Semiconductor inventory remains at perilously low levels warns iSuppli

The market analyst also reports that days of inventory (DOI) appear to be significantly less than company financial reports indicate. iSuppli reports that global semiconductor inventory amounted to $25.73billion in the first quarter of 2010, up by just 1% from $25.48bn in the previous quarter - and rising by 0.2% from the first three months of 2009. The analyst forecasts inventory in the second quarter to rise 3.3% to $26.60bn - 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." Ciriello states that at 69 days in the first quarter, DOI rose by 3.2% 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," he observed. iSuppli analysis indicates, by using both reported revenue and inventory value in the first quarter, and then adjusting cost of goods sold via the long-term average gross margin, DOI actually measures 20% lower than the seasonal average. "While inventories at present are not actually 20% 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's data also shows 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. According to the analyst, 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. Hwever, iSuppli believes semiconductor suppliers are committed to controlling their side of the supply/demand equation by keeping inventory at agile, lean and manageable levels. Nevertheless, double ordering appears common, especially among upstream suppliers and many companies tracked by iSuppli report book-to-bill ratios in excess of 1:1, suggesting inflated demand. Ciriello concluded, "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."