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Semiconductor Industry Undertakes Much-Needed Inventory Correction

EL SEGUNDO, CA — Stockpiles from semiconductor suppliers declined in the third quarter, putting a halt to the steady expansion of the previous seven quarters, as the industry went into welcome self-correction mode in order to reduce oversupply, according to an IHS iSuppli Inventory Tracker report from information and analysis provider IHS.

As calculated by the Days of Inventory (DO I) measure, semiconductor stockpiles in the third quarter stood at 81 days, down a modest 2.5 percent from 83 days in the second quarter. The DOI level had continued to rise since the fourth quarter of 2009 when it stood at just 67 days-a time when stockpiles were low because demand had evaporated during the dark days of the recession. Since then, inventory DOI has been creeping up, partly to make up for depleted stocks, and also to cope with growing demand as strength returned to the supply chain. The third­ quarter DOI was worth some $36.96 billion, down from $37.29 billion in the second quarter.

Semiconductor inventory levels are an important gauge of industry health, and the stockpile amount at any point in time also indicates the confidence-or lack thereof-of the supply chain in its forthcoming prospects. Too little inventory suggests caution for possible hard times ahead as manufacturers expect demand to ratchet down; but too much inventory is also a problem, fueling worrisome oversupply that forces down pricing.

For the third quarter, semiconductor suppliers began an inventory correction to alleviate an escalating oversupply situation on top of already inflated stockpiles. With the global economy all but stalled, and in the face of declining orders as well as decreased visibility, many semiconductor manu­ facturers opted to reduce capacity utilization. And with lead times now declining to normal levels after extended periods of waiting in the past, manufacturers were more confident about trimming bloated inventories this time around without fear of causing too much pain to the supply chain.

Despite the inventory cutback, DOI in the third quarter rained elevated in absolute terms­ the highest of the last 10 quarters, dating all the way back to the fourth quarter of 2008—suggesting that stockpiles are still quite high. Moreover, the percentage of oversupply during the period rose to12.1 percent, exceeding the 11.1 percent spike in oversupply during the fourth quarter of 2008. As a result, expectations are that inventories will be trimmed further in the final quarter of this year.

Among the various semiconductor sectors, inventory levels rose for handset original equipment manufacturers, distributors and analog companies—all of which posted percentage gains in DOI. Stockpiles, however, fell for fabless, memory, foundry, PC original equipment manufacturers, storage and electronic manufacturing services.

For handset manufacturers, inventories increased in the third quarter as suppliers prepared for their seasonally busy end-of-year period. In comparison, inventory at pure-play foundries declined more strongly than expected—the result of a reduction in utilization rates.

Total DOI is projected to decline another 2.5 percent in the fourth quarter to 79.3 days, IHS predicts. Visibility continues to be murky in many sectors given the volatile world economy, and end demand remains difficult to predict.

IHS iSuppli

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