Echoing what we heard from a variety of distributors at May’s EDS Show in Las Vegas, iSuppli says that chip inventory levels among semiconductor suppliers remain at low levels despite a small increase in the first quarter of 2010, and days of inventory (DOI) appear to be significantly less than company financial reports indicate. At EDS, it was abundantly clear that inventory was tightening in the supply chain. As a result, lead times were growing longer.
“There’s no doubt that the speed of this recovery took the manufacturers by surprise,” said Pete Shopp, senior vice president of business operations at Mouser Electronics (see www.engineeringtv.com/video/EDS-2010-Discussion-Series-Supp). “We wish we had a lot more inventory on the shelves. We have a lot of back orders.” Of course, distributors such as Mouser are feeling the pinch across the board, not just with semiconductors.
But to put some numbers on the inventory problem for semiconductors, iSuppli says that global semiconductor inventory amounted to $25.73 billion in the first quarter of 2010, up by a scant 1.0% from $25.48 billion in the previous quarter and rising by a mere 0.2% from the first three months of 2009. Inventory in the second quarter is forecasted to rise 3.3% to $26.60 billion, continuing the slow upward movement (see the figure) that began at the start of this year.
“When measured in terms of DOI, chip supplier stockpiles for the 10 semiconductor product categories tracked by iSuppli appear to be within the range of normal seasonal equilibrium,” said Carlo Ciriello, analyst for financial services at iSuppli. “However, iSuppli believes these numbers are misleading and that the supply chain is actually leaner than current levels indicate.”
Ciriello backs his argument by indicating that the DOI is inflated because of near-record-high gross margins. By using both reported revenue and inventory value in the first quarter, and then adjusting cost of goods sold (COGS) via the long-term average gross margin, DOI actually measures 20% lower than the seasonal average, according to iSuppli’s analysis.
“While inventories at present are not actually 20% lean, the adjusted calculation indicates that current DOI levels, as reported in company financial reports, are misleadingly elevated and that in reality, chip makers and other participants in the chain are shorter on supply than is widely perceived,” Ciriello said.
Also, iSuppli says that except for a modest increase in the third quarter of 2009 and the rise of values beginning this year, inventory dollars have consistently declined since the third quarter of 2008. In addition, the current inventory figures indicate that stockpiles were not replenished in the first quarter and that device manufacturers continue to operate on “hand-to-mouth,” just-in-time fulfillment schedules.
As you might expect, given the current leanness of inventory, lead times have extended throughout the supply chain. Among semiconductor suppliers, capacity is straining to keep up with downstream demand, resulting not only in long lead times but also in shortages for many commodity components. Nonetheless, semiconductor suppliers are committed to controlling their side of the supply/demand equation by keeping inventory at agile, lean, and manageable levels.
With semiconductors in short supply, double ordering appears to be a common strategy, especially among upstream suppliers. Many companies tracked by iSuppli report book-to-bill ratios dangerously in excess of 1:1, suggesting inflated demand.
But despite the difficulty of gauging whether double orders will be put into production, let alone become an inventory problem, the semiconductor industry remains bullish on the revenue outlook for both the current quarter and the full year. This implies that double ordering will not damage the ongoing recovery now being enjoyed by the market.
iSuppli contends that the industry must maintain prudent inventory management if it is to avoid a rapid shift toward oversupply in the event that macroeconomic factors weaken end demand. For more about the current state of semiconductor inventory, Ciriello’s latest report, Inventories on Balance Sheets May Be Leaner than They Appear, can be purchased at www.isuppli.com/Semiconductor-Value-Chain/Pages/Inventories-on-Balance-Sheets-May-be-Leaner-Than-They-Appear.aspx?PRX.