Rising semiconductor inventory causes oversupply worries -

The third quarter may see semiconductor inventory levels heading into oversupply territory,  iSuppli has said.

The Semiconductor Days Of Inventory (DOI) for chip suppliers are estimated to have climbed to 75.9 days in the third quarter of 2010. This was up by 1.5 days from the second-quarter.

DOI in the third quarter was 4.8 percent higher than the average for this time and  the total value of semiconductor inventory held by chip suppliers continued to grow.

Inventory in the third quarter was estimated to amount to $34.3 billion, which was a growth of 10.6 percent from the second quarter. The last time value was this high was in the second quarter of 2008, when semiconductor suppliers’ stockpiles peaked at $35.4 billion.

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Sharon Stiefel, a researcher for semiconductor inventory and manufacturing at iSuppli, says the increase in DOI is in line with projected revenues for the coming quarter. She said this posed no "overt danger toward overinflating the current supply chain.”

“Likewise, inventory dollars, also on the upswing, will remain generally appropriate when measured against DOI," she added.

However, she warned that "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," she added.

“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."

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

However, inventory is not increasing at a standard rate throughout the supply chain, despite the overall expansion during the past four quarters. iSuppli points out that as an example, fabless companies reported stronger inventory growth rates than other segments of the semiconductor industry, such as foundries.

iSuppli warns a gathering storm of conflicting market factors could 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.”