Current semiconductor inventory at "worrisome levels"

STAMFORD, USA: Semiconductor days of inventory (DOI) are forecast to plateau in the third quarter of 2011 at worrisome levels given current conditions and the likelihood that consumer and business spending will be weaker than expected, according to Gartner, Inc. Gartner expects the semiconductor industry to begin an inventory correction in late 2011.

"The semiconductor industry entered the third quarter of 2011 with moderately high levels of inventory," said Gerald Van Hoy, senior research analyst at Gartner. "Current levels are too high given the weakening economic sentiment, and the industry must rein in production growth and take action to reduce accumulated inventory. We expect that these actions will occur during the next few quarters with production and sell-through expected to return roughly to balance by the second quarter of 2012."

"The inventory correction comes at a time when average selling prices (ASPs) are tracking below trend levels, with overcapacity in the foundry space expected to prolong this weakness," said Peter Middleton, principal analyst at Gartner. "Excess inventory levels helped buffer the impact of the Japanese earthquake; however, now action should be taken to rationalize stock levels in the face of macroeconomic weakness."

Gartner analysts said the industry will undergo a moderate inventory correction during the next few quarters, which will lower demand for semiconductor production in the second half of 2011 and early 2012. The proportion of total semiconductor inventory held by OEMs has begun to rise; however, it is still near historic lows, which will help reduce the impact of an order correction on semiconductor vendor sales.

Gartner's conclusions are supported by its Gartner Index of Inventory Semiconductor Supply-chain Tracking (GIISST), which remains at caution levels with days of inventory (DOI) at 1.12 in the third quarter of 2011.

Within the GIISST, an above DOI level of 1.10 indicates inventories are inflated, and there will likely be downward pressure on ASPs. Below the 0.95 level indicates inventories are low, components may be on allocation and double ordering begins.

The GIISST is a single number that measures the health of the semiconductor industry. It assesses "normal" inventory levels throughout the supply chain and compares 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.