Intel’s chip stockpiles create glut

Intel, the world’s largest chipmaker, has almost single-handedly created the biggest semiconductor glut in the industry since it was hit by massive stockpiles two years ago, according to a leading research firm.

ISuppli on Tuesday estimated the value of surplus chip inventories in the second quarter at $2bn, higher than the $1.6bn recorded in the third quarter of 2004 - the peak of the last inventory mountain.

The figure is 78 per cent higher than the $1.1bn recorded in the first quarter and is the highest since the $2.5bn accumulated in the third quarter of 2002.

“Excess inventories have exceeded the worrying levels seen during the last semiconductor supply snafu in mid-2004,” said Rosemary Farrell, an iSuppli analyst.

“However, with most of the excess inventory restricted to PC-related chips and mainly to a single supplier – Intel Corp – the surplus stockpiles are not a major concern for the global electronics industry.”

Inventory build-ups can signal falling demand and lead to lower prices and sometimes write-offs of stock by manufacturers.

Analysts expressed concern at Intel’s inventory levels during its second-quarter earnings call last month. But Andy Bryant, chief financial officer, said it would take a drop in demand of 10 to 15 per cent for it to consider any inventory write-offs.

Intel’s inventory of $4.3bn was up more than $750m from the first quarter. It said that $200m of this came from the manufacturing ahead of schedule of its chip codenamed Conroe, which was launched as the Core 2 Duo microprocessor last week.

The inventory build-up was also influenced by ramped-up production of its “Broadwater” chipset. Mr Bryant said inventories could rise again in the third quarter.

Intel does not appear to be worried about its stockpiles. It sees them as part and parcel of a transition to a new generation of processors, with the latest chips unlikely to lose their value in the short term.

It is also seeking to avoid the chipset shortage it suffered last year that caused it to concede market share to its rival Advanced Micro Devices.

“If I have made one mistake in the last two years, it was that we did not build enough chips at the right time…that got us in trouble in terms of market share,” Paul Otellini, chief executive, told analysts.

ISuppli predicted Intel’s surplus, which it determines as the point where days of inventory exceed historical averages, would linger into 2007. It said a price war between Intel and AMD meant customers were placing smaller, more frequent orders to get the best prices, but causing stockpiles at the manufacturers.