September 23, 2011 – Gartner analysts have already joined the chorus of industry watchers cutting 2011 forecasts (and some see 2012 softer too). Now they’re raising another red flag: semiconductor inventories are at "worrisome" levels given market conditions and likely soft end-market spending.

Semiconductor inventories were "moderately high" in 3Q11, " too high given the weakening economic sentiment," said Gerald Van Hoy, senior research analyst at Gartner, in a statement. "The industry must rein in production growth and take action to reduce accumulated inventory." Gartner’s days-of-inventory (DOI) index is at "caution level" at 1.12 in 3Q11; anything above 1.0 indicates inflated levels and downward pressures on ASPs, while below 0.95 means levels are too low, leading to component allocations and double-ordering.

Earlier this month at a MEPTEC forum lunch, Gartner analyst Jim Walker mentioned inventory correction as one reason for Gartner’s newly downgraded forecast (along with foundry and DRAM overcapacity, overlaid with macroeconomic uncertainties). There has been no lift from the traditional back-to-school selling cycle, and holiday builds are down too, he said.

Look for the industry to pull back production to reduce inventory over the next few quarters (late 2012 and early 2012). OEM inventory is rising but still near "historic lows" which will help soften the blow to any order correction on vendor sales. ASPs are tracking below trend levels, and this is prolonged by foundry overcapacity, added Gartner principal analyst Peter Middleton. He notes that the impact from Japan’s March 11 earthquake/tsunami disaster was largely buffered by already-built-up semiconductor inventory — but now it’s time to actively "rationalize stock levels in the face of macroeconomic weakness," he says.