The semiconductor industry is now on track to eliminate its chip overages, thanks to significant declines in excess inventories in the supply chain in Q4 2004, which marked the end of a nine-month run-up in surplus stockpiles, according to the latest from iSuppli Corp.

However, the supply chain still has $1 billion in excess chip inventories to burn and with semiconductor sales growth slowing this year, the surplus remains an issue of concern to the worldwide electronics industry.

As a result, iSuppli for is maintaining the "yellow alert" it sounded in Q3 regarding excess chip inventories.

Excess inventories in the electronics supply chain declined to $1 billion in Q4, down 38.3 percent from $1.6 billion in Q3, according to the El Segundo, Calif.-based firm’s preliminary estimate. Previously, iSuppli had forecasted that excess inventories would decline more modestly to $1.5 billion in Q4, thus, the larger decline in inventory came as a upside surprise.

The Q4 reduction arrived after excess inventories swelled markedly during the first three quarters of last year.

Excess chip stockpiles actually began 2004 in negative territory, with inventories $700 million short of historical averages. However, those inventories grew to $12 million in excess in Q1 and then to $829 million in Q2, before peaking at $1.6 billion in Q3.

The huge buildup in Q3 was due to over-zealous chip ordering in the first half of 2004, which clogged the distribution channel in anticipation of strong end demand in the second half, the firm noted. After demand failed to materialize, chip customers throughout the supply chain reassessed inventory needs in the third quarter, delaying orders and pushing parts back to suppliers. The result was a doubling in excess inventory in Q3, iSuppli reported.

Fortunately, the Q3 setback took just one quarter to remedy. During the last three months of 2004, the chain burned off almost all the surplus accumulated in Q3 and now is on track to dispense with the remaining excess in the first half of 2005, iSuppli believes.

Semiconductor suppliers have been responsible for the bulk of the oversupply, and thus needed to reduce their stockpiles in order to spur production. In a positive sign, these companies accounted for much of the reduction in the semiconductor surplus in Q4 as they began efforts to cut their surplus.

Inventories at semiconductor suppliers declined in accordance with the reduction in chip stockpiles throughout the entire supply chain.

After starting Q4 with more than a week’s worth of excess supply, these companies held slightly less than five days of surplus at the quarter’s close. With a move of almost three days closer to their target level for days of inventory (DOI), suppliers decreased the value of excess supply they held by 38 percent in Q4 -- the same as the entire supply chain.

At the same time, however, not all suppliers experienced a decline in inventories with a majority of suppliers that released financials for Q4 actually increased DOI compared to Q3. Large reductions in DOI at a few suppliers offset slight increases at most chip merchants.

Some areas of congestion remain for suppliers, most notably in wireless infrastructure and in access and DSL products. For suppliers, the lesson from the second half of 2004 is that congestion can build up quickly, iSuppli said.

There also have been reports of some inventory still languishing in the channel, although those stockpiles decreased significantly during the quarter.

The inventory build during 2004 occurred for all products and across all regions. However, according to the firm, the burn off in Q4 was slower for standard products and products sold through distribution channels.

OEMs and ODMs in Taiwan and China still are dealing with excess inventories in the region, although some product segments, such as notebook PCs, have successfully burned through stockpiles of components, while others are digesting more slowly, such as with mobile phones.

The semiconductor supply chain pushed back the supply glut that welled up during the third quarter of the year, partially due to the natural ups and downs of the cycle of correction, which just needed time to process the parts ordered in the first half of 2004. The speed of the correction also was made possible by chip suppliers’ quick response to control the surplus after early warning signals at the end of the summer, iSuppli concluded.

By: DocMemory
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