Chip Inventories Drop to Low But Safe Levels

The recession of 2000-2002 was dominated by all of the mass-extinction of over hyped dot-com firms, but there was a secondary problem during that time period as well: excessive inventory.

Many companies had frozen all investments in the late 1990s in preparation for Y2K . When 2000 came around and their systems didn’t implode, they went on an orgy of hardware spending — new PCs, servers, etc. When that came to a screeching halt, a lot of big name vendors kept making supply when there was no demand and were left holding an awful lot of inventory they couldn’t sell.

Chip companies — Intel (NASDAQ: INTC), AMD (NYSE: AMD), nVidia (NASDAQ: NVDA), Broadcom (NASDAQ: BRCM), etc. – lived through that era and learned all too well to control their inventories. That’s why after the economy collapsed late in the fourth quarter of 2008 and there was a sudden spike in inventory, semiconductor suppliers got control of their manufacturing and production much quicker than they did in 2001.

That led to a very rough period from late 2008 to early 2009 as everyone stomped on the brakes. “It seemed there might have been draconian cuts, but at the time it seemed those cuts appeared to be necessary given what was going on around them, rather then get caught with too much inventory,” Carlo Ciriello, financial analyst for market research firm iSuppli, told

iSuppli has issued a report stating it believes semiconductor suppliers achieved supply and demand equilibrium with their customers, with days of inventory (DOI) running just a shade under normal levels.

Instead of 72 days of inventory, which is about the average for chip vendors, they are running at about 69-70 days of inventory. Hardly a threat or scenario for shortages, Ciriello notes.

“They learned their lesson [from 2001],” Ciriello said. “In terms of the supply chain nodes, each node is more efficient at controlling their inventory. So that’s a positive. The technology to track and maintain inventory is better than it was in 2001. That’s why you saw this huge correction and an ease back into equilibrium.”

Managing the supply chain

The “nodes” are defined as all the players along the supply chain, so starting with Intel or AMD and then down the line to distributors, OEMs, ODMs, their distributors and finally retailers. And because everyone is keeping their inventories low, they are likely all seeing the same economic signs and coming to the same conclusions, said Ciriello.

In the second quarter of 2009, DOI at semiconductor suppliers fell 6.1 percent short of optimal levels. It’s quite a contrast from the fourth quarter of 2008, when DOI exceeded equilibrium by 14.8 percent, but it also shows that the chip makers are not over-correcting in adjusting to new inventory levels.

Despite the below-target semiconductor inventories in the second quarter, there is no imminent danger of chip shortages at this time. With global semiconductor factory utilization at extremely low levels, suppliers can easily boost their manufacturing to meet demand.

Because supplies have been kept a little lower than usual, iSuppli thinks global chip revenue in the third quarter likely will rise by three percent more than actual demand would dictate, creating an artificial bump in sales for the industry in Q3.

It’s quite a change for the chip vendors, who used to keep 10 to 15 percent extra days of inventory in 2007 and 2008. “Back then you could have excess inventory. You weren’t as concerned. Now you have to pull every last penny out and really have to control your assets,” said Ciriello.

News Around the Web