Soaring semiconductor inventory mitigates impact of Japan disaster in Q1

EL SEGUNDO, USA: Normally a cause for concern, excess inventory actually served as a boon for the global semiconductor industry in the first quarter, alleviating the severity of component shortages spurred by the Japan disaster, new IHS iSuppli research indicates.

Days of inventory (DOI) among chip suppliers—excluding memory companies—stood at an estimated 80.3 days at the end of the first quarter in 2011, up 1.1 percent from 79.4 days in the fourth quarter of 2010 and an increase of 9.1 days from the same period in 2010, as presented in the figure. This represented a two year high, with inventories reaching a level not seen since the first quarter of 2009, when DOI amounted to 82.4.Source: IHS iSuppli, USA.

“Efforts by suppliers to build inventory during the seasonally slow period from the fourth quarter of 2010 through the first quarter of 2011 proved to be fortuitous,” said Sharon Stiefel, analyst for semiconductor market intelligence at IHS.

“These efforts resulted in a two- to-four-week cushion of raw materials, work-in-process goods and finished products, which came in handy when chip supplies were disrupted by the Japan disaster. While a large inventory overhang can be a negative development for the semiconductor industry—fueling excess supply, dampening pricing and reducing profits—it turned out to be a positive factor during the first quarter as the industry contended with supply shortages.”

And because the Japan disaster occurred so late in the first quarter, with the quake hitting on March 11, the number of weeks of direct disruption to the supply chain was limited during the first quarter, Stiefel added.

DOI in the semiconductor channel has been climbing steadily since the third quarter of 2009, moving in tandem with a rise in inventory value dating back to the first quarter of 2010. Inventory value in the first quarter this year stood at an estimated $27.2 billion.

Q2 benefits
The second quarter also experienced a more muted effect from the Japan disaster than previously thought. Many semiconductor manufacturing facilities initially damaged or affected by lack of steady electricity supply have returned to normal operations, narrowing the negative impact on semiconductor revenue during the second quarter. And in cases where damage was severe, manufacturing has been transferred to other company facilities or to outside foundries.

At Renesas Electronics, for instance, production from the company’s damaged facility in Naka was redistributed to other sites soon after the quake. Just the same, the company already is targeting a return to pre-disaster production levels by the end of July.

Inventory levels at semiconductor suppliers are expected to continue to rise in the second quarter, IHS believes. The expansion will be intentional as companies prepare for increased demand in the second and third quarters, and the buildup in semiconductor stockpiles will not necessarily be driven by fears of component shortages.

Supply problems ahead?
Despite the inventory increase in the near term, the supply outlook becomes a bit less clear further in the future.

“Once internal inventories dwindle, the pipeline may not be replenished quickly enough to meet all of the end demand, creating risks for participants in the supply chain,” Stiefel warned.

Inventory policies are being revisited as a result of the Japan disaster, as companies adhering to just-in-time (JIT) inventory strategies re-evaluate the potential loss of orders. Such order losses could be due to the inability to ship products because of a missing component or raw material, versus the cost savings realized by a JIT practice. Companies may find that customers are second-sourcing components due to the disaster—and potentially may lose a socket to a competitor in the ensuing fallout.

Time will tell if recent global events such as the Japan crisis spur a permanent practice—as opposed to a merely temporary trend—in which additional inventory is held, serving as an insurance policy against unforeseen events that upend the markets.

Source: IHS iSuppli, USA.