April 4, 2007 – Surplus semiconductor inventories dropped more than expected at the end of 4Q06 and weak orders to start 1Q07 have started to pick up again, but chipmakers stepping up production levels still need to tread very lightly, according to analysis by iSuppli Corp.

Chip suppliers started slashing production at the end of 3Q, and by 4Q had already reduced excess supplies by a third (from $4.2 billion to $2.8 billion), even with soft demand following the peak holiday buying season, noted Rosemary Farrell, inventory analyst at iSuppli. In 1Q07 the industry chipped another 10.7% off of inventories, down to $2.5 billion. iSuppli’s earlier estimates pegged surplus chip inventory levels still at around $3.2 billion for 1Q07.

Worries of seasonally slow orders in 1Q came true at least in the early weeks of the quarter, Farrell noted, but demand seems to have bottomed out in January and began to recover in February, with stronger orders from OEMs and distributors.

Despite the good news with excess inventory burnoff, iSuppli notes that chipmakers are expected to ramp up production in 2Q07 ahead of anticipated demand in 2Q-3Q, which will flush more chips into the channel. Reducing inventory levels is good news, Farrell said, but there’s still a lot of product in the supply chain, and chipmakers “still have very little visibility into demand levels of customers of their distribution partners.” Much depends upon strong end-market demand now and anticipated demand for new products in 2H07 mix, not to mention macroeconomic X-factors including rising fuel prices and stock market fluctuations. All this means chipmakers must be very cautious over the next few quarters “to avoid stuffing the channel with superfluous parts again.”

Preliminary estimate of worldwide excess semiconductor inventory
in the global electronics supply chain (US $B)

…………………………4Q05……….1Q06……….2Q06……….3Q06……….4Q06……….1Q07
Excess
semiconductor
inventory………….-0.726………..1.2…………..3.9……………4.2………….2.8……………2.5

Source: iSuppli Corp.