Gartner: Semiconductor Inventory Levels Too High, IT Demand Weakening

Gerald Van Hoy, senior research analyst at Gartner, said the chip industry entered the current quarter with "moderately high levels of inventory" as demand softens. Gartner forecasted the days of inventory (DOI) for semiconductors to plateau in the third quarter this year.

"Current levels are too high given the weakening economic sentiment, and the industry must rein in production growth and take action to reduce accumulated inventory," Van Hoy said in a press statement. "We expect that these actions will occur during the next few quarters with production and sell-through expected to return roughly to balance by the second quarter of 2012."

Gartner said the industry will undergo a "moderate inventory correction" over the next several quarters that will lower chip production in the second half of 2011 and early 2012. Despite the fact that semiconductor inventory held by OEMs has begun to rise, the levels are still near historic lows, which will help lessen the impact of the correction on semiconductor sales.

"The inventory correction comes at a time when average selling prices (ASPs) are tracking below trend levels, with overcapacity in the foundry space expected to prolong this weakness," said Peter Middleton, principal analyst at Gartner, in a press statement. "Excess inventory levels helped buffer the impact of the Japanese earthquake; however, now action should be taken to rationalize stock levels in the face of macroeconomic weakness."

In addition to Gartner's forecast, market research firm IHS iSuppli also predicted weakened demand for chips. The firm reported this week that semiconductor revenue will increase just 2.9 percent this year; IHS iSuppli had forecast last month that revenue would grow 4.6 percent.

“Mounting economic weakness is taking its toll on the worldwide electronics and semiconductor industries just as these markets are entering the critical pre-holiday sales season,” said Dale Ford, vice president of electronics supply chain and semiconductors for IHS, in a press statement.

“While economic challenges have persisted into 2011, consumer spending could have still sustained a reasonable level of growth in electronics demand if conditions had remained reasonably stable. Unfortunately, the accelerating decline and instability of the economy has reasserted itself as the primary driver of tepid electronics and semiconductor revenue growth in 2011. The continuing impact of a weakened and stagnant economy is expected to continue to drag on the semiconductor market in 2012, limiting revenue growth to 3.4 percent.”