Inventory Fade Eases Chip-Glut Fears

Strong end-of-year sales of chips used in cell phones and networking gear pushed inventory levels down to the lowest point in years among electronics companies.

The slim stockpiles have triggered a wave of new orders among chipmakers, as electronics distributors and other customers take steps to rebuild their inventories, according to a report by industry research firm iSuppli.

The note follows stronger-than-seasonal sales reports by some chipmakers earlier this month, which led to speculation that the supply of chips in the distribution channel may be piling up.

But iSuppli's report suggests that the large chip orders may not be a cause for concern after all.

"Exceptionally strong seasonal sales in the final quarter of 2005 left the semiconductor supply chain underweight," said iSuppli analyst Rosemary Farrell in a statement accompanying the report.

According to iSuppli, semiconductor stockpiles in the electronics supply chain during the fourth quarter of 2005 were $726 million short of the optimal level. The firm had initially projected that inventory levels during the period would be off by $300 million.

The bulk of the inventory reductions in the fourth quarter were in the wireless, networking and retail segments, according to iSuppli.

iSuppli estimated that the chip inventory level in the current quarter remains well short of oversupplied, standing at negative $400 million. And with chipmakers continuing to suffer from a lack of back-end assembly and testing equipment, customer concerns of adequate semiconductor supplies persist.

Some investors have worried that chip customers are ordering more supply than they really need. Earlier this month, Texas Instruments(TXN Quote - Cramer on TXN - Stock Picks) and National Semiconductor(NSM Quote - Cramer on NSM - Stock Picks) each reported better-than-expected sales during the typically slow first months of the year.

National Semi noted that its distributor inventory during the quarter ended Feb. 26 surpassed the 10-week level; it was just below the 10-week level in the previous quarter.

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