Excess Chip Inventory Keeps Growing

Total excess chip inventory swelled to $4.3 billion in the fourth quarter, up 4.9 percent from $4.1 billion at the end of the third quarter, according to a preliminary estimate from iSuppli. "The 4.9 percent increase in excess semiconductor stockpiles conforms to iSuppli's forecast, and does not mark a significant worsening of the surplus inventory situation," said Rosemary Farrell, analyst with iSuppli. "While rising levels of excess inventory are a concern for the global semiconductor industry in 2007, they are not sufficient to derail market growth." Although $4.3 billion appears to be a worrying total, the impact of the overage on the semiconductor industry will not be that great in 2007. If the excess inventory were taken out of the equation, the semiconductor market would experience only a 1 to 2 percentage point increase in growth in 2007 compared to iSuppli's present forecast of a 10.6 percent expansion in global chip sales for the year. However, indications of rising inventory come amid signs of the start of a seasonal slowdown for the semiconductor market and the larger electronics industry. Chip suppliers in the fourth quarter experienced slowing orders for semiconductors for 3G wireless handsets and for high-end computers, adding to weakness already seen in some segments of the networking and wired communications segment. Furthermore, overproduction of LCD televisions added to excess stockpiles of related chips during the quarter. In light of these trends, some semiconductor suppliers have trimmed their guidance for their fourth-quarter results. Semiconductor suppliers in the fourth quarter typically reduce their Days of Inventory (DOI) by a larger margin than they do in the third quarter. After entering the third quarter of 2006 with elevated DOI, semiconductor suppliers reduced their DOI by less than a day in the third quarter. This slight decrease of inventory fell short of the five-year average of nearly two days of reduction in DOI among semiconductor suppliers in the third quarter. While most of the excess stockpiles are concentrated at the semiconductor suppliers, there are signs of worsening inventory levels at Electronics Manufacturing Services (EMS) providers. EMS inventory remains bloated and some will be pushed back to semiconductor suppliers. DOI at component distributors is stable. Despite this, iSuppli believes that the current inventory situation is not a cause for major concern. Although some semiconductor suppliers reduced their guidance, the negatives are offset by positive results at other companies. The fact that DOI at semiconductor suppliers are on track to decline at a lower-than-normal rate is not unexpected. This is due to the slowing of demand from some end markets, as well as inventory adjustments among chip customers.