Semiconductor Inventories Rise but Don’t Cause Alarm—Yet

Inventory climbs 9 percent; market is less volatile.

Chip suppliers are reporting rising inventory, but the swelling stockpiles do not represent a cause for concern in the industry at present with demand expected to increase during the coming months, according to semiconductor industry analysis firm iSuppli Corp.

Midway through the second-quarter reporting period, total inventory from approximately 35 semiconductor component manufacturers climbed to $9.6 billion, up a strong 9 percent from $8.9 billion in the first quarter—faster than the seasonal average of 3.2 percent.

Likewise, average days of inventory (DOI) grew, increasing about 4 days during the period to 73.2 days, up 6 percent from 69.3 days—a rate slower than the historical DOI seasonal increase of 9.6 percent, or 6 days.

All told, the numbers underline a common theme for the semiconductor industry in the second quarter of record revenues, profits and gross margins. Such indicators, along with positive revenue guidance for the third quarter, are providing managers with the confidence needed to increase inventories for the second half of the year.

Across the semiconductor market, management comments in earnings announcements have been extremely positive, citing strong results in various end applications and geographies. The solid second-quarter results—based on higher-than-usual seasonal revenues, favorable Average Selling Prices (ASP) and innovative new products—are allowing companies to finally relax their vice grip on inventories, iSuppli believes.

Given the quick rise in demand, however, semiconductor suppliers are finding it difficult to restock to pre-recessionary levels. Products being shipped are intended to meet current orders, iSuppli has determined, and not meant for placement into inventory.

As a result, the current backlog is driving many semiconductor suppliers to increase capacity, although conservative capital spending appears to be the norm. Instead of committing to long-term capital investments for new facilities, suppliers often are investing cautiously in equipment to relieve constriction points in production. The exceptions to the rule are the large corporations—entities such as Intel Corp. and Samsung Electronics Co. Ltd.—with enough cash to invest, the economic downturn notwithstanding.

Overall, however, the increase in inventory reflects a justifiable build, and iSuppli is not concerned over an inventory bubble. And with the market now less volatile, semiconductor companies gradually will be returning to more normal operating conditions and inventory levels over the next few quarters, iSuppli believes.