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Electronics Production | April 05, 2007

Excess Chip Inventory Falls 40% From 2006 Peak

After experiencing a larger-than-expected drop in surplus inventory at the end of the fourth quarter of 2006, excess semiconductor stockpiles in the global electronics supply chain continued to decline in the first quarter of 2007 due to previous production cuts by chip manufacturers, according to iSuppli Corp.
Excess semiconductor inventories in the global electronics supply chain declined to $2.5 billion in the first quarter of 2007, down 10.7 percent from $2.8 billion in the fourth quarter of 2006, according to a preliminary estimate from iSuppli's Semiconductor Inventory Tracker service. This represents a major decrease from the recent high-point for excess semiconductor inventory in the third quarter of 2006. Surplus inventory in the first quarter was down by an impressive 40.5 percent compared to $4.2 billion in the third quarter of 2006.

The figure below presents iSuppli's preliminary estimate of excess semiconductor inventory in the global electronics supply chain.



“The cause of the decline in excess inventory was a major reduction in production among semiconductor suppliers at the end of the third quarter of 2006," said Rosemary Farrell, inventory analyst at iSuppli. “With lower volumes of semiconductors entering the supply chain, inventories began to decrease in the fourth quarter—despite a softening in demand following the peak holiday buying season."

As has been the case in recent years, semiconductor suppliers are carrying the bulk of the excess chip inventory in the supply chain, Farrell added. Semiconductor Days of Inventory (DOI) among chip suppliers remained steady in the first quarter compared to the fourth. The semiconductor suppliers as a group ended the first quarter holding more than one week's worth of excess supply. Elevated inventory also lingered at Electronic Manufacturing Service (EMS) providers and at some Original Equipment Manufacturers (OEMs). In order to rebalance elevated stockpiles in the supply chain, distributors and OEMs delayed shipments in the first quarter, causing their inventories to decline.

Surprising strength in Q1
At end of 2006, semiconductor suppliers were concerned that orders would be weaker than normal in the first quarter of 2007. Early in the first quarter, this indeed appeared to be the case. However, a pickup in demand materialized later in the first quarter. Based on mid-quarter financial updates from semiconductor suppliers, iSuppli believes chip orders bottomed out in January and then began to recover in February. Some semiconductor suppliers noted strength in orders from OEMs as well as from distributors. Although only a modest rise, this upward trend in purchasing on top of the reductions at the end of 2006 helped reduce inventory levels in the first quarter to a larger degree than expected. The reduction handily exceeded iSuppli's previous forecast of a decline to $3.2 billion in surplus semiconductor stockpiles in the first quarter of 2007. While the decrease in excess inventory is positive for chipmakers and their customers, a larger quantity of semiconductors is expected to enter the electronics supply chain in the second quarter as suppliers ramp up production.

Return to growth
Most semiconductor suppliers expect demand to begin rising in the second and third quarters of 2007 and now are preparing for the expected surge in sales. Semiconductor fabs began coming back online in the second half of the first quarter.

The current reduction of inventory levels at distributors is certainly positive for chip suppliers. However, semiconductor suppliers still have very little visibility into demand levels for customers of their distribution partners. Semiconductor suppliers must be careful during the next few quarters to avoid stuffing the channel with superfluous parts again.
Overall lead times for semiconductors remained generally stable in the first quarter, allowing customers to be more conservative in their ordering.

At the moment, there are some signs of a strengthening of semiconductor sales. While most expect that consumer confidence will remain strong, and support a rise in chip sales, recent negative news on the economic front—including rising fuel prices and stock-market slides—should remind all supply chain participants how quickly changes can occur in the macroeconomic picture. Despite the declines in excess supply, plenty of product remains in the supply chain. Strong end-market demand now, and for the new products expected to arrive in the second half of the year, is essential to keeping excess stockpiles from building up again.

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