After Hitting 11-Year High in Q4, Semiconductor Inventories Set to Decline Slightly in Q1

March 21, 2012
Sharon Stiefel

Despite rising by a worrisome 3.4 percent and hitting an 11-year high in the fourth quarter of 2012, average semiconductor days of inventory (DOI) held by chip suppliers are expected to decline by 0.5 percent in the first quarter, providing some hope that market conditions are improving.

Amid slow demand and continued excess production, average global semiconductor stockpiles held by chip suppliers rose to 84.1 DOI in the fourth quarter, up from 81.3 in the third quarter, according to an IHS iSuppli Inventory Market Brief report from information and analytics provider IHS (NYSE: IHS). However, demand is predicted to rise in the first quarter, drawing down stockpiles to 83.7 DOI, as presented in the figure below.

“The fourth quarter of 2011 proved disappointing from both a revenue as well as earnings standpoint,” said Sharon Stiefel, analyst for semiconductor market intelligence at IHS. “Global semiconductor revenue declined by 2.8 percent compared to the fourth quarter of 2010 as customer orders declined. Meanwhile, semiconductor suppliers struggled to balance their factory utilization levels against the drop in demand, leading to the rise in semiconductor inventories.”

Semiconductor inventories in the fourth quarter of 2011 were at their highest level since the first quarter of 2001. Excess inventory can represent a challenge for the semiconductor, particularly in times of declining demand, causing prices to decline and resulting in factories reducing their manufacturing.

However, there are signs that conditions in the semiconductor market are improving.

“Semiconductor suppliers are projecting a resumption of demand in the first quarter,” Stiefel observed. “Book-to-bill ratios are reaching parity, and global macroeconomic indicators point to a healthier outlook. These factors are raising optimism among semiconductor suppliers that better days are ahead for the industry.”

At the close of the fourth quarter financial reporting season, the main message from semiconductor manufacturers was to put the past behind them and look ahead with hope to the future. A common theme echoed in many investor conference calls was that the bottom of the downturn has already been reached. As proof that the industry might be turning a corner, semiconductor suppliers pointed to improved bookings in January following the apparent end to customer inventory corrections.

“Should semiconductor demand rise more than projected, those companies holding excess inventory could turn that to their advantage later in 2012, because they will be in a better inventory position than those that have become too lean,” Stiefel said.

Learn More > Semiconductor Manufacturers Must Look to the Future, Not Dwell on the Past

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