Semiconductor inventory back to healthy levels

It may not yet be the time to uncork the bubbly but the smiles and optimism are definitely back in the global semiconductor industry.

Sitting on a pile of inventories for the past six months, fab owners and fabless chipmakers are heaving a sigh of relief with stocks moving faster on signs of a revival in various sectors that drive the industry.

Recent commentary from players across the spectrum — chipmakers, equipment suppliers, industry bodies and analysts — suggest the current semiconductor cycles could be bottoming out.

Though not out of the woods yet, statements by semiconductor companies and equipment suppliers post Q1 results indicate increased offtake.

For instance, new orders for semiconductor equipment supplier Applied Materials saw a $3.16 billion decline in backlog, a drop of nearly $1 billion sequentially.

Despite the weak earnings, the management gave an optimistic picture of the current scenario in a conference call.

Likewise, the world’s biggest chipmaker Intel came out with positive comments on the cycle and kick off to Q2 sales. Though acknowledging IT demand was sluggish, AMD CEO Dirk Meyer observed the severe inventory corrections of the prior quarter have stabilised and should play out completely in the coming quarter.

According to a recent client note put out by brokerage house CLSA, fabless inventories are on the path to normalisation, reverting to inventory periods of 60 days in Q1 from 77 days in Q4 of 2008. The promise to stay in the range of 58-63 days band for the next two quarters bodes well for upstream and back-end stocks, said analysts Bruce Lu and Bhavtosh Vajpayee in the note.

And interestingly, China and to some extent India may have some role to play in this resurgence in the semiconductor industry. “We know for a fact that China is driving a lot of demand for integrated circuit chips with the deployment of three 3G networks currently going on there. In India, it is a similar story, with none of the operators slowing down their investments in backhaul communications equipment,” said Neeraj Verma, sales director at semiconductor company Xillinx.  There is a lot of demand for base stations which are now being produced in India, he said.

“It is difficult to say if it has bottomed out, but yes, traction in Asia is good with China going great guns,” said Sanjeev Keskar, country sales director at Freescale Semiconductor, a leading manufacturer of microcontrollers, microprocessors and semiconductors.

Though some have projected a flattish growth in PC and other computer equipment sales in the current quarter across the world including India, the main sectors that drive semiconductor sales such as telecom, automotive, industrial electronics and to some extent consumer electronics have been showing good traction in the current quarter.

The current slowdown started in October 2008 leading to a painful Q4 2008. But an inventory correction was seen in Q1 and the positive signals have continued in Q2. The auto industry has picked up, mobile phones are flying off the shelves with 10-12 million subscribers being added every month while IT and office equipment segment laptop sales are picking up, Keskar said.

While it is not clear if the market has bottomed out, as the current spurt could also be because of pent-up demand, the activity in the current quarter across all five verticals that drive the semiconductor industry is a good sign.

Moreover, going forward, one could expect the momentum to continue, at least in India, given that the festive season begins in July through September and could give a fillip to inventories.

“However, companies are cautious and are playing back-to-back where supplies are concerned and are emphasising on managing lead times better in a bid to keep inventories at the optimum levels,” said Freescale’s Keskar.

“Our estimates indicate that fabless inventory will pose no alarm in the near term and we expect 58 days of inventory, in Q2 and 63 days in Q3,” CLSA’s Lu and Vajpayee said.