EL SEGUNDO, CA  -- Surplus semiconductor inventories rose again in the fourth quarter of 2006, meaning that excess stockpiles are likely to linger through 2007, iSuppli Corp. predicted today. The research firm was quick to dispel concerns that the stockpiles are worsening or will hamper market growth, however.

Preliminary estimates show excess chip inventories swelled to $4.3 billion in the fourth quarter, up 4.9% sequentially.  "The increase does not mark a significant worsening of the surplus inventory situation,” said analyst Rosemary Farrell. “While rising levels of excess inventory are a concern for the global semiconductor industry in 2007, they are not sufficient to derail market growth.”

The impact of the $4.3 billion overage on the semiconductor industry will not be that great in 2007, the firm says. If the excess inventory were taken out of the equation, the semiconductor market would experience only a 1 to 2 point increase in growth in 2007. iSuppli present forecasts a 10.6% expansion in global chip sales for the year.

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 high-end computers, adding to weakness already seen in some segments of the networking and wired communications segment. Furthermore, overproduction of LCD TVs added to excess stockpiles of related chips during the quarter.

In light of these trends, some semiconductor suppliers have trimmed fourth-quarter guidance. Semiconductor suppliers in the fourth quarter typically reduce their days of inventory by a larger margin than they do in the third quarter. After entering the third quarter with elevated DOI, semiconductor suppliers reduced their DOI by less than a day. 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 EMS providers. Some of this will be pushed back to semiconductor suppliers, iSuppli says. Inventories among component distributors are stable.

iSuppli believes that the current inventory situation is not 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.

iSuppli defines excess inventory as the point where DOI exceed historical averages during a quarter. The firm looks at quarter-ending inventory levels for approximately 100 companies (foundries, component manufacturers, distributors, OEMs, contract manufacturers and distributors), and compares these 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. All 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.

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