Chipmakers Working Down Inventory - TheStreet

Chipmakers Working Down Inventory

Excess chip totals fell 11% sequentially.
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The glut of semiconductors flooding the market is receding much faster than expected, as chipmakers cut back their production.

According to market research firm iSuppli, the amount of excess chip inventory in the global supply chain totaled $2.5 billion in the first quarter, down roughly 11% sequentially.

More importantly, chip stockpiles are down 40% from the peak of the inventory oversupply in the third quarter of 2006, when excess inventory was $4.2 billion.

The reduction in chip inventory among distributors and original equipment manufacturers is a good sign for semiconductor companies, which have seen their sales slow because of the inventory glut. As the stockpiles of chips are reduced, chipmakers are hoping customers boost their orders for more chips.

"The cause of the decline in excess inventory was a major reduction in production among semiconductor suppliers at the end of the third quarter of 2006," said iSuppli analyst Rosemary Farrell in a statement.

And a surprising uptick in demand in the latter part of the first quarter helped burn off some of the excess chip inventory. The $2.5 billion in excess chip inventory was significantly lower than iSuppli's expectation that surplus stockpiles would total $3.2 billion in the first quarter.

Some companies, such as

Texas Instruments

(TXN) - Get Report

, have already ramped up production levels at the factories in anticipation of a return of demand. And earlier this year,

Analog Devices

(ADI) - Get Report

and

National Semiconductor

(NSM)

both said that orders were picking up once again.

But the downturn is not complete yet, as evidenced by continuing financial warnings from companies such as

RF Micro

(RFMD)

and

Agere

(which merged with

LSI

(LSI) - Get Report

on Tuesday).

Ongoing macroeconomic concerns -- from rising fuel prices to inflation fears -- as well as the seasonally slow time of year for chip sales are all tempering the semiconductor sector's recovery.

And iSuppli noted that chipmakers risked prolonging the chip glut by boosting production levels too aggressively and stuffing the channel with superfluous parts.

"Despite the declines in excess supply, plenty of product remains in the supply chain," iSuppli said in the announcement. "Strong end-market demand now, and for new products expected to arrive in the second half of the year, is essential to keeping excess stockpiles form building up again."