Semiconductor inventories remain under control, defying doomsayers

EL SEGUNDO, USA: Despite a recent financial report warning of bloated semiconductor inventories at electronic distributors, stockpiles among these companies and in nearly all other segments of the chip supply chain remain lean, according to iSuppli Corp.

“Concerns have been raised that a semiconductor inventory bubble appeared among distributors starting in the third quarter of 2009 that potentially could impact the expected recovery of the chip industry in 2010,” said Carlo Ciriello, an analyst with iSuppli. “However, iSuppli sees no evidence to support the claim that semiconductor inventories at distributors were higher in the third quarter of 2009 than they were at the onset of the downturn in the third quarter of 2008. In fact, iSuppli’s research indicates that inventory levels among these companies are well below the historical average.”

Distributors controlled 36.9 Days of Inventory (DOI) at the end of the third quarter of 2009, down 15 percent from 43.4 DOI for the same time in 2008, according to iSuppli. In dollar terms, distributors held $4.8 billion worth of semiconductor inventory at the conclusion of the third quarter of 2009, down 22 percent from $6.1 billion for the third quarter of 2008.

These reductions meant distributor DOI at the end of the third quarter were 17 percent less than the trailing three-year average.

iSuppli currently forecasts a small rise in inventory dollars in the fourth quarter, and DOI at distributors should continue to decline. iSuppli’s preliminary estimate for the end of the fourth quarter of 2009 puts DOI at 18.7 percent less than the three-year historical average.

The decline in distributor semiconductor inventories parallels that of the stockpile reductions among chip suppliers. DOI at semiconductor makers declined to 66.4 at the end of the third quarter of 2009, down 11 percent from 74.6 for the same time in 2008.

“Semiconductor suppliers have been maintaining tight control over inventories,” Ciriello says. “Suppliers prefer just-in-time fulfillment to capital-constraining shelf stocking. This has resulted in lower inventories throughout the electronics supply chain, including at distributors.”

Chain mail
Looking beyond the semiconductor suppliers and distributors, chip inventories remain at low levels for most other segments of the electronics supply chain. Semiconductor DOI in the fourth quarter were at lower than historical levels for makers of PCs, storage devices like Hard Disk Drives (HDDs) and cell phones.

This means that any increase in demand for such end products is likely to translate directly into rising semiconductor sales.

Intel stays lean
Confirming iSuppli’s view, leading semiconductor supplier Intel Corp. in its fourth-quarter financial call last week stated that distributor inventories were down compared to the third quarter. Furthermore, the company said, “the combination of much stronger sell through and lower year-over-year inventory levels gives us comfort that the supply chain continues to operate very efficiently.”

Intel added that its own inventories are at healthy levels and are at an appropriate size relative to demand, echoing iSuppli’s recent statements.

Clearing the way for growth
The semiconductor suppliers’ deft management of semiconductor inventories was a major factor spurring the recovery of the chip business in the second half of the year. In concert with recovering demand, lean inventory levels will be key to driving the semiconductor market’s return to growth in 2010 after a decline of 12.4 percent in 2009.

Worldwide semiconductor revenue is set to rise by 15.4 percent in 2010, iSuppli predicts.

The figure presents iSuppli’s estimate of quarterly DOI among distributors and semiconductor suppliers in 2008 and 2009.Source: iSuppli, Jan. 2010