Total semiconductor inventory at the end of the second quarter, as measured by the key Days of Inventory (DOI) factor, stood at an unusually elevated 83.4 days—a level exceeding even the last record high of 83.1 days seen in the first quarter of 2008. The current level of inventory is at least 11 percent above the historical seasonal average usually recorded for the second-quarter period, and stockpiles are just shy of the 11.1 percent oversupply condition in 2008 prior to the economic downturn.

The second-quarter inventory DOI represents a fairly large jump of 3.5 days from 79.9 days in the first quarter, and is the first time in 12 consecutive quarters that DOI has tipped over the 80-day mark.

For the semiconductor industry, wading into such potentially troubling territory—reminiscent of the dark days leading into the recession—could herald the beginning of a critical inventory adjustment period. The correction is likely to place over the next few quarters and get completed only by mid-2012, which would call for suppliers making a prolonged modification in their inventory strategies to avoid dangerous oversupply, IHS believes.

Already, revenue projections for the third quarter are being scaled back as various indicators point to a stalling economy. For instance, U.S. gross domestic product growth rates for 2011 have been reduced to a mere 1.5 percent compared to 3.0 percent last year, and IHS Global Insight predicts a 40 percent chance of the United States and Europe entering into another recession. IHS iSuppli also has revised its semiconductor revenue forecast to 2.9 percent growth in 2011, down from the 4.6 percent annual growth rate projected in an August forecast and a steep plunge from the 32.4 percent growth recorded in 2010.

For many semiconductor companies, the projections for flat sequential revenue made during second-quarter earnings calls reflect the decreased supply chain visibility that suppliers are experiencing at this time based on slowing end demand. Many, in fact, also have lowered their third-quarter revenue guidance in mid-quarter announcements as a response to the deteriorating global economic outlook. In the seg­ment representing analog suppliers, for instance, manufacturers are being extra-cautious to ratchet down inventory as analog DOI at the end of the second quarter stood at an even higher 92.5 days compared to the rest of the semiconductor industry.

One aspect, however, represents cause for hope: the financial environment in 2011 is not as ill-pre­pared as in 2008. U.S. banks today are healthier, many corporate balance sheets are strong, and European leaders are handling the continent’s sovereign debt crisis better than U.S. institutions did in tackling the subprime debt situation that led then to a global financial collapse. 

Despite the current high inventories, DOI is projected to decline by more than 2 percent in the third quarter to 81.3 days as semiconductor suppliers recalibrate inventory to refl ect the ongoing reduction in demand. And unlike the past, suppliers now have reduced capacity utilization to cope with downsized markets while still maintaining flexible production capacity in case unexpected orders materialize.

Sequential growth of 4.8 percent is predicted for the industry in the third quarter notwithstanding the ongoing economic turmoil. Strong performances are expected from the semiconductor sectors serv­ing the data processing and wireless communication categories, which should help offset declines in the other end markets.

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