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Semiconductor inventory remains at extremely low levels: iSuppli

Despite a small increase in the first quarter of 2010, chip inventory levels among semiconductor suppliers remain at low levels, and Days of Inventory (DOI) appear to be significantly less than company financial reports indicate, according to iSuppli Corp.



Global semiconductor inventory amounted to $25.73 billion
in the first quarter of 2010, up by a scant 1.0 percent from $25.48
billion in the previous quarter and rising by a mere 0.2 percent from
the first three months of 2009. Inventory in the second quarter is
forecasted to rise 3.3 percent to $26.60 billion-continuing the slow
upward movement 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.”

At 69 days in the first quarter, DOI rose by 3.2 percent
from 66.8 days during the fourth quarter of 2009. Such a DOI figure
might give an impression-false, as it turns out that restocking is
occurring, but 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 percent lower than the
seasonal average, iSuppli analysis indicates.

“While inventories at present are not actually 20 percent
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.

iSuppli data also show 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.

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, as iSuppli has
consistently maintained, semiconductor suppliers are committed to
controlling their side of the supply/demand equation by keeping
inventory at agile, lean and manageable levels.

That being said, double ordering appears common, especially
among upstream suppliers. Many companies tracked by iSuppli report
book-to-bill ratios dangerously in excess of 1:1, suggesting inflated
demand. However, 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.

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, iSuppli contends.

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