Chip Supply Solid, Merrill Says

There appears to be a solid inventory of chips in the supply chain, though according to a Merrill Lynch report published this week, there’s room to grow.

The report, “Semiconductors: Q3 2005 Supply Chain Analysis,” which is the result of a survey of some 22 PC companies, says that inventory remains “high but flat” versus recent quarters.

Inventory levels are high relative to what Merrill Lynch calls “the trough levels” reached at the beginning of 2003. The investment firm said it believes we’re unlikely to see such low levels again as a result of an increased level of supply-chain risk being borne by component manufacturers.

“The analysis continues to suggest that device manufacturer inventories are sufficient to prevent any component shortages from emerging,” the Merrill Lynch report said.

Available inventory declined to 72 days, according to Merrill Lynch’s research, which is below the historical average for the first time in five quarters. But about half of the companies in Merrill Lynch’s 42-company sample reported higher inventories, notably VIA and Xilinx . Inventory days at Intel and Texas Instruments were flat from the previous quarter.

Based on that research Merrill Lynch said PC inventory decreased to 49 days in Q3 down from 51 days in Q2 –- both well below the historical average of 65 days.

However, third-quarter inventory has decreased each of the past five years, so the current drop is at least consistent with that trend.

“Following the post-bubble drawdown it appears that the PC supply chain is able to continue to reduce inventory levels as inefficiencies are squeezed out of the system,” the Merrill Lynch report said. “The equilibrium point now appears to be in the range of 50-55 days.”

One notable shift in the semiconductor supply chain was a 14 percent increase in dollar inventories held by wireless players. Days of inventory fell to 165 from 170, which Merrill Lynch said was mainly the result of seasonal sales shifts.

Wireless handset component inventory days were flat at 39 days in Q3, which Merrill Lynch said is about inline with seasonal trends.

Thirty-nine days is significantly below the historic average of 63 days, which Merrill Lynch attributes to the growing presence of non-public companies in the handset business putting downward pressure on the average number of days.

And while lower, the number of days appears to have stabilized in recent quarters not too far from the just-reported 39-day mark.