May 8, 2006 – Semiconductor inventories throughout the electronics industry swelled faster than expected during 1Q06, but overall the supply chain continues to be healthy and chip stockpiles remain lean, according to a report from iSuppli Corp.

Semiconductor inventories in the electronics supply chain soared by $794 million in 1Q06, rebounding strongly from a $844 million shortfall in 4Q05 — but still $50 million below the optimal target for chip stockpiles, suggesting supply and demand are nearly in balance, the firm said. iSuppli, which had expected the supply chain would fall $400 million short of the optimal mark in the first quarter, added that semiconductor inventories likely will remain higher than ideal targets through the end of the year, as suppliers “remain beholden to their customers in terms of pricing and visibility.”

Meanwhile, chip distributors also increased inventory levels, but are operating at “historically low stockpile levels,” and are still in a state of undersupply despite inventory replenishments, iSuppli noted.

In terms of demand, most end markets saw softening demand in 1Q06 compared with the prior quarter, in line with typical seasonal patterns. Exceptions included products such as MP3 players, where demand was stronger than expected. One result of a slowdown in demand is that parts formerly in tight supply are now available, iSuppli noted. However, orders are still being placed with caution, even by makers of end products that saw growth in 1Q06. “There is little evidence of panic and double ordering at this time,” the firm stated. Companies “are holding off from full-scale restocking,” with mixed and declining macroeconomic trends and large inventories at suppliers keeping customers from aggressively placing orders.

The backend segment also continues to see tightened supplies, helping to limit excess shipments into the supply chain, the firm noted.