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Chip makers' efforts fail to cut excess inventory

Q3 figures show stockpiles still rising

The volume of excess chip inventory in the channel during Q3 was higher than expected, market watcher iSuppli has revealed, despite aggressive attempts to eliminate the stockpile.

iSuppli had previously anticipated some $800m worth of unused semiconductors would be taking up storage space in chip manufacturers, distributors, resellers and manufacturers' warehouses, down 3.5 per cent on the $829m measured in Q2.

In fact, the company now anticipates the inventory level will have risen 32.7 per cent to $1.1bn during Q3, based on its preliminary research. The rise was seen in all territories and "most" sectors of the semiconductor market, iSuppli said.

Chip makers themselves had to deal with the bulk of the excess - not, as many of them suggested, the channel and customers. Chip manufacturers themselves held a whopping 85.7 per cent on unsold products during Q3, iSuppli calculates.

The excess inventory has caused chip manufacturers much grief during Q3, with most companies' quarterly results showing reduced sales and shipments as customers delay buying in order to use up already-supplied semiconductors. That trend emerged mid-Q2, but Q2's early high sales volumes masked the impact on that quarter's results for most companies.

Chip makers have since moved to adjust output according to declining demand, but iSuppli's figures suggest that they have not gone far enough - not a good sign for Q4. Indeed, the researcher expressed its concern that industry hopes that the inventory situation will have eased by the end of 2004 or early 2005 may prove unfounded.

As we've noted before, if the inventory situation extends much beyond Q1 2005, it will segue into what it widely anticipated to be a period of slowing growth and eventually shallow decline in the chip market.

Of course, those 2005 and 2006 forecasts were made while 2004's figures appeared to be becoming ever more rosy, and it's entirely possible that the ripples caused by the H2 2004 slowdown will change set the industry on a different course over the coming 18 months or so. The factors behind forecast damping of average selling prices and demand may be coming in early, but more weakly than the all-at-once, bust-follows-boom scenarios of the past.

Historically, Q3's inventory level was lower than at similar circumstances in the past. Q3 2002 saw inventory levels reach $2.5bn, for example. ®

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