI Book-to-Bill ratio was 0.9 down from 0.96 in November and 0.98 in October. The SEMI Book-to-Bill ratio for January 2011 gets published on February 21, 2011. Let`s hope it has recovered to over 1.0.

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