Semiconductor Inventory Menace Fades; iSuppli Cancels “Yellow Alert”
The global electronics supply chain has made significant progress in reducing excess semiconductor inventories and is on track to digest the surplus completely by the end of the second quarter.
Semiconductor suppliers, which are holding the majority of the excess stockpiles, have continued to reduce their days of nventory in the first quarter. iSuppli believes that the supply chain by the end of the first quarter could achieve a 24 percent reduction in total excess chip
stockpiles to $780 million. Due to these developments, iSuppli is canceling its "yellow alert" for excess chip inventories. iSuppli had sounded the alert in the third quarter of 2004 after excess inventory in the supply chain jumped by 103 percent compared to the second quarter. This includes inventories held by semiconductor suppliers as well as by other members of the electronics supply chain, such as OEMs, contract manufacturers and distributors. To help reduce the size of the inventories, semiconductor suppliers in late 2004 began cutting their wafer starts and reassessing their capital spending plans, moves that contributed greatly to the recent slowdown in the chip market.
However, mid-quarter updates indicate that most semiconductor suppliers expect to meet or come close to their previously-stated financial guidance for the first three months of the year. Despite some companies narrowing their expectations, the overall picture is positive. These encouraging developments come in stark contrast to the third quarter of 2004, when most
companies downgraded, sometimes more than once, their guidance for that quarter due to inventory woes. iSuppli expects semiconductor suppliers to have four days worth of chip inventory at the end of the first quarter.
This is down from more than a week's worth at the start of the fourth quarter, and five days at the beginning of the first quarter. Given these trends, iSuppli predicts the surplus inventory will be completely cleared out of the supply chain by early in the second quarter.
Companies are not expecting a snap-back to the point where their customers over-adjust inventory to levels well below target levels. Conversely, inventory at electronics distributors is not expected to build up after the present cycle of adjustment concludes. Looking at specific segments of the semiconductor industry, suppliers of Programmable Logic Devices (PLDs) have been slower to dig out from the inventory overbuild than other chip makers.
While most other chip suppliers began to reduce their surplus in the fourth quarter of 2004, the PLD companies were not as fortunate.
However, the first quarter of 2005 looks more positive than expected as areas that formerly were mired in a slowdown-notably 3G mobile phone base stations and DSL gear-have begun to experience a comeback in demand, followed by inventory replenishment at customers. Analog and power semiconductor suppliers also are experiencing some upside in the first quarter of 2005. These companies weren't expected to begin a turnaround until the second half of 2005.
However, indictors now point to a slightly more speedy recovery in their inventory situation, paving the way for a rebound in their business. While most of the supply chain is conforming to inventory-reduction expectations in the first quarter of 2005, there were some problem areas While distributors in Asia have been able to work off much of the overage in the channel, stockpiles of mobile phones in the regions remain congested.
Furthermore, the seasonal pickup in business following the Chinese New Year
holiday appears to picking up at a slow rate. The upbeat atmosphere in the first quarter is certainly welcome news for the supply chain. However, suppliers remain very cautious because the health of the supply chain can swing rapidly during times of limited visibility. Intel Corp.'s shortages
during the first quarter are a good example. In the second half of 2004, the inventory buildup in the supply chain was partially blamed on the "Intel effect" as the chip supplier experienced builds and wrote down excess inventory. During the company's conference call discussing the first quarter of 2005, the possibility of double-ordering by customers was raised
as a cause of the shortages.
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