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Semiconductor Stockpiles Declined in Third Quarter

Buyers can expect semiconductor suppliers to continue reducing inventory levels in the first quarter.
Semiconductor inventories at suppliers declined in the third quarter of 2011, but still remain at the highest level since the fourth quarter of 2008, according to researcher IHS.

The researcher reported that days of inventory (DOI) at chip suppliers was 81 days in the third quarter of 2011, down from 83 days in the second quarter.

The DOI level had been increasing since the third quarter of 2009 when DOI stood at 65 days. Since then, inventory levels at chipmakers have increased as suppliers replenished depleted stocks to meet rising demand. However, while demand was strong in 2010, it weakened in 2011 and stockpiles grew.

Weaker demand and high inventory levels resulted in price declines for some semiconductor suppliers. As a result, semiconductor revenue grew just 1.9 percent in 2011, according to IHS.

Semiconductor inventory levels are an important gauge of industry health. Too little inventory suggests that suppliers expect demand decline, while too much inventory results in declining prices and less revenue for suppliers.

In the third quarter, semiconductor suppliers began “an inventory correction to alleviate an escalating oversupply situation on top of already inflated stockpiles,” noted Sharon Stiefel, semiconductor analyst at IHS. She said with weak economic growth and declining orders, chipmakers have decided to cut capacity utilization.

“With leadtimes now declining to normal levels after extended periods of waiting in the past, manufacturers were more confident about trimming bloated inventories without fear of causing too much pain to the supply chain,” said Stiefel.

She added that despite inventory reductions at suppliers, DOI remains high. In fact, it is the highest it has been in the last 10 quarters dating back to the fourth quarter of 2008. Because chip stockpiles remain high, IHS believes inventory reduction will continue.