Inventory bubble not a concern, iSuppli says

As demand is expected to continue to increase in the near term, the market research company is not alarmed by rising electronics supply chain inventory reported by chip suppliers.

By Suzanne Deffree, Managing editor, news -- EDN, August 24, 2010

Inventory may be high, but so is demand, according to a recent report from iSuppli Corp.

As demand is expected to continue to increase in the near term, the market research company is not concerned about rising electronics supply chain inventory reported by chip suppliers.

ISuppli said that midway through Q2 total chip inventory among the approximately 35 semiconductor component manufacturers that it tracks climbed to $9.6 billion, up a 9% from $8.9 billion in Q1 and above the seasonal average of 3.2% growth.

ISuppli further reported that average DOI (days of inventory) grew, increasing by about four days during the quarter to 73.2 days, up 6% from 69.3 days. Historically, DOI increases seasonally increase at 9.6% or 6 days.

"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, semiconductor manufacturing researcher for iSuppli, in a statement. "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."

However, iSuppli noted that semiconductor suppliers are finding it difficult to restock to pre-recessionary levels. Products being shipped are intended to meet current orders, iSuppli has determined, and not meant for placement into inventory. Suppliers are reacting by increasing capacity, mostly through conservative capital spending and cautious investment in equipment.

Given the overall situation, iSuppli said it is not concerned about an inventory bubble. With the market now less volatile, the researcher believes semiconductor companies will be returning to more normal operating conditions and inventory levels over the next few quarters.