Chip companies made significant progress in eliminating overinflated inventories in the fourth quarter of 2004, but expectations of slowing growth for this year could call for further reductions, according to research from iSuppli.
Manufacturers reduced excess inventory in the fourth quarter to $US1 billion, iSuppli said. This was a 38 per cent drop from the third quarter, when iSuppli estimated the chip industry was holding on to $US1.6 billion in excess inventory.
Isuppli defined excess inventory as "the point where days of inventory exceed historical averages for the quarter", it said.
The market researcher records inventory data from about 100 chip companies each quarter to come up with its figures.
The chip industry is notoriously cyclical, and dramatic fluctuations in demand are quite common from year to year. Large orders placed in the first half of the year contributed to the overstock situation at large suppliers such as Intel and Texas Instruments as well as many other smaller chip vendors, iSuppli said. Hardware vendors initially believed that the demand in the second half of 2004 would be stronger than historical trends would indicate, but that didn't happen.
Shipments by the PC and mobile phone industries still grew at double-digit rates in the second half of the year, but those companies were saddled with larger inventories as a result of their aggressive forecasts, causing them to delay chip purchases for a quarter or two. This led Intel to decrease production in the third quarter in order to let its customers burn off their excess inventories.
Quick action by chip companies meant the glut of semiconductors decreased faster than expected, iSuppli said.
The industry would continue to reduce its inventories in the first half of 2005, but given the current amount of excess inventory, companies should continue to watch demand closely, the researcher said.
Consumers should also be aware of the supply situation in the semiconductor industry, since prices often track the state of the supply/demand balance.
An oversupply of chips generally leads to a decline in prices, while a scarcity of chips will portend an increase in prices, as most people learned in basic economics.