PALO ALTO, CA -- Inventory throughout the supply chain decreased in the first quarter of 2005, albeit not as fast as sales/COGS, resulting in a moderate decrease in inventory velocity. 

Deutsche Bank analysts believe communications OEMs will likely work inventory levels lower in 2Q and 3Q in the face of only moderate end market demand (negatively impacting near-term EMS demand).

Based on analysis of 50 OEMs, manufacturers and distributors, Deutsche Bank estimates that total inventory throughout the supply chain decreased 5% quarter on quarter. Days of inventories increased the most at communications OEMs, while hardware OEMs, EMS, semiconductor and passive/connector manufacturers all saw a slight uptick. 
 
OEM inventories increased roughly 5 days from last quarter to 31 days. Communications OEMs'inventory increased 10% on a 33% decrease in COGS. Inventory for Ericsson, Nokia and Motorola alone increased 12%, while their combined COGS decreased 39%. DB expects these trends to reverse in the upcoming quarters as the OEMs bleed their inventory.
 
Hardware OEMs' inventory days increased a day to 24 days, comparable to this quarter last year, DB said.
 
Inventory days for the EMS industry increased 3 days to 41 days (down 2 days vs. the year ago quarter). Despite big improvements in the quarter from Solectron, Plexus, and to a lesser degree Jabil, total inventory for the EMS industry only decreased 2% Q/Q (on a 8% decline in COGS). Flextronics' 10-day increase in days inventories drove most of this increase (due to the Nortel acquisition late in the quarter), as days inventories for the rest of the group was flat.
 
DB believes the OEMs' inventory build from the first two quarters of last year are largely behind us (excluding communications equipment), but that OEMs have room for further inventory velocity improvement. The company predicts EMS vendors to experience anemic demand over the next 3-6 months as end market demand for technology hardware remains lackluster and OEMs further reduce inventory levels.

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