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Increased Capacity Causes Semiconductor Inventories to Rise

Days of semiconductor inventory in the supply chain are elevated and could mean lower prices for some chips in the first half of 2012, according to researcher Gartner Inc.

Gartner’s index of inventory in the semiconductor supply-chain was 1.16 in the third quarter, up from 1.12 in the beginning of September.

When the index is above 1.10 it indicates that inventories are inflated and there will likely be downward pressure on prices. When the index is below 0.95 it indicates that inventories are low, components may be on allocation, and double ordering begins.

Inventory levels are high because suppliers added capacity and there has been a slowdown in demand.

"We expect that average selling prices for foundry-produced components will be under pressure through the first half of 2012 because of aggressive investment in capacity made as the industry came out of the last recession," said Peter Middleton, principal research analyst at Gartner. "That investment is leading to excess capacity at the same time as concern is rising about end-market demand levels due to weak economic prospects."

However, while the proportion of total semiconductor inventory held by OEMs has begun to rise, it is still near historic lows, which will “help reduce the impact of an order correction on semiconductor vendor sales,” said Gerald van Hoy, senior research analyst at Gartner.