Early this month, iSuppli had indicated that semiconductor inventory levels may have headed into oversupply territory in Q3.
It said: "Semiconductor Days Of Inventory (DOI) for chip suppliers are estimated to have climbed to 75.9 days in the third quarter of 2010, up 1.5 days from the second-quarter. DOI in the third quarter also was 4.8 percent higher than the seasonally adjusted average for the period."
iSuppli added that the value of inventory was not been this high since the second quarter of 2008, when semiconductor suppliers’ stockpiles peaked at $35.4 billion.
Thanks to Jon Cassell and Debra Jaramilla at iSuppli, I was able to speak with Sharon Stiefel, analyst for semiconductor inventory and manufacturing for iSuppli on this situation.
Is there really an oversupply?
I asked Sharon Stiefel that given the growth that 2010 has seen so far, why are semiconductor inventory levels heading into oversupply territory in Q3?
She said that semiconductor inventories, overall, have risen both in terms of DOI and dollars for the past several quarters, and not yet achieved pre-recession levels last seen in 2008. "The overly lean conditions of 2009 and early 2010 are giving way to inventory levels, which are more appropriate for the strong growth experienced in 2010.
"Oversupply in Q3 2010 is not a foregone conclusion, but is possible that if the companies are not able to match manufacturing run rates with demand as the year winds to a close," she added.
Which sectors have been witnessing or recording some softness in demand and why?
Stiefel said: "Companies reporting Q3 revenues over the past two weeks have reported a softening in demand, particularly in PC and consumer end markets, attributed to the continued uncertainty in the global economy, leaving consumers unwilling to spend. A company with more exposure to these sectors has more potential of excessive inventories, versus a company with a more balanced product portfolio."
Industry needs to moderate inventories
It is also said in iSuppli's release that: 'The industry will need to moderate inventories at the appropriate time in its growth curve in order to capture current revenue opportunities while they still exist.' So, when exactly is that appropriate time?
Stiefel noted: "The appropriate time is when sales opportunities exist – projected quarters of growth, rather than revenue contraction. Semiconductor revenues are projected to grow in Q3 2010, contract in Q4 2010 and Q1 2011, and then resume moderate single digit growth for the remainder of 2011."
The iSuppli study also indicated that 'Inventory is not increasing at a uniform rate throughout the supply chain, despite the overall expansion during the past four quarters.' Well, does that suggest the industry has been neglecting this situation? If yes, why?
According to Stiefel, inventory management is a high priority for companies, and this statement is reflective of each sector’s unique responses to the supply/demand balance.
What's the situation like in the foundries and how do they stand against the fabless companies?
She indicated that foundries are running at near full capacity and inventory levels have risen to meet this high utilization level. Fabless companies as a group have seen a jump in inventory levels, returning to pre-recessionary levels in Q2 2010. "The days of inventory growth for both foundries and fabless companies are more in line with projected revenue growth," she added.
In what ways will makers seek to balance the "the current situation of long lead times and capacity constraints against concerns regarding of softening demand through the end of 2010'?
Stiefel said: "Companies have adopted different strategies for increasing capacity to bring lead times down to targeted levels, such as outsourcing capacity to front end fabs or back end assembly and test facilities, or purchasing equipment to relieve manufacturing bottlenecks.
"Thus far, in the Q3 reporting period, several semiconductor manufacturers are reporting that lead times are returning to normal, and component shortages are becoming a more isolated occurrence. This is an indication that balance is being realized by those particular companies."
Preventing inventory bubble burst!
Finally, is iSuppli seeing a softening of global demand? Will makers be able to prevent the inventory bubble burst from happening?
According to her, all indicators are that global growth is continuing, albeit at a slower pace than anticipated. "I believe that this data is no surprise to manufacturers, who will continue to keep a tight reign on inventories, and avoid a 'bubble' situation."
Part 2 of my discussion with Sharon will look into whether the global semiconductor industry set for a soft landing in 2011!