Rising IC inventories pose threat to semicon margins

SAN FRANCISCO: The 10 per cent growth of IC supply chain inventories in the second quarter compared to the first quarter of the year, has begun to cause concern that it will result in downward pressure on semiconductor gross margins and contribute to future revenue declines. A preliminary second quarter inventory analysis by a Wall Street analyst brought up the concern..

This rise in inventory is preceded by 4 percent increases in both the first quarter of this year and the fourth quarter of 2009, say the analyst. The 10 percent sequential inventory increase has happened across the spectrum of IC firms, distributors EMS vendors and handset, PC and communications equipment OEMs.

The report says that an inventory increase of about 5 percent is expected to happen in the second quarter. This increase signals that a cautionary approach needs to be taken regarding future revenue and earnings loss by chip firms, which can be expected to happen as natural and reasonable outcomes as customers stop replenishing inventory and even begin to de-stock inventory.

Chip firms' inventory dollars grew 12.5 percent in the second quarter, which is 10 points worse than typical, says the report. According to the analyst, days of inventory at the firms that were surveyed are still at reasonable levels- about 6.5 percent higher than the all-time lows hit in the third quarter of 2009.