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Inventories Too High?

2010 will go down in the history books as one of the greatest recoveries the semiconductor industry has experienced. Contributing to this recovery was the fact that the industry underinvested prior to the downturn. In addition, the fears and uncertainty surrounding the length and depth of the recession and its impact on electronics sales resulted in an overreaction by the supply chain which stripped inventories to near zero. As it turned out, electronics is one of the segments that has fared the best during this recession. As a result the supply chain has been in a catch-up mode for the past year.

Housing continues to languish with foreclosures, falling prices and restricted banks loans. The automotive industry has made some nice recoveries yet is still well below production levels from just a few years ago. The new consumer is different. They are younger and two things are apparent. One, cars are not the highest priority for these consumers. Two, buying a house is also not high on the priority list. What is a priority is the ability to have access to social networking, games, videos, pictures and music. These priorities drive consumers to upgrade their smart phone, iPod, tablet/iPad and notebook. These products are priced such that they do not require credit and are considered a necessity in today's world.

In 2010 the semiconductor industry will see a growth rate of 32%, a welcome sight to the industry. As I go out and talk to CEOs from around the world, the questions I continually get asked include the following. Are semiconductor sales exploding too fast? Are inventories out-of-control? Is there double and triple ordering? Is 2011 going to be a down year? All of these are valid questions and I'll address these issues. First, is 32% too much growth?

The simple answer is no. We've seen strong unit growth in smart phones, netbooks, notebooks, tablets and HDTVs in the consumer market. All of these devices are connected devices and the additional demand from social networking, music and video downloads have created tremendous demands on bandwidth and storage requirements on the web. We are seeing a strong upgrade cycle in server farms and broadband build-out’s to support these connected devices. The 2010 growth rate is driven by increasing unit demand and the requirement to rebuild supply chain inventory levels. Semico looked at several different semiconductor categories and plotted the unit consumption on a two-year rolling average over the last 25 years. We found that in most cases the 2010 growth just brings us back to the expected trend line level. We will be monitoring inventories closely in 2011.

Our current expectation is that the second half of 2011 should experience slower growth to avoid an overbuilding of inventory. The risk is that semiconductor companies will be driven by their goals to increase market share. That could fuel an inventory over-build resulting in a market downturn that will continue into 2012.

It is our belief that the industry will not allow inventories to get too much out of control and that companies who are investing in wafer fab equipment will rapidly cut off equipment orders as inventories grow. This should make the next downturn short and shallow. Semico also believes that the continued expansion of 3G and the introduction of 4G wireless systems, in addition to growth in server farms and broadband expansion will soften the next downturn. These topics and other important issues surrounding the semiconductor industry are addressed in the monthly Semico IPI report, required reading for anyone wanting to keep up-to-date on the semiconductor industry. Semico will also post the graphs that illustrate the potential timing of the next excess inventory situation so keep visiting our website.

Jim Feldhan