Inventory excesses eased in Q1

By Colleen Taylor, Contributing Editor -- Electronic News, 4/4/2007

Both chipmakers and their customers can look forward to feeling relief after months of excess inventory issues. Semiconductor stockpiles in the global electronics supply chain continued to decline in Q1 thanks to production cuts by chip manufacturers, according to the latest report from market research firm iSuppli Corp.

Excess semiconductor inventories in the global electronics supply chain declined to $2.5 billion in Q1, down 10.7 percent from $2.8 billion in the Q4 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 Q3 2006. Surplus inventory in Q1 was down by 40.5 percent compared to $4.2 billion in Q3 2006, iSuppli said.

According to the firm, semiconductor suppliers are carrying the bulk of the excess chip inventory in the supply chain. Semiconductor days of inventory (DOI) among chip suppliers remained steady in Q1 compared to Q4. The semiconductor suppliers as a group ended Q1 holding more than one week's worth of excess supply, iSuppli said.

Elevated inventory also lingered at electronic manufacturing service (EMS) providers and at some OEMs. In order to rebalance elevated stockpiles in the supply chain, distributors and OEMs delayed shipments in Q1, causing their inventories to decline.

The remaining inventory excesses should not prove to be a major problem for long, however, as demand is swiftly picking up for suppliers. On mid-quarter financial updates from semiconductor suppliers, iSuppli said it 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.

The upward trend in purchasing on top of the reductions at the end of 2006 helped reduce inventory levels in Q1 to a larger degree than expected; iSuppli's previous forecast of a decline to $3.2 billion in surplus semiconductor stockpiles in Q1 was decidedly surpassed by the industry's actual performance.

Most semiconductor suppliers expect demand to begin rising in Q2 and Q3 and now are preparing for the expected surge in sales. Semiconductor fabs began coming back online in the second half of Q1, iSuppli said.

Amidst all the good news, iSuppli warned that the industry needs to continue its vigilance to prevent another inventory flood. "Semiconductor suppliers must be careful during the next few quarters to avoid stuffing the channel with superfluous parts again," the firm warned in its report. "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."