EL SEGUNDO, Calif. -- Semiconductor inventories remained higher than expected in the third quarter due to weak demand, according to a new report from iSuppli Corp. The market research firm said higher-than-expected chip inventories have pushed out the timeframe for supply-chain corrections into the first quarter of 2002.

Excess inventories in the supply chain--between chip manufacturers and the systems sales channels--exceeded a previous forecast of $5.9 billion, or 17 days of supplies, according to the iSuppli Market Intelligence report.

"Approximately 27% of the excess inventory in the supply chain was worked off during Q3, but this was less than we had previously projected primarily due to much weaker system demand in the consumer and enterprise sectors aided by the terrorist acts of Sept. 11," said Greg Sheppard, vice president for the company's Market Intelligence Services. "In fact, the electronics supply chain actually lost about one week of shipments in September, as logistics shut down in the U.S. and between its trading partners after the attacks."

He said financial write-downs by several manufacturers of commodity chip products--such as discrete transistors, analog circuits, standard logic, and memories--"is masking a far more serious excess inventory position." He added that iSuppli believes "many of these products remain in the supply chain so 'effective' excess inventory could be as high as $7.4 billion at the moment."

According to iSuppli, nearly half of the inventory in the supply chain continues to be held by contract electronics manufacturers, which are providing outsourced assembly services to system suppliers. These assembly houses are holding these inventories for clients "even though some major contract manufacturers were able to make customers move several billion in inventories back onto their balance sheets," Sheppard said.

"The value of inventory held by nearly all segments including semiconductor makers decreased for Q3, except for distributors and automotive manufacturers who actually posted small gains," he said. "Look for supplier burdens to increase in coming months, however, as many large customers demand concessions in terms of vendor managed inventory programs from semiconductor makers."