Modest Rise in Semiconductor Inventories Expected in the Second Half of 2009

Stockpiles at appropriate levels following fi rst-half correction.

Following a sharp semiconductor inventory correction in the first half, chipmakers have reduced their stockpiles to appropriate levels, paving the way for modest increases in the third and fourth quarters as demand recovers somewhat, according to iSuppli Corp.

Shrinking demand in the first half of 2009 prompted a swift inventory correction, with stockpiles among chipmakers falling by 14.9 percent in terms of revenue. Companies dialed down utilization levels and cleared swaths of inventory by reducing Average Selling Prices (ASPs), in anticipation of continued depressed demand.

The correction didn’t stop there. Costs were cut in an effort to right-size companies to better reflect the economics of smaller end markets.

As presented, not only did semiconductor suppliers overall reduce the value of their inventory, so did all other electronics industry segments, including storage product makers, mobile handset OEMs, Electronics Manufacturing Services (EMS) providers and distributors.

iSuppli in the second quarter estimates chip inventory values were flat to down 2 percent as firms continued their efforts to refine inventory management practices.

H2 Inventory Trends
Based on conversations with high-level management at industry leading tech houses, as well as our proprietary models and internal industry expertise, iSuppli forecasts that second-half inventories will increase modestly in unison with modest sequential revenue increases.

However, corporations remain apprehensive about the second half, consistently noting fragile demand. Market values have declined, and the tradeoff between raising prices and maintaining market share has commanded more management attention than usual.

No one is stepping to the plate to aggressively build inventories in anticipation of a future demand snap back. Expectations of modest sequential revenue increases in the third and fourth quarter, as well as anticipatory inventory builds ahead of the holiday season, will improve utilization rates and boost gross margins in the near term. However, anticipating longer-term end-demand has proven difficult. Thus, a self-inflicted oversupply situation with too much inventory build would be akin to applying frost to blossoming “green shoots”.