In Q1, the worldwide electronics industry reduced its excess semiconductor inventories at a rate that was dramatically faster than expected, which sent a positive signal for future chip-market growth, market researchers at iSuppli Corp. reported today.

The value of surplus chip stockpiles in the electronics supply chain dropped to $500 million in Q1, down 51.5 percent from $1.03 billion in Q4 2004, according to the El Segundo, Calif.-based firm.

iSuppli previously predicted total excess semiconductor stockpiles in Q1 would decline by 24 percent to $780 million.

“The reduction of excess semiconductor inventory in the historically slow first quarter of the year is undeniably a positive development for the global chip industry,” said iSuppli semiconductor Analyst Rosemary Farrell, in a statement.

“Better-than-average sales of bellwether semiconductor products including microprocessors, digital signal processors (DSPs), discrete devices, high-performance analog parts and power-management chips helped reduce excess inventories in these areas,” she continued. “Most companies in the electronics supply chain expect to burn off their oversupply by the end of the second quarter, and a number of firms have even said they expected their overage to be completely eliminated by the end of the first quarter of 2005."

iSuppli noted that semiconductor suppliers continue to hold the bulk of surplus chip stockpiles although these companies did reduce their days of inventory (DOI) by 33 percent in Q1, according to preliminary estimates.

The issue of excess chip inventory rose to the forefront of electronics industry concerns in Q3 2004, when the value of surplus chip inventories in the electronics supply chain skyrocketed to more than $1.62 billion, up 95.4 percent from $829 million in Q2, the firm said.

The value of the excess was far short of $13 billion in surplus chip stockpiles in Q1 2001, which contributed greatly to the industry’s catastrophic downturn that year. However, the rise in excess semiconductor stockpiles in Q3 2004 was sufficiently large and rapid to contribute to a weakening in semiconductor pricing late last year and early this year.

Semiconductor suppliers responded to the inventory challenge rapidly, reducing capital-equipment orders and slowing production. Thus, by the end of Q4, the surplus was reduced by $590 million, or 36.4 percent compared to Q3.

Now, iSuppli believes the deflation of the inventory bubble paves the way for an eventual recovery in semiconductor pricing power, plus a renewal in capital spending and production increases among chip suppliers, even if the near-term impact may not be that significant.

Partly due to the decline in excess inventories, in Q1, iSuppli raised its forecast of 2005 semiconductor revenue growth to 6.1 percent, up 1.4 percentage points from the previous prediction of 4.7 percent in Q4 2004.

Further, the firm recognizes that semiconductor suppliers continue to struggle with weak market conditions. Lead times remain short, chip orders were slow in March, results from IT companies have been poor and some electronics companies have issued muted outlooks for Q2.

The inventory environment also remains tentative in some regards. While safety stocks in the supply chain are quite low, visibility is limited, the firm said.

And although inventories are now nearly in balance, iSuppli reminded that it is important for the industry to remember and not repeat the mistakes it made in the first half of 2004 including rapid production increases. When upbeat demand projections failed to materialize in the second half of 2004, the inventory correction rippled through the supply chain. Then after customers reconsidered inventory requirements, chip suppliers saw orders and parts pushed back to them.

Due to this recent history, iSuppli recommends chip suppliers maintain a cautious stance when considering increases in production this year.

By: DocMemory
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