SAN FRANCISCO—Chip inventories held by semiconductor suppliers declined for the first time in eight quarters in the third quarter of 2011 as the industry moved to cut production to reduce oversupply, according to market research firm IHS iSuppli, which estimates that inventories fell further in the fourth quarter.
According to the IHS iSuppli Inventory Insider report, semiconductor stockpiles stood at 81 days of inventory (DOI) in the third quarter, down about 2.5 percent from 83 DOI in the second quarter.
The DOI level had been rising steadily since the third quarter of 2009, when it stood at just 65 days, according to IHS. At that point, stockpiles were relatively low because chip production had been reduced during the dark days of the global recession, the firm said.
Since then, inventory DOI had been creeping up, partly to make up for depleted stocks and also to cope with growing demand as strength returned to the supply chain, according to IHS. But amid signs of weakening growth in the semiconductor market, the rise in inventory had generated concerns.
IHS estimates that global semiconductor revenue increased by just 1.9 percent in 2011 compared to 2010. The firm originally forecast that semiconductor sales would rise by about 7 percent in 2011.
Semiconductor inventory levels are an important gauge of industry health, and the stockpile amount at any point in time also indicates the confidence—or lack thereof—of the supply chain in its forthcoming prospects, according to IHS.
"For the third quarter, semiconductor suppliers began an inventory correction to alleviate an escalating oversupply situation on top of already inflated stockpiles," said Sharon Stiefel, semiconductor analyst at IHS, in a statement.
Stiefel said that with the global economy stalled and facing declining orders and decreasing visibility, many chip makers opted to reduce capacity utilization. With lead times for many parts now declining to normal levels after extended waiting periods in the past, chip makers were more confident about trimming bloated inventories without causing too much pain in the supply chain, Stiefel said.
Despite the inventory cutback, DOI in the third quarter remained elevated in absolute terms—the highest of the last 10 quarters, dating all the way back to the fourth quarter of 2008—suggesting that stockpiles are still quite high, according to IHS. The percentage of oversupply during the period rose to 12.1 percent, exceeding the 11.1 percent spike in oversupply during the fourth quarter of 2008, according to the firm, which expects inventories declined further in the fourth quarter of 2011. The firm estimates that DOI declined another 2.5 percent in the fourth quarter to 79.3 days.
Among the various semiconductor sectors, inventory levels rose for handset OEMs, distributors and analog companies—all of which posted percentage gains in DOI in the third quarter, IHS said. Stockpiles fell for fabless semiconductor makers, memory suppliers, foundries, PC OEMs, storage gear companies and electronic manufacturing services providers, the firm said.
For mobile handset manufacturers, inventories increased in the third quarter as suppliers prepared for their seasonally busy end-of-year period, according to IHS. Inventory at pure-play foundries declined more strongly than expected as the result of a reduction in utilization rates, the firm said.
"Visibility continues to be murky in many sectors given the volatile world economy, and demand remains difficult to predict," Stiefel said.