Excess Chip Inventory Keeps Growing; Surplus ... - Circuitnet

Excess Chip Inventory Keeps Growing; Surplus Expected to Linger
El Segundo, Calif., Jan. 10, 2007—Surplus semiconductor inventories in the global electronics
supply chain rose again in the fourth quarter of 2006, meaning that excess stockpiles are
likely to linger through 2007, iSuppli Corp. predicts. Total excess chip inventory swelled to
$4.3 billion in the fourth quarter, up 4.9 percent from $4.1 billion at the end of the third
quarter, according to a preliminary estimate from iSuppli.
“The 4.9 percent increase in excess semiconductor stockpiles conforms to iSuppli’s forecast,
and does not mark a significant worsening of the surplus inventory situation,” said Rosemary
Farrell, analyst with iSuppli. “While rising levels of excess inventory are a concern for the
global semiconductor industry in 2007, they are not sufficient to derail market growth.”
Although $4.3 billion appears to be a worrying total, the impact of the overage on the
semiconductor industry will not be that great in 2007. If the excess inventory were taken out
of the equation, the semiconductor market would experience only a 1 to 2 percentage point
increase in growth in 2007 compared to iSuppli’s present forecast of a 10.6 percent expansion
in global chip sales for the year.
However, indications of rising inventory come amid signs of the start of a seasonal slowdown
for the semiconductor market and the larger electronics industry. Chip suppliers in the fourth
quarter experienced slowing orders for semiconductors for 3G wireless handsets and for highend
computers, adding to weakness already seen in some segments of the networking and
wired communications segment.
Furthermore, overproduction of LCD televisions added to excess stockpiles of related chips
during the quarter. In light of these trends, some semiconductor suppliers have trimmed their
guidance for their fourth-quarter results.
Semiconductor suppliers in the fourth quarter typically reduce their Days of Inventory (DOI)
by a larger margin than they do in the third quarter. After entering the third quarter of 2006
with elevated DOI, semiconductor suppliers reduced their DOI by less than a day in the third
quarter. This slight decrease of inventory fell short of the five-year average of nearly two days
of reduction in DOI among semiconductor suppliers in the third quarter.
While most of the excess stockpiles are concentrated at the semiconductor suppliers, there are
signs of worsening inventory levels at Electronics Manufacturing Services (EMS) providers.
EMS inventory remains bloated and some will be pushed back to semiconductor suppliers. DOI
at component distributors is stable.
Despite this, iSuppli believes that the current inventory situation is not a cause for major
concern. Although some semiconductor suppliers reduced their guidance, the negatives are
offset by positive results at other companies. The fact that DOI at semiconductor suppliers are
on track to decline at a lower-than-normal rate is not unexpected. This is due to the slowing of
demand from some end markets, as well as inventory adjustments among chip customers.
About iSuppli’s Semiconductor Inventory Tracker Service
iSuppli defines excess inventory as the point where Days of Inventory (DOI) exceed historical
averages during a quarter. The Semiconductor Inventory Tracker Service employs quarterending
inventory levels for approximately 100 companies at every node of the electronics
supply chain, i.e. foundries, Integrated Device Manufacturers, distributors, OEMs, contract
manufacturers and system distributors.
iSuppli then compares this data against target levels for each point in the chain by analyzing
historical seasonal patterns and surveys of the companies to determine the desired level for
inventory. We now do this at the total semiconductor level.

All DOI calculations are based on cost of goods sold, except for semiconductor suppliers, which
are calculated on a cost-of-sales basis. For each segment, and for the entire supply chain,
iSuppli then calculates what those extra days of parts lingering in inventory are valued at
during the quarter based on the target levels.
For more information, please contact:
Jonathan Cassell
Editorial Director and Manager, Public Relations
iSuppli Corporation
Office: 408.654.1714
Mobile: 408.921.3754
www.isuppli.com
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All Information and Intellectual Property Contained Herein is the Sole Property of iSuppli
Corporation
About iSuppli Corporation
iSuppli Corporation is the global leader in technology value chain research and advisory
services. iSuppli provides market intelligence services for the EMS, OEM and supplier
communities in addition to servicing consumer electronics and media concerns. Services
afforded by iSuppli range from electronic component research to device-specific application
market forecasts, from teardown analysis to consumer electronics and from display device and
systems research to multimedia content and services. More information is available at
www.isuppli.com