Semiconductor inventory correction balancing out early in 2012

January 12, 2012 — Semiconductor buyers have reduced orders under combined forces of moderately high inventory in the electronics supply chain and deteriorating macroeconomic sentiment. Gartner Inc. expects this inventory correction to work out in early 2012, with production and sell-through returning roughly to balance.

Semiconductor sales were weaker than expected in Q3 2011, and Q4 shows weak guidance. Chip makers are taking action to reduce production based on the weaker sales numbers. Near-term sequential growth prospects for the semiconductor industry are relatively poor, Gartner notes.

Relative inventory levels (expressed by days of inventory [DOI]) are starting to fall, indicates the Gartner Index of Inventory Semiconductor Supply-chain Tracking (GIISST). Relative inventory went from 1.13 in Q3 2011 to 1.11 in Q4. DOI declined quarter-to-quarter in all supply chain segments except electronics manufacturing service (EMS) providers/contract electronics manufacturers (CEM). Absolute inventory in dollar-value terms is still rising.

Another analyst firm, IHS iSuppli, also noted that chip inventories contracted in Q3 2011, reversing a 7 quarter trend. Sharon Stiefel, semiconductor analyst at IHS, said "With the global economy all but stalled, and in the face of declining orders as well as decreased visibility, many semiconductor manufacturers opted to reduce capacity utilization," adding that lead times have also lowered to normal. Read the IHS iSuppli take on the chip inventory correction here.

Figure. Gartner’s inventory index 2000 to present.

The proportion of total semiconductor inventory held by OEMs continues to rise, Gartner reports; OEMs will likely seek to reduce this from levels reached at the start of Q4 2011.

Gartner found that distributor lead times were affected by flooding in Thailand, but were returning to pre-flood levels as of late November. Read more about Thai floods & the semiconductor industry:

Learn more about the inventory correction in Market Trends: Semiconductor Inventory Correction Continues in 4Q11 at Gartner Inc. (NYSE:IT) is a leading information technology research and advisory company.

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