Excess inventory in the electronics supply chain from a poor Q4 2007 could continue to impact the semiconductor industry through Q2, Gartner Inc warned today.

The research company said its Dataquest Semiconductor Inventory Index (DASI) spiked significantly last quarter to 1.16 from 1.04 in Q3 2007 on lackluster Q4 semiconductor “holiday sales” and lowered expectations for sales in Q1.

The DASI assesses normal inventory levels throughout the electronics supply chain and compares them with current levels to evaluate industry trends, Gartner explained. The index gauges the normal inventory level at each stage of production that will allow for a smooth flow of products and management of the production process without inventory shortages or surpluses, the company said. (See DASI index below)

“The spike in the DASI from 1.04 to 1.16 is a direct result of a delayed reaction to market conditions. In the last two inventory updates Gartner released, we said that companies would be wise to reduce inventory as a cautionary measure against the potential of a weak fourth quarter and the traditionally weak first quarter. This was compounded by wariness in the financial sector with regards to the macroeconomic conditions and warnings,” Gartner analyst Gerald Van Hoy wrote in today’s Semiconductor DQ Monday Report.

Gartner noted that in Q3 inventory levels continued to rise, while macroeconomic news continued to worsen. The company at the time suggested companies reduce inventories in Q4 to avoid a surplus in Q1. Although inventory levels did decrease in the closing quarter of 2007, it was not enough of a decline, Gartner said.

“Companies that managed to increase their revenue above market expectations and reduce their inventory considerably are now in a better position to ride out this lull. Moving forward into [the first half of 2008], companies need to level or drop their inventories. We expect the DASI to remain in the ‘caution zone’ for Q1 and possibly Q2,” Van Hoy wrote.

Earlier this month, Gartner cut its semiconductor market growth estimate by nearly half to 3.4% on a more-cautious demand-side outlook, much of is being influenced by DRAM and NAND.

By: DocMemory
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