Semiconductor inventory correction dampening sales in H2-2011

STAMFORD, USA: As many semiconductor vendors announced relatively weak sales for the third quarter of 2011, and pre-announced poor guidance for the fourth quarter, the anticipated inventory correction is well under way, according to Gartner Inc. Gartner analysts expect that this process will continue to dampen sales prospects for at least the remainder of the year before sequential growth can return in 2012.

The days of inventory (DOI) level in the semiconductor supply chain was elevated going into the third quarter of 2011, but corrective action will help bring it under back control at the cost of reduced sales for semiconductor vendors, according to Gartner. DOI is an efficiency ratio that measures the average number of days the company holds its inventory before selling it.

"We expect that average selling prices (ASPs) for foundry-produced components will be under pressure through the first half of 2012 because of aggressive investment in capacity made as the industry came out of the last recession," said Peter Middleton, principal research analyst at Gartner. "That investment is leading to excess capacity at the same time as concern is rising about end-market demand levels due to weak economic prospects."

Gartner’s Index of Inventory Semiconductor Supply-chain Tracking (GIISST) moved further into the caution zone as levels hit 1.16 in 3Q11, up from 1.12 in Gartner's initial 3Q11 update in September.

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 that 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.

"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," said Gerald van Hoy, senior research analyst at Gartner.