Semiconductor inventories at alarming levels

Semiconductor suppliers had 83.6 days of inventory (DOI) at the end of the fourth quarter of 2010, up 5.5 days, or 7%, from 78.1 days in the previous quarter. Inventory was at its highest level since the second quarter of 2008—right before the onset of the last semiconductor downturn—when DOI reached 84 days. “Inventory levels arguably now are high by any standard, illustrating the difficulty of controlling chip stockpiles even with semiconductor suppliers’ arduous efforts to keep them in check,” said Sharon Stiefel, analyst, semiconductor market intelligence, at IHS. “The sharp increase of semiconductor inventory during the fourth quarter defied expectations of a decline for the period. This inflated level of inventory could become a concern if semiconductor industry growth falls short of expectations in 2011.” The rise in inventory came as a surprise, given that IHS iSuppli forecasts had predicted stockpiles would decrease by 2.5 DOI in the fourth quarter. The actual fourth-quarter results indicate an eight DOI swing compared to expectations. The current IHS iSuppli semiconductor forecast calls for revenue growth of 5.6% in 2011, following a 31.8% increase in 2010. Assuming our forecast holds, the current inventory level should be manageable. However, if growth is lower, the high inventories could cause oversupply in the market, causing chip prices to decline faster than normal. This could amplify the size and duration of a downturn or slowdown in the semiconductor market. Hot segments like smart phones and media tablets continue to generate strong growth for semiconductors. Furthermore, other segments like the automotive and industrial markets, which tend to get less visibility also are generating encouraging chip sales.