iSuppli: Intel Causes Q2 2006 Chip Inventory Spike

Semiconductor inventories soared to their highest level in years during the second quarter, but the trouble is mainly in the PC sector and namely with chips from Intel, according to market researcher iSuppli.

Although chip inventories have exceeded levels of the glut of 2004, iSuppli said the current situation is no cause for “major concern.” This time around, the excess is mainly in PC chips, not the entire electronics supply chain like it was two years ago.

Chip inventories in the global supply chain soared to US$2 billion in value during the second quarter, nearly double the amount from the first quarter. The figure is cause for concern because it’s far higher than industry watchers had predicted, and it’s the highest level since swelling to $1.6 billion in the third quarter of 2004, the peak of a glut that caused a major chip downturn.

“However, iSuppli is not raising any alarm bells at this time,” the industry researcher said in the report.

The current chip oversupply is centered on the PC industry, mainly with one company, Intel. The company’s excess inventories carried over from the first quarter and worsened in the second quarter as a price war erupted with rival Advanced Micro Devices (AMD), iSuppli said.

Microprocessor buyers have taken advantage of the price war by placing smaller, more frequent orders than normal, watching for further reductions so they can nab the best prices, iSuppli said. By waiting for further price cuts, the industry is forcing Intel and AMD to hold inventory for far longer than normal.

The market researcher predicts that chip inventories will begin to fall in the third quarter, which runs through the end of September, but that Intel’s surplus will linger into next year.

Intel executives have said the company’s inventories will rise in the third quarter and fall in the fourth quarter, during a conference call with analysts last month.

The growth in inventory could be a reaction to an earlier slipup at the chip maker. “If I’ve made one mistake in the past two years, it was that we didn’t build enough chipset inventory at the right time in the second half of 2004, early 2005, and that got us into trouble in terms of market share, and that got us in trouble with customers,” said Paul Otellini, chief executive officer of Intel, during a conference call with analysts.

The Intel chipset shortage riled customers and caused some to turn to AMD microprocessors and compatible chipsets, where there was no shortage.

The company declined to immediately comment on the iSuppli report, aside from providing notes to the conference call.

Intel’s second-quarter profit dropped to $885 million, less than half as much as the same time a year earlier. The number of microprocessors sold and their average selling price both fell, Intel said at the time, noting the growth in microprocessor inventories at retailers as well as a loss of market share to AMD.

The company also forecast third-quarter revenue at between $8.3 billion to $8.9 billion, below analysts’ estimates of $9.1 billion.

Since then, the company has announced plans to lay off 1,000 managers and sell its communications chip division as well as its media and signaling business.

-Dan Nystedt, IDG News Service (Taipei Bureau)

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