Chipmakers act fast to cut inventories

Semiconductor makers and their customers have reacted with unusual speed to reports of excess inventory by limiting orders of chips, the Semiconductor Industry Association said yesterday.

The assessment came as the association published global chip sales figures that showed an unexpected slowdown in growth in August. Chip sales increased by 1.1 per cent to $18.2bn from July, but were 34 per cent higher than a year ago.

The industry is expected to ease into a cyclical downturn over the next two years, though some analysts have warned that swelling inventories could send chip sales spiralling downwards, repeating a painful slump that began four years ago.

August's sales figures from the SIA appeared to be in line with analysts' bearish expectations.

?Semiconductor producers and their customers have reacted with unprecedented speed to recent reports of excess chip inventories,? said George Scalise, SIA president. ?In previous market cycles, it has generally taken several quarters for the supply chain to take corrective action.? When the first reports of excess inventory surfaced in the second quarter, producers and customers moved quickly to adjust their positions, he said. ?Both VLSI Research and iSuppli are now reporting that chip inventories are declining. ?With both producers and customers paying close attention to chip inventories and taking action quickly, we expect that semiconductor sales will continue to show steady growth through the balance of the year and will meet the current forecast of 28 per cent growth for all of 2004.? He added: ?We expect a modest decline in capacity utilisation rates in the current quarter.?

The SIA president pointed out that capital spending had been running at about 23 per cent of sales, in line with historical patterns. ?At this time, we do not believe overcapacity will be a major concern in 2005,? he said.

In recent months, semiconductor manufacturers have become concerned about weakening demand in some product segments and regions leading to a build-up in chip inventories. These concerns prompted a spate of lowered sales forecasts from chipmakers including Intel and Texas Instruments in turn knocking their share prices.

On Thursday, in the wake of the SIA statement, the Philadelphia Semiconductor Index added 1 per cent to 384.6 in early trading. Chip stocks have swung violently. Since the beginning of July, shares fell up to 28 per cent, before rebounding in September.