More Inventory Cycles Ahead

Unit shipments of ICs jumped 12.8% during the summer, a 62% annual rate of increase, following a gain of only 8.8% over the previous 21 months. This recent pace is obviously not sustainable. The need for parts, from the combination of higher production of electronic systems, more circuits per system, new applications for semiconductors and pipeline restocking, is growing well below 7%. The 17% growth rate of IC shipments since the business expansion began in the spring of 2003 suggests that current parts demand is unlikely to be expanding faster than a 20% annual pace. Either unit shipments will remain near the summer level into 2006 or a new period of excess inventory accumulation has already begun.

Recent experience suggests that system assemblers or their board-level suppliers will accumulate some excess inventory in 2006. In a growing market for systems, most assemblers can financially justify buying ahead of production needs to beat anticipated price increases, which helps them to prepare for stretched-out delivery lead times or to gain a capacity or product availability advantage for a new semiconductor application. From 1999 to date, unit shipments grew at an 11.55% annual rate, while the quarter-to-quarter change in shipments was 25%, annualized.

The type of semiconductor parts with the largest unit-shipment gains recently provides further evidence for ongoing inventory accumulation. Wireless parts had a 26% shipment gain in the last quarter; the gain was 21% for consumer equipment parts. This included shipment gains of ~20% for optoelectronics and flash memory and 25% for standard cells. Recall that both of these markets were largely responsible for previous periods of excess inventory accumulation. However, the increase was <5% for automotive parts and only 10% for computers and peripherals. Both of these markets have more stable semiconductor buying practices. They are better able to forecast production schedules and parts demand and less able to make abrupt changes in production schedules and parts needs when they misjudge customer demand.

We have changed the semiconductor shipment forecast for 2006-07 to account for shipments above end-market parts consumption until mid-2006, followed by shipments below consumption into 2007 and then a second period of inventory building later in 2007. As always, the variation in shipment revenue will be larger than for shipment volume, because average selling price strengthens during inventory building and weakens during inventory reduction periods. This result is a 7.6% rise in shipments in 2005, 13.3% in 2006 and 6.7% in 2007. For 2006-07 together, this is only slightly higher than the 19.5% increase in the latest SIA market forecast.