Global supplier semiconductor stockpiles at the end of the second quarter stood at an unusually elevated 83.4 Days of Inventory (DOI)—a level exceeding even the last record high of 83.1 DOI seen in the first quarter of 2008.
The second-quarter inventory DOI represents a fairly large jump of 3.5 days from 79.9 days in the first quarter, and is the first time in 12 consecutive quarters that DOI has tipped over the 80-day mark.
The inventory level in the second quarter was 11 percent above the historical seasonal average usually recorded for the period. This is close to the 11.1 percent oversupply seen in the first quarter of 2008, right at the start of a two-year downturn in the semiconductor industry.
“For the semiconductor industry, wading into such potentially troubling territory—reminiscent of the dark days leading into the recession—could herald the beginning of a critical inventory adjustment period,” said Sharon Stiefel, semiconductor analyst at IHS. “The correction is likely to take place during the next few quarters and will not be completed until mid-2012. As such, it will involve suppliers making a prolonged reduction in their inventory levels to avoid dangerous oversupply situations.”
Warning Signs for Chip Industry
Semiconductor revenue projections for the third quarter are being scaled back as various indicators point to a stalling economy.
For instance, U.S. gross domestic product growth in 2011 now is expected to amount to a mere 1.7 percent, down sharply from 3.0 percent in 2010, according to IHS Global Insight.
IHS also has revised its semiconductor revenue forecast to 2.9 percent growth in 2011, down from the 4.6 percent annual growth rate projected in an August forecast and a steep plunge from the 32.4 percent growth recorded in 2010.
Visibility Gets Cloudy
For many semiconductor companies, the projections for flat sequential revenue made during their second quarter earnings calls reflect the decreased supply chain visibility that suppliers are experiencing at this time based on slowing end demand. Many, in fact, also have lowered their third-quarter revenue guidance in mid-quarter announcements as a response to the deteriorating global economic outlook. In the segment representing analog suppliers, for instance, manufacturers are being extra-cautious to ratchet down inventory as analog DOI at the end of the second quarter stood at an even higher 92.5 days compared to the rest of the semiconductor industry.
Third Quarter Dip
DOI is preliminarily estimated to have declined by more than 2 percent in the third quarter to 81.3 days as semiconductor suppliers recalibrate inventory to reflect the ongoing reduction in demand. And unlike the past, suppliers now have reduced capacity utilization to cope with downsized markets while still maintaining flexible production capacity in case unexpected orders materialize.
Sequential growth of 4.8 percent is predicted for the industry in the third quarter notwithstanding the ongoing economic turmoil. Strong performances are expected from the semiconductor sectors serving the data processing and wireless communication categories, which should help offset declines in other end markets.