Semiconductor Inventories Rise But Don’t Cause Alarm Yet

Chip suppliers are reporting rising inventory, however, due to an expected increase in demand during the coming months but the swelling stockpiles do not represent a cause for concern in the industry at present with demand, the swelling stockpiles do not represent a cause for concern in the industry at present. Experienced semiconductor industry analysts from iSuppli Corp. confirm this increase in demand.

Midway through the second-quarter reporting period, total chip inventory among the approximately 35 semiconductor component manufacturers tracked by iSuppli climbed to $9.6 billion, up a strong 9 percent from $8.9 billion in the first quarter. This was way better than the seasonal average of 3.2 percent.

Likewise, average Days of Inventory (DOI) grew, increasing by about four days during the period to 73.2 days, up 6 percent from 69.3 days. This is slower than the historical DOI seasonal increase of 9.6 percent, or 6 days.

All said, the numbers suggest a common theme for the semiconductor industry in the second quarter of record revenues, profits and gross margins. Such indicators, along with positive revenue guidance for the third quarter, are instilling confidence in managers to increase inventories for the second half of the year.

“Across the semiconductor market, management comments in earnings announcements have been extremely positive, citing strong results in various end applications and geographies,” said Sharon Stiefel, Researcher (Semiconductor Inventory & Manufacturing) at iSuppli. “The solid second-quarter results—based on higher-than-usual seasonal revenues, favorable Average Selling Prices (ASP) and innovative new products—are allowing companies to finally relax their vice grip on inventories.”

Given the drastic rise in demand, however, semiconductor suppliers are finding it difficult to restock to pre-recessionary levels. iSuppli’s market research analysis has determined that products being shipped are intended to meet current orders and not for placement into inventory.

Consequentially, the current backlog is driving many semiconductor suppliers to increase capacity, although conservative capital spending appears to be the norm. Instead of being committed to long-term capital investments for new facilities, suppliers often are investing with a lot of caution in equipment to relieve constriction points in production. The exceptions to the rule are the large corporations like Intel Corp. and Samsung Electronics Co. Ltd. who have enough cash to invest, the economic downturn notwithstanding.

Overall, however, the increase in inventory reflects a justifiable build, and iSuppli is not concerned over an inventory bubble. And with the market now less volatile, iSuppli believes that semiconductor companies will gradually return to more normal operating conditions and inventory levels over the next few quarters.

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