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Expect Chipmakers to Cut Semiconductor Stockpiles

Electronics buyers can expect semiconductor companies to begin reducing their chip inventory levels by cutting back on production growth over the next several quarters.

Semiconductor supplier inventory levels have been increasing since the second quarter of last year, and now have apparently plateaued at a level that is too high, considering current chip demand and economic conditions, according to researcher Gartner Inc.

Semiconductor days of inventory have been rising since the second quarter of last year, but now have plateaued.
Semiconductor days of inventory (DOI) have increased from an average of 60.1 days in the second quarter of 2010 to 74.9 days in the third quarter of this year, Gartner reported.

The semiconductor industry entered the third quarter with moderately high levels of inventory, according to Gerald Van Hoy, senior research analyst at Gartner. "Current levels are too high given the weakening economic sentiment, and the industry must rein in production growth and take action to reduce accumulated inventory,” he said.

Van Hoy added that inventory reduction will occur during the next few quarters, with production and sales expected to return roughly to balance by the second quarter of 2012.

Peter Middleton, principal analyst at Gartner, said the current excess inventory has largely been as a result of overproduction by chipmakers. He noted that this started to become evident early in the year, “but then when the earthquake disaster occurred in Japan, excess inventory proved useful as a buffer as the supply chain recovered.” However, Middleton added that immediate action should be taken “to rationalize stock levels in the face of macroeconomic weakness."

Middleton attributed semiconductor overproduction this year to a general over-optimism about the pace of economic recovery and growth. “However, now economic sentiment has weakened further, and there is a significant risk of another recession. Weaker demand generates risk that the inventory picture will deteriorate,” said Middleton.

Gartner forecast that the industry will undergo a moderate inventory correction during the next few quarters, which will lower demand for semiconductor production in the second half of 2011 and early 2012.

While chipmakers are cutting back inventory levels, the proportion of total semiconductor inventory held by OEMs has begun to rise, but it is still near historic lows, according to Gartner.

Gartner's conclusions are supported by the researcher’s Index of Inventory Semiconductor Supply-chain Tracking (GIISST), which remains at caution levels with days of inventory (DOI) at 1.12 in the third quarter. A DOI index level of 1.12 indicates inventories are inflated, and there will likely be downward pressure on prices. Below the 0.95 level indicates inventories are low, components may be on allocation, and double ordering begins.