EL SEGUNDO – Chip inventories held by semiconductor suppliers declined in the third quarter, putting a halt to the steady expansion of the previous seven quarters, as the industry cut production to reduce oversupply, says IHS iSuppli.

Semiconductor stockpiles in the third quarter stood at 81 days, down 2.5% sequentially, says the research firm.

The days of inventory level had been on the rise since the third quarter of 2009 when it stood at just 65 days – a time when stockpiles were low because production had been reduced during the dark days of the recession.

Since then, DOI had been creeping up, partly to make up for depleted stocks, and also to cope with growing demand as strength returned to the supply chain. However, amid signs of weakening growth in the semiconductor market, the rise in inventory had generated concerns, according to IHS iSuppli.

Global semiconductor revenue in 2011 is estimated to have risen by a scant 1.9%, compared to a forecast of 7% growth issued early in the year.

“For the third quarter, semiconductor suppliers began an inventory correction to alleviate an escalating oversupply situation on top of already inflated stockpiles,” said Sharon Stiefel, semiconductor analyst at IHS. “With the global economy all but stalled, and in the face of declining orders as well as decreased visibility, many semiconductor manufacturers opted to reduce capacity utilization. And with lead times now declining to normal levels after extended periods of waiting in the past, manufacturers were more confident about trimming bloated inventories this time around without fear of causing too much pain to the supply chain.”

Despite the inventory cutback, DOI in the third quarter remained elevated in absolute terms – the highest of the last 10 quarters, dating all the way back to the fourth quarter of 2008 – suggesting that stockpiles are still quite high. Moreover, the percentage of oversupply during the period rose to 12.1%, exceeding the 11.1% spike in oversupply during the fourth quarter of 2008. As a result, expectations are that inventories will be trimmed further in the fourth quarter of 2012.
Inventory levels rose for handset original equipment manufacturers, distributors and analog companies, all of which posted percentage gains in DOI. Stockpiles, however, fell for fabless semiconductor makers, memory suppliers, foundries, PC original equipment manufacturers, storage gear companies and electronic manufacturing services providers.

For mobile handset manufacturers, inventories increased in the third quarter, as suppliers prepared for their seasonally busy end-of-year period. In comparison, inventory at pure-play foundries declined more strongly than expected – the result of a reduction in utilization rates, says the firm.

The company predicts total DOI to decline another 2.5% in the fourth quarter to 79.3 days.

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