Despite a small increase in the first quarter of 2010, chip inventory levels among semiconductor suppliers remain at low levels, and Days of Inventory (DOI) appear to be significantly less than company financial reports indicate, according to iSuppli Corp.
Global semiconductor inventory amounted to $25.73 billion in the first quarter of 2010, up by a scant 1.0 percent from $25.48 billion in the previous quarter and rising by a mere 0.2 percent from the first three months of 2009. Inventory in the second quarter is forecasted to rise 3.3 percent to $26.60 billion—continuing the slow upward movement that began at the start of this year.
“When measured in terms of DOI, chip supplier stockpiles for the 10 semiconductor product categories tracked by iSuppli appear to be within the range of normal seasonal equilibrium,” said Carlo Ciriello, analyst for financial services at iSuppli. “However, iSuppli believes these numbers are misleading and that the supply chain is actually leaner than current levels indicate.”
At 69 days in the first quarter, DOI rose by 3.2 percent from 66.8 days during the fourth quarter of 2009. Such a DOI figure might give an impression—false, as it turns out that restocking is occurring, but the DOI is inflated because of near-record-high gross margins. By using both reported revenue and inventory value in the first quarter, and then adjusting Cost of Goods Sold (COGS) via the long-term average gross margin, DOI actually measures 20 percent lower than the seasonal average, iSuppli analysis indicates.
“While inventories at present are not actually 20 percent lean, the adjusted calculation indicates that current DOI levels, as reported in company financial reports, are misleadingly elevated and that in reality, chip makers and other participants in the chain are shorter on supply than is widely perceived,” Ciriello said.
iSuppli data also show that except for a modest increase in the third quarter of 2009 and the rise of values beginning this year, inventory dollars have consistently declined since the third quarter of 2008. In addition, the current inventory figures indicate that stockpiles were not replenished in the first quarter and that device manufacturers continue to operate on “hand-to-mouth,” just-in-time fulfillment schedules.
Given the current leanness of inventory, lead times have extended throughout the supply chain. Among semiconductor suppliers, capacity is straining to keep up with downstream demand, resulting not only in long lead times but also in shortages for many commodity components. Nonetheless, as iSuppli has consistently maintained, semiconductor suppliers are committed to controlling their side of the supply/demand equation by keeping inventory at agile, lean and manageable levels.
That being said, double ordering appears common, especially among upstream suppliers. Many companies tracked by iSuppli report book-to-bill ratios dangerously in excess of 1:1, suggesting inflated demand. However, despite the difficulty of gauging whether double orders will be put into production—let alone become an inventory problem—the semiconductor industry remains bullish on the revenue outlook for both the current quarter and the
full year. This implies that double ordering will not damage the ongoing recovery now being enjoyed by the market.
The industry must maintain prudent inventory management if it is to avoid a rapid shift toward
oversupply in the event that macroeconomic factors weaken end demand, iSuppli contends.
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