Semiconductor industry continues to shed inventory but significant market turnaround unlikely in 2009

STAMFORD, USA: The Dataquest Semiconductor Inventory (DASI) Index will continue to fall in the third quarter of 2009, having moved from the "severe excess" level of 1.21 and higher during the past four quarters to just inside the "caution zone" (1.10 to 1.20), according to Gartner Inc.

However, analysts warned that the DASI Index will not stabilize until at least 2010, when Gartner forecasts the next year of growth for the semiconductor industry.

Gartner employs the DASI Index to provide an aggregate view of the inventory health of the semiconductor industry by assessing normal inventory levels throughout the supply chain and comparing them with current levels to evaluate industry trends. It gauges the normal inventory level at each stage of production that will allow for a smooth flow of products and management of the production process without inventory shortages or surpluses.

The DASI Index includes control zones* of "Normal" and "Warning." Above 1.10, inventories are inflated, and there is likely to be downward pressure on average selling prices. Below 0.95, inventories are low, components may be on allocation and double-ordering begins.

"While some industries are experiencing a fundamental demand-side recovery, other industries are benefiting from a reduction in inventory simply because of their continued conservative efforts in keeping the supply chain lean," said Gerald Van Hoy, senior research analyst at Gartner. "Concerns of possible shortages in inventory seem to be premature, but inventory should continue to be monitored, especially in large-scale markets, such as PCs and cellular phones."

"Even though revenue has been showing positive growth, there is not enough of it to overcome the declines we saw at the beginning of 2009, and we do not see indications of this changing before the end of the year. Nevertheless, the industry continues to shed inventory, which has made the current crisis manageable," Van Hoy said.

While the economy is in a recovery phase and sensitive to global conditions — such as natural disasters and political events — Gartner continues to express cautious optimism for the immediate future and predicts that the market will return to growth in 2010 and 2011.

Van Hoy explained that this cautious optimism is largely due to the fact that there are crucial differences between the present semiconductor supply chain and the one that existed at the last major crisis in 2001 to 2002.

"The decrease in demand has been severe, yet the response in absolute inventory levels has been more in tune with the change in demand," he said. "In the current situation, we see a very different pattern of response and inventory management, with the percentage differences between revenue and inventory much tighter than during the crisis in 2001 and 2002."

Gartner maintained that concerns of possible shortages in inventory are premature — although shortages could potentially occur, they will most likely be few and far between, and, given the current end demand, short-lived.

Van Hoy said 2009 remains a negative revenue growth year for the semiconductor market and should be treated as such. Some consumer spending is beginning to occur but is still short of a significant turnaround in the market.