Date: 07/06/2012

IHS: Semiconductor inventories increased in Q1 to indicate possible demand recovery

IHS iSuppli has announced the Inventory Insider Market Brief report for Q1-2012. The reports analyzed that the semiconductor stockpiles held by chip suppliers increased during Q1-2012, but the rise in inventory for a second straight quarter was driven by the anticipation of higher demand from customers,

Total semiconductor inventory as a percentage of suppliers' revenue amounted to 50.0 percent in Q1, up from 47.8 percent in the Q4-2011 and from 46.1 percent in the Q3-2011, as shown in the below chart. But while inventory grew during the last two quarters, the reasons behind the expansions for each of the two periods and what they implied for the market couldn't be more different.

inventory

"In the fourth quarter, inventory rose among suppliers because of uncertain macroeconomic conditions such as the sovereign debt crisis in Europe, leading to an overall decline in the worldwide demand for semiconductors," said Sharon Stiefel, semiconductor inventory analyst at IHS. "And while inventory rose during the fourth quarter for semiconductor suppliers, chip stockpiles fell at the same time among customers, indicating a paucity in demand. In contrast, the higher inventory numbers among semiconductor suppliers for the first quarter of 2012 represent a signal of better things to come. There was an increasing level of inventory both among chip suppliers and customers, indicating that both the supply and demand sides of the business believe that the environment in the electronics market has turned positive."

A story of two quarters
There is a broad-based decline in stockpiles among major semiconductor purchasers, reveals the customer inventory trends in Q4-2011.

For instance, customer inventory held by the electronics distributor segment fell to 36.9 percent of revenue in the fourth quarter, down from 41.7 percent in the third quarter. The same pattern of decreasing inventory replicated across various semiconductor customer segments during the same period: to 24.9 percent for EMS providers, down from 26.7 percent; to 20.8 percent for original equipment manufacturers in the storage segment, down from 21.5 percent; and to 9.6 percent for handset makers, down from 13.8 percent.

In Q1-2012, however, suppliers saw order bookings fill up, allowing them to gain greater visibility into the supply chain. Book-to-bill ratios are also close to reaching parity, indicating more balanced supply-and demand dynamics. Such developments, combined with anticipated higher demand for the second quarter, led to a rise in inventory as a percentage of supplier revenue during the first quarter, giving the market fresh reason to cheer.

Challenges in the Chip industry
Some problem areas exist in the memory segment in spite of the improvement in market conditions.

A common occurrence in the semiconductor industry is to bring too much capacity online to meet rising demand. This surge in capacity frequently is followed by a softening of demand that then leads to an inventory overhang and an inability to reduce production quickly enough. This in turn leads to oversupply.
Memory companies, in particular, are historically prone to larger swings in oversupply and undersupply in response to shifting end demand, making them potentially vulnerable.

The analog semiconductor segment is another probable problem area, because the sector is exposed to markets-such as industrial communications infrastructure-that are traditionally slower to rebound from cyclical downturns.

The ratio of inventory to sales increasingly should come into alignment as overall semiconductor sales increase over the course of this year. The anticipated return to moderate demand will also give semiconductor suppliers an extra dose of confidence in knowing that their inventory levels are appropriate.

Source: IHS