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High Chip Inventory Levels Could Mean Lower Prices

At the end of the fourth quarter of 2010, suppliers' semiconductor inventory levels reached their highest levels since the second quarter of 2008, according to researcher IHS iSuppli. If high levels continue and chip demand weakens, semiconductor buyers can expect chip prices to decline.

Semiconductor suppliers had 83.6 days of inventory (DOI) at the end of the fourth quarter of 2010. That's up 5.5 days, or seven percent, from 78.1 days in the third quarter of 2010. Inventory levels were the highest since the second quarter 2008 when DOI was 84 days, according to IHS iSuppli.

Inventory levels are now high "by any standard, illustrating the difficulty of controlling chip stockpiles even with semiconductor suppliers' arduous efforts to keep them in check," said Sharon Stiefel, analyst, semiconductor market intelligence, at IHS iSuppli, based in El Segundo, Calif.

Stiefel said the increase of semiconductor inventory levels could become a concern for the chip industry if semiconductor demand falls "short of expectations" in 2011.

According to IHS iSuppli, semiconductor revenue should rise 5.6 percent in 2011. In 2010, chip revenue increased 31.8 percent. If the 2011 forecast holds, "the current inventory level should be manageable," said Stiefel. If demand is lower, the high inventory levels will result in prices declining faster than normal, she said.

The good news for chip suppliers is that Smart phones and media tablets are generating strong growth for semiconductors, as are less visible segments such as automotive and industrial markets.

Chart caption: Suppliers' semiconductor inventory levels increased to 83.6 in the last quarter of 2010.