EL SEGUNDO, CA -- Semiconductor inventory levels may have headed into oversupply territory in the third quarter, according to research firm iSuppli.

Semiconductor days of inventory for chip suppliers are estimated to have climbed to 75.9 days in the third quarter of 2010, up 1.5 days from the second-quarter. DOI in the third quarter also was 4.8% higher than the seasonally adjusted average for the period.

Mirroring the rise in DOI, the total dollar value of semiconductor inventory held in by chip suppliers continued to grow as well. Inventory in the third quarter was estimated to amount to $34.3 billion, up 10.6% from the second quarter. The value of inventory was not been this high since the second quarter of 2008, when semiconductor suppliers’ stockpiles peaked at $35.4 billion.

“By most estimates, the increase in day of inventory is thought to be in line with projected revenues for the coming quarter, posing no overt danger toward overinflating the current supply chain,” said Sharon Stiefel, a researcher for semiconductor inventory and manufacturing for iSuppli. “Likewise, inventory dollars, also on the upswing, will remain generally appropriate when measured against DOI. Nonetheless, softness in demand is being noted in some sectors, raising flags about potential trouble down the road.”

Whether that softness is an isolated event or portends a broader slowdown remains to be seen, but it is commonly believed that the industry will need to moderate inventories at the appropriate time in its growth curve in order to capture current revenue opportunities while they still exist, Stiefel said.

“Should demand decline at a rate faster than initially forecasted—an entirely reasonable assumption given the slower-than-expected pace of economic recovery around the world—semiconductor inventory may go into an oversupply situation,” she added.

The potential for oversupply represents a complete turnaround from the lean stockpiles during recent months.

However, inventory is not increasing at a uniform rate throughout the supply chain, despite the overall expansion during the past four quarters. For instance, fabless companies report stronger inventory growth rates than other segments of the semiconductor industry, such as foundries. And with companies operating more efficiently, enjoying record profits and setting higher safety stock targets, elevated inventory levels may well qualify as the new normal.

Still, a gathering storm of conflicting market factors may compel manufacturers to take extra caution.

“With inventories predicted to grow in the third and fourth quarters, manufacturers likely will seek to balance the current situation of long lead times and capacity constraints against concerns regarding of softening demand through the end of 2010, especially in particular sectors like PCs,” Stiefel said. “Adding to the general anxiety are fears of global demand weakening in the face of continued economic uncertainty. As inventories continue to build through the end of the year, the potential exists for oversupply to steal back into the supply chain. The result is that the industry will need to keep a watchful eye to adjust manufacturing at the first sign of softness in demand.”

To this end, managers will need to protect assets, maintain lean operations and reduce inventories—all in the name of preventing inventories from expanding by the end of the fourth quarter.

Such actions, taken quickly to balance production with the new lower level of demand, may then prevent an inventory bubble from occurring.

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