Semiconductor inventory situation worse than thought: Gartner

An increase in inventory days has been seen in most of the supply chain, but it is particularly severe for semiconductor vendors, communications OEMs, and electronics retailers, according to the market research company.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 5/5/2008

The electronics supply chain's semiconductor-inventory situation is worse off than earlier warnings indicated, Gartner Inc reported this morning.

The market research company in March forecasted that excess inventory in the electronics supply chain from a poor Q4 2007 could continue to impact the semiconductor industry through Q2. Gartner made that statement based on the performance of its Dataquest Semiconductor Inventory Index (DASI), which spiked significantly in Q4, to 1.16 from 1.04 in Q3 2007 on lackluster semiconductor "holiday sales" and lowered expectations for sales in Q1.

The DASI assesses normal inventory levels throughout the electronics supply chain and compares them with current levels to evaluate industry trends, Gartner explained. The index gauges the normal inventory level at each stage of production that will allow for a smooth flow of products and management of the production process without inventory shortages or surpluses, the company said.

"We now project that the fourth quarter of 2007 results will actually tilt the DASI higher for this period and will in fact indicate a severe excess inventory event (meaning 1.20 or higher), coming in between 1.22 and 1.25," Gartner analyst Gerald Van Hoy wrote in today's Semiconductor DQ Monday Report.

Van Hoy said the reason for the revision is that the DASI is predictive and uses consensus data for the next quarter's revenue outlook. Because Gartner is monitoring days of inventory, which is calculated from the cost of goods sold (COGS), actual numbers can affect the final result for a previous quarter. Furthermore, Gartner uses companies' profit margin ratios to determine their COGS; then the ratios are used to determine inventory days, Van Hoy wrote.

"The severity of the fourth quarter of 2007 spike is because we now have actual COGS numbers to enter into our model, and we see that the estimates for the first quarter of 2008 were not severe enough," Van Hoy stated. "Declining sales expectations and the associated decline in COGS resulted in the spike we are now observing."

Gartner in March advised semiconductor companies to level or drop inventories. The market-research company today credited Intel for posting positive numbers with regard to inventory days. Intel dropped its inventory days from one of its highest points of 89.4 in Q4 2006 to 67.9 in Q4 2007, according to Gartner. Gartner noted similar declines in inventory days at Xilinx, Pixelworks, Mindspeed Technologies, Qimonda, Benchmark Electronics, and Celestica.

Inventory days at other companies—Cypress Semiconductor, Spansion, Texas Instruments, and Monolithic Power Systems—have been steadily on the rise, Gartner said.*

"The increase in inventory days has been seen in most of the supply chain, but it is particularly severe for semiconductor vendors, communications OEMs, and electronics retailers," Van Hoy said.

"The failure to put the brakes on inventory appears to be a supply-side issue with certain semiconductor-device suppliers; this is particularly true for memory, wireless communications, consumer, and diversified suppliers that compete in several device markets," he continued.

Gartner said that the reasons for the spike in the DASI (see above chart) have not changed since its March statements. "They are the direct result of a delayed reaction to market conditions; a weaker-than-expected fourth quarter; a traditionally weak first quarter; and worries from the financial community regarding macroeconomic conditions and warnings. But now the numbers are coming in, and those worries are not only valid, they are worse than expected," Gartner's report stated.

"This surplus in inventory may now take another two quarters before returning to normal ranges," Van Hoy wrote. "The semiconductor supply chain is in a delicate position and vulnerable to a future macroeconomic event. Moving deeper into 2008, companies will need to drop their inventories. This might be achieved by more aggressive measures to reduce obsolete inventory or by making pricing adjustments."

Gartner said it expects the DASI to remain in the "severe excess inventory" state in Q1 and possibly Q2. "We see the first quarter of 2008 as the crest, with the DASI beginning to trend down in the second quarter of 2008," Van Hoy said.

*Editor's note: This article originally stated that Infineon was among those companies posting negative results in inventory days based on Gartner's data, which on May 5, reported that Infineon nearly doubled its inventory days from 66.3 in Q3 2007 to 121.4 in the following quarter. On May 12, Gartner updated its information on Infineon, reporting that the company’s inventory days were 74.9 in Q3 2007 and its inventory days decreased to 74.3 in Q4 2007.