Excess Chip Inventory Taints Market Outlook

By Colleen Taylor -- Electronic News, 11/1/2006

After two quarters of ballooning semiconductor inventories in the electronics supply chain, early results for Q3 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," Rosemary Farrell, semiconductor inventory analyst for market research firm iSuppli, said in a statement. "However, based on reported financial results, Q3 will end up looking much like the Q2. 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 Q3 remained flat at the Q2 level of $3.9 billion.

New product transitions and holiday stockpile builds also expanded semiconductor inventory levels at chip making rivals Intel and AMD in the first half of the year, iSuppli noted, saying that the overages 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 Q2, with DOI just 5 percent lower than at the end of June. According to iSuppli, this decrease, along with inventory builds at AMD, will contribute to 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, iSuppli noted. The company also does not expect significant changes in the size of its inventory in Q4 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.

Meanwhile, AMD, which built inventories in expectation of Q4 demand, also expects to increase stockpiles in 2007. Continued strong acceptance for new products and the release of Microsoft's Vista operating system will help draw down inventories at both companies after the start of the new year, iSuppli predicted.