Q1 chip inventories signal rising demand, IHS says

Dylan McGrath

SAN FRANCISCO—Semiconductor suppliers increased their inventories for the second straight quarter in the first quarter, this time driven by anticipation of higher demand from customers, according to a report by market research firm IHS iSuppli.

Total chip inventory as a percentage of suppliers' revenue amounted to 50 percent in the first quarter, up from 47.8 percent in the fourth quarter of 2011 and from 46.1 percent in the third quarter of 2011, IHS said.

While inventory increased in each of the last two quarters, the reasons for the increases and the implications for the market differed dramatically, according to IHS iSuppli's latest Inventory Insider market brief.

"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, in a statement.

While chip suppliers' inventories rose in the fourth quarter of 2011, customers' chip stockpiles declined, indicative of lower demand, Stiefel said. But, in contrast, the higher inventory among chip suppliers in the first quarter signal better demand to come, Stiefel said.

"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," Stiefel said.

In March, IHS said it expected average days of inventory held by semiconductor suppliers to decline by 0.5 percent in the first quarter after hitting an 11-year high in the fourth quarter of 2011.

Customer inventory held by electronics distributors fell to 36.9 percent of revenue in the fourth quarter of 2011, down from 41.7 percent in the third quarter, according to IHS. The same pattern of decreasing inventory replicated across various semiconductor customer segments during the same period, the firm said.

But in the first quarter of this year, suppliers saw order bookings fill up, allowing them to gain greater visibility into the supply chain, according to IHS. Book-to-bill ratios are also close to reaching parity, indicating more balanced supply-and demand dynamics, the firm said. 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, according to IHS.

But despite the improvement in market conditions, some problem areas do persist, especially in the memory segment, IHS said. Memory chip vendors have historically responded to increased demand by bringing more capacity online, leading to oversupply, the firm noted.

IHS said another potential problem area is the analog chip market. The analog market is highly exposed to markets like industrial communications infrastructure that are traditionally slower to rebound from cyclical downturns.

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