Semiconductor Inventory Continues Climbing

Semiconductor inventory levels at chip suppliers worldwide are believed to have risen for the seventh consecutive month in a row in the second quarter, as the industry rebuilds depleted stockpiles and prepares for expected increases in demand, according to the latest IHS iSuppli Inventory Market Brief.

The total stockpile level for all semiconductor suppliers—excluding the volatile memory segment—is projected to rise to 81.5 days in the second quarter, up 1.5 percent from 80.3 days in the first quarter, according to the most recent IHS forecast. With this increase, inventories will have risen during every quarter since the last three months of 2009.

“Increases in stockpiles during the first quarter reflect efforts by semiconductor suppliers to rebuild inventory for products that were in short supply during the capacity crunch of 2010,” said Sharon Stiefel, analyst for semiconductor intelligence at IHS. “Suppliers also are moving to strategically build for the higher demand expected later this year. In a fortuitous stroke of good timing, semiconductor component manufacturers were able to take advantage of the reduced demand environment during the seasonally slow first quarter to build their stockpiles.”

Broad inventory increase
Inventories throughout the electronics supply chain—including at semiconductor suppliers, distributors, contract manufacturers and original equipment manufacturers (OEM)—during the first quarter rose for all sectors except for computer makers. Computer OEM stockpiles declined more than 8 percent, likely because they shipped most of their products to retail outlets for restocking following the busy holiday season in the fourth quarter of 2010.

In comparison, memory and analog companies had the highest percentage increases in their internal inventory, with growth of almost 15 percent, while fabless companies and distributors experienced more muted increases.

With macroeconomic factors feeding the growth of the overall electronics industry and generally trending positive—except for the U.S. housing sector as well as increased gasoline and food prices—semiconductor inventories are likely to continue rising throughout 2011. Growth will be stimulated by market demand for popular consumer items like smartphones and tablets, as well as for perennial reliables such as PCs.

Effects of the Japan quake
The Japan quake disaster in March will have a minimal effect on inventories throughout the electronics supply chain, given that inventories had been built up during the prior two quarters, IHS research shows. In fact, a more widespread disruption that had threatened to unfold was held at bay by opportune supplies on hand, the timely repair and restart of production facilities and agile moves among manufacturers to shift production from Japan to facilities outside the country.

One continuing area of concern might be the supply of raw wafers because Japan provides approximately 60 percent of the global supply of semiconductor wafers. However, in a positive indicator, leading semiconductor foundry Taiwan Semiconductor Manufacturing Co. announced that it will not experience any detrimental effects from the aftermath of the disaster. Areas of potential impact will continue to be closely monitored by IHS.

Just the same, manufacturers may increase orders as a cushion in light of the recent turbulence to guard against future supply chain disruptions. Maintaining higher inventory could become the new normal in the future, a calculated measure deployed to mitigate the disrupting effects of natural disasters and political upheavals.

IHS iSuppli