Ad
Ad
Ad
Ad
Electronics Production | November 01, 2006

Excess Chip Inventory Lingers in Q3

After two quarters of ballooning semiconductor inventories in the electronics supply chain, early results for the third quarter indicate that excess chip stockpiles are not going away.
"After excess inventories rose to $3.9 billion in the first half of the year, the overloaded situation in the supply chain was expected to ease slightly moving into the second half," said Rosemary Farrell,
semiconductor inventory analyst for iSuppli. "However, based on reported financial results, the third quarter will end up looking much like the second quarter. This means that the stress on the supply chain caused by excess inventory will remain after the holidays."

iSuppli's updated estimate shows excess semiconductor inventory in the global electronics supply chain in the third quarter remained flat at the second-quarter level of $3.9 billion, as presented in the figure below and attached.

For semiconductor suppliers, the second half of the year already began with an overload of microprocessors that quickly spread across the supply chain. Typically, Days of Inventory (DOI) at semiconductor suppliers recede slightly moving from the second to the third quarter. However, this is not the case in 2006.

New product transitions and holiday stockpile builds expanded semiconductor inventory levels at Intel Corp. and Advanced Micro Devices Inc. (AMD) in the first half of the year. These overages have spread to other segments of the PC semiconductor supply chain in the second half.

Intel's chip inventory at the end of September remained mostly flat compared to the second quarter, with DOI just 5 percent lower than at the end of June. This minor decrease, and inventory builds at AMD, will contribute to uninspiring inventory decreases throughout the semiconductor supplier segment of the chain, which remains bloated with or without Intel's overages.

Despite a pick-up in PC demand, strong acceptance of its new products and price cuts for older lines, Intel failed to make any headway on reducing its DOI. The company also does not expect significant changes in the size of its inventory in the fourth quarter due to its continued transition to new microprocessor products. This transition is making it necessary for Intel to carry higher-than-normal inventories into 2007.

AMD, which built inventories in expectation of fourth-quarter demand, also expects to increase stockpiles in 2007.

Continued strong acceptance for new products, along with the release of Microsoft Corp.'s Vista operating system will help draw down inventories at both companies after the start of the new year, iSuppli predicts.

Along with the excess inventories, the widespread concern regarding demand that plagued the electronics supply chain in the first half of the year also has not disappeared. Electronics supply-chain participants are wary regarding the demand outlook-even in areas where sales are
improving.

After PC demand stalled in the second quarter, inventory spikes occurred in the supply chain. iSuppli's channel checks indicate that hard disk drive inventories reached a six-week high in September due to some overproduction in the segment. However, stockpiles began to decline
after they peaked.

Supply-chain anxiety is sometimes a candle burning at both ends; rising inventories and concern over PC end- market demand in the fourth quarter has been accompanied by worries over new shortages of microprocessors. Although these shortages of low-end desktop microprocessors are not as problematic as those seen in 2005, the channel also has lean supplies of higher-end notebook microprocessors as well, resulting from product-mix issues.

Mobile-phone inventory also experienced some swings during the quarter, particularly for lower-cost handsets. Although suppliers to smaller handset OEMs still may encounter some inventory overages, they are not expected to impact shipments during the seasonally strong fourth quarter.

Network chip suppliers remain cautious, with some expectations of increased inventory for the fourth quarter.

Since visibility remains clouded, chip buyers continue to be apprehensive about end-demand in the fourth quarter. Customers and the distribution channel are being careful with their forecasts and
ordering, making semiconductor suppliers especially anxious about the strength of consumer demand in the fourth quarter. If consumers steer clear of stores in the fourth quarter, it would mean inventory will roll over into 2007.

"Lower energy prices and holiday cheer this December will be the only remedy to the electronics supply chain's chip congestion," Farrell said.

iSuppli defines excess inventory as the point where Days of Inventory (DOI) exceed historical averages during a quarter. The Semiconductor Inventory Tracker Service employs quarter-ending inventory levels for approximately 100 companies at every node of the electronics supply chain, i.e. foundries, Integrated Device Manufacturers, distributors, OEMs, contract manufacturers and system distributors.

iSuppli then compares this data against target levels for each point in the chain by analyzing historical seasonal patterns and surveys of the companies to determine the desired level for inventory. We now do this at the total semiconductor level.

All DOI calculations are based on cost of goods sold, except for semiconductor suppliers, which are calculated on a cost-of-sales basis. For each segment, and for the entire supply chain, iSuppli then
calculates what those extra days of parts lingering in inventory are valued at during the quarter based on the target levels.

Farrell's upcoming report, Inventory Tracker-Q4 2006, from iSuppli's Inventory Tracker service, will present detailed research on the state of semiconductor stockpiles in the electronics supply chain.

Comments

Please note the following: Critical comments are allowed and even encouraged. Discussions are welcome. Verbal abuse, insults and racist / homophobic remarks are not. Such comments will be removed.
Further details can be found here.
Ad
Ad
Load more news
April 23 2018 3:48 pm V9.3.2-1