Semiconductor makers increase inventories ahead of higher demand

June 7, 2012 — Semiconductor stockpiles held by chip suppliers increased during Q1 2012, but the rise in inventory for a second straight quarter was driven by the anticipation of higher demand from customers, according to an IHS iSuppli Inventory Insider Market Brief report.

Figure. Semiconductor supplier inventory as a percentage of revenue. SOURCE: IHS iSuppli Research.

Total semiconductor inventory as a percentage of suppliers’ revenue ticked up to 50.0% in Q1 from 47.8% in Q4 2011 and 46.1% in Q3 2011. But while inventory grew during the last two quarters, the reasons behind the expansions for each of the two periods and what they implied for the market couldn’t be more different.

“In the fourth quarter, inventory rose among suppliers because of uncertain macroeconomic conditions such as the sovereign debt crisis in Europe, leading to an overall decline in the worldwide demand for semiconductors,” said Sharon Stiefel, semiconductor inventory analyst at IHS. “And while inventory rose during the fourth quarter for semiconductor suppliers, chip stockpiles fell at the same time among customers, indicating a paucity in demand. In contrast, the higher inventory numbers among semiconductor suppliers for the first quarter of 2012 represent a signal of better things to come. There was an increasing level of inventory both among chip suppliers and customers, indicating that both the supply and demand sides of the business believe that the environment in the electronics market has turned positive.”

A look at customer inventory trends in Q4 2011 reveals a broad-based decrease in stockpiles among major semiconductor purchasers. Customer inventory held by the electronics distributor segment fell to 36.9% of revenue in Q4, down from 41.7% sequentially. The same pattern of decreasing inventory replicated across various semiconductor customer segments during the same period: from 26.7% to 24.9% for EMS providers; from 21.5% to 20.8% for original equipment manufacturers in the storage segment; and from 13.8% to 9.6% for handset makers.

In Q1 2012, however, suppliers saw order bookings fill up, allowing them to gain greater visibility into the supply chain. Book-to-bill ratios are also close to reaching parity, indicating more balanced supply-and demand dynamics. Such developments, combined with anticipated higher demand for the second quarter, led to a rise in inventory as a percentage of supplier revenue during the first quarter, giving the market fresh reason to cheer.

Despite the improvement in market conditions, some problem areas do persist, however, especially in the memory segment. Semiconductor makers commonly bring too much capacity on-line to meet rising demand. This cycles into softer demand and an inventory overhang and inability to reduce production quickly enough, creating oversupply.

Memory companies, in particular, are historically prone to larger swings in oversupply and undersupply in response to shifting end demand, making them potentially vulnerable.

The analog semiconductor segment is another potential problem area, because the sector is exposed to markets that are traditionally slower to rebound from cyclical downturns.

As overall semiconductor sales increase over the course of this year, the ratio of inventory to sales increasingly should come into alignment. The anticipated return to moderate demand will also give semiconductor suppliers extra confidence their inventory levels.

IHS (NYSE: IHS) is a leading source of information, insight and analytics in critical areas that shape today’s business landscape. Internet: www.ihs.com.

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