No need for alarm over chip inventory spike: iSuppli

Global chip inventories soared at a faster than expected rate during the first quarter, but there's no reason to be alarmed about a glut, iSuppli says.

Inventories of semiconductors used in all kinds of electronics gadgets soared faster than expected during the first three months of the year, but there's no reason to be alarmed about a chip glut, market researcher iSuppli said Tuesday.

Chip inventories in the global supply chain soared US$794 million in value during the first quarter, to just US$50 million below what iSuppli considers the optimal level. But it was a far greater surge than forecast by the market researcher, which had expected inventory to fall US$400 million short of the optimal level.

"Chip supply and demand appear to be nearly in balance," iSuppli said.

The size of the leap in inventories during the first quarter raised the specter of a chip glut like the one that hit the industry in mid-2004 and caused a number of stock market analysts and other industry watchers to voice concerns. In 2004, the over-stuffed supply chain caused revenues in the industry to dive, and the trouble extended into early 2005.

Hoping to avoid a repeat of the glut, the industry scaled back on production and inventories last year, so much so that by the middle of 2005, a scarcity of some chips was holding back sales of certain IT goods. One example was a shortage of Intel computer chipsets that some analysts believe helped boost the company's main rival, Advanced Micro Devices.

One stock market watcher, Credit Suisse Group chip analyst Michael Masdea believes there's no correction in the offing, and says that the chip industry will continue to chug along at a slow, steady pace.

"We think recent worries in the semiconductor industry of inventory build, demand fall-off, and/or a repeat of the correction (in the second half of 2004) are overblown," he wrote in a report Monday.

Credit Suisse has forecast 10 percent year-on-year revenue growth for the chip industry in 2006, followed by 15 percent growth in 2007.

However, iSuppli also pointed out that lean inventories in the supply chain have forced chip suppliers themselves to hold greater inventories than normal. Equipment makers and chip distributors have been reluctant to hold inventory due to fears of being caught in a glut again. The result will likely be that suppliers won't be able to increase prices and will find it difficult to predict demand until the end of the year, the market researcher said.

The trouble with chip suppliers holding inventory is that they normally only hold semi-finished products in their store rooms. That means a spike in demand could surprise the markets and cause bottlenecks for certain kinds of chips. Suppliers would still have to send their stored goods in for final assembly, and that can take weeks or longer, since there is currently a shortage of chip assembly services available globally.

ISuppli believes the current chip inventory situation is manageable since growth in global electronic equipment revenue is expected to decline this year to just 5.9 percent, compared to 7.8 percent growth last year.

One group that views the current chip inventory with some trepidation is the Semiconductor Industry Association (SIA), a global industry group, which said Monday that global trends such as high gasoline prices could hurt consumer spending and cause IT market growth to stumble.

"We estimate that gasoline prices at current levels will take approximately US$138 billion from American households' discretionary income this year," said George Scalise, president of SIA, in a Monday statement.

So far, there's been no sign high oil prices are affecting chip sales. Global chip sales rose to US$59.1 billion during the first quarter of 2006, up 7.3 percent from the same time last year, when sales totaled US$55.1 billion, according to SIA. The industry group credited strong PC and mobile phone sales for the increase.

But SIA warned that, "If pump prices continue to increase significantly, there will be further erosion of discretionary income and that could affect consumer confidence and consumer spending."

Join the newsletter!

Error: Please check your email address.
Rocket to Success - Your 10 Tips for Smarter ERP System Selection
Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.

Dan Nystedt

IDG News Service
Show Comments

Cool Tech

Breitling Superocean Heritage Chronographe 44

Learn more >

SanDisk MicroSDXC™ for Nintendo® Switch™

Learn more >

Toys for Boys

Family Friendly

Panasonic 4K UHD Blu-Ray Player and Full HD Recorder with Netflix - UBT1GL-K

Learn more >

Stocking Stuffer

Razer DeathAdder Expert Ergonomic Gaming Mouse

Learn more >

Christmas Gift Guide

Click for more ›

Most Popular Reviews

Latest Articles

Resources

PCW Evaluation Team

Edwina Hargreaves

WD My Cloud Home

I would recommend this device for families and small businesses who want one safe place to store all their important digital content and a way to easily share it with friends, family, business partners, or customers.

Walid Mikhael

Brother QL-820NWB Professional Label Printer

It’s easy to set up, it’s compact and quiet when printing and to top if off, the print quality is excellent. This is hands down the best printer I’ve used for printing labels.

Ben Ramsden

Sharp PN-40TC1 Huddle Board

Brainstorming, innovation, problem solving, and negotiation have all become much more productive and valuable if people can easily collaborate in real time with minimal friction.

Sarah Ieroianni

Brother QL-820NWB Professional Label Printer

The print quality also does not disappoint, it’s clear, bold, doesn’t smudge and the text is perfectly sized.

Ratchada Dunn

Sharp PN-40TC1 Huddle Board

The Huddle Board’s built in program; Sharp Touch Viewing software allows us to easily manipulate and edit our documents (jpegs and PDFs) all at the same time on the dashboard.

George Khoury

Sharp PN-40TC1 Huddle Board

The biggest perks for me would be that it comes with easy to use and comprehensive programs that make the collaboration process a whole lot more intuitive and organic

Featured Content

Product Launch Showcase

Latest Jobs

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?