News and New Products

Electronics Inventory Levels Up Slightly

By Ed Sperling -- Electronic News, 10/9/2006

Inventory is up slightly in the electronics industry, but this time it has been stockpiled at foundries, contract manufacturers and OEM sites.

The bloated supplies are surprising to those portions of the industry that regularly keep track of inventory levels. The two largest distributors—Arrow and Avnet—haven’t seen the increases directly and most of their information is secondhand from their broad global customer base. Historically, excess inventory showed up at the distributor level first, but changes in their infrastructure and business models since the 2001 downturn have forced the problem down to the manufacturing level, where it has been hidden from the normal reporting channels.

The inventory oversupply is small in comparison to what happened in 2000, when contract manufacturers were double-ordering to ensure they would have enough components to service the hyperactive dot-com market. This time, at least some of the excess inventory already has been used up. But as with any oversupply, repercussions can persist for a couple of quarters in the best of times—and far longer in a down market.

“It started with the PC,” said Chia Song Hwee, president and CEO of Chartered Semiconductor in Singapore. “Then it spread to the communications market.”

Chia said the primary portions of communications affected were devices such as routers and the second-tier handset manufacturers, mainly in China where the OEMs believed the domestic market would continue to grow faster than it did. “I think the extent of the correction will be something like what we saw in late 2004 and 2005,” he said. “From a foundry perspective, that was two quarters. This one will be shorter, and not as deep … but typically what happens is that customers have a slow quarter and an inventory issue like in Q3. They cut back on wafer starts at the foundry, so our revenue declines. As their business recovers, they burn through inventory.”

He said that could push new wafer starts off until first quarter of 2007, depressing earnings for the remainder of 2006. And because the first quarter is usually a slow one in the electronics industry, due to cautious spending patterns, it could be second quarter before the entire market picks up again.

Weighed against the global electronics market, however, these are blips that tend to get lost in the overall data, or they are not included in the data because of market fragmentation. Distributors have always served as an early warning system for inventory problems, but their information—although highly detailed and extensive—is limited to those markets where they have a strong presence. In Asia, particularly China, the top three distributors in Asia, including Avnet, Arrow and Taiwan-based WPI, only own about 30 percent of the market. In North America and the top two distributors collectively own more than 80 percent of the market, and in Europe they own about 70 percent.

“What we have seen in the larger markets is good underlying strength everywhere,” said Bill Mitchell, president and CEO of Arrow Electronics. “We don’t see anything that’s really too hot, and we don’t see anything that’s down. Everything is within normal operating limits. … The U.S. electronics market is alive and vibrant. The European market is pretty good. The Asian market continues to be strong. There is no reason to believe any of those things are going to change.”

Mitchell noted the distribution channel has been running well for several years, and that Arrow regularly polls its customers to determine inventory levels. “Clearly the EMS [electronic manufacturing services] companies have built up some inventory and there was a small bubble there,” he said. “The stuff at the foundries is hard for us to have a view towards. We get a little out of our suppliers, but we have very little visibility into what kind of signals are going into the foundries from the suppliers. But we sure don’t see anything that says there are shortages or problems. It’s a rational market right now.”

Harley Feldberg, president of the global Avnet Electronics Marketing group, likewise sees little wrong with the overall electronics inventory picture. “Some customers are insulating themselves with additional inventory, but my assessment is that it looks minimal. There was a slowdown in the Americas, but that’s a normal seasonal summer. Asia is unclear at this point. We are seeing a predictable ramp up toward Christmas, but it is not euphoric like in the past. We’ve seen a lot of years of monstrous growth at this time. That’s not happening this year, but it’s still okay growth.”

Both Mitchell and Feldberg said that new markets opening up in India and continued expansion in China also could offset any negative effects of inventory for electronics as a whole. Avnet looks at India as potentially 1 billion customers, with hundreds of millions more potential customers in China.
 
Still, the bigger the global market, the more uncertainties that can creep into the system and be overlooked because of its sheer size and breadth.