The semiconductor market is currently in a slow growth period. After 10% growth in 2014, the market is expected to only show low single-digit growth in 2015. Our own forecast at Semiconductor Intelligence is 1.5%. In several previous market slowdowns, inventories in the channel have climbed as some companies were slow to adjust their inventories to match lower demand levels.
The chart below shows total inventory as a percentage of quarterly revenue for five of the top six semiconductor companies. Samsung is not included since it does not disclose inventory data for its semiconductor business. Most of the companies show no significant change in the inventory ratio over the last six quarters. The exceptions are Intel and Qualcomm. Intel’s ratio went from 29% in 2Q 2014 to 37% in 2Q 2015. This is primarily due to lower revenues, with Intel’s 2Q 2015 revenue down 5% from a year ago. Qualcomm’s ratio climbed from 24% in 2Q 2014 to 41% in 2Q 2015. Qualcomm’s 2Q 2015 IC revenue was down 22% from a year ago due to increased competition for its smartphone chipsets.
Are inventories at electronics companies getting out of alignment with revenues? The chart below illustrates total inventories as a percentage of quarterly revenues for key electronics companies. The companies are six of the top eight purchasers of semiconductors, according to Gartner. The other two are Dell, which is now private, and Huawei, which does not disclose inventory data. The inventory to revenue ratio varies significantly from company to company, with Apple averaging about 4% and Sony ranging from 30% to 50%. These differences are due to factors such as number of product lines (relatively few for Apple, numerous for Sony) and supply chain strategy. Some companies (such as Sony, Samsung and Lenovo) tend to build inventory in the third quarter in anticipation of stronger fourth quarter sales. None of the companies show any significant change in their inventory ratio for 2Q 2015 compared to a year ago.
The links in the semiconductor supply chain which usually show the largest variation in inventories are distributors and electronic manufacturing services (EMS). The chart below displays the ratio of total inventories to quarterly revenues over the last fifteen years for major distributors and EMS companies. The two largest semiconductor distributors, Avnet and Arrow Electronics, are used for the distributor ratio. Each company has over $20 billion in annual revenues. The EMS companies are Jabil, Sanmina, Flextronics and Celestica. Hon Hai (Foxconn) is the largest EMS company, but it does not disclose inventory data for its EMS business.
When the Internet bubble burst in 2001 the semiconductor market plunged 32%, following strong 37% growth in 2000. Distributors’ inventory ratio peaked at over 80% from the low 60% range in 1999. The distributors did not reduce their inventories quickly enough to match the decline in revenues. Since 2001, the distributors have done a better job of managing inventories. For the last eight years their inventory ratio has held at close to 40%.
The EMS companies were caught by surprise by the semiconductor downturn. Most of these companies did not become significant factors in electronics manufacturing until the 1990s and did not experience the previous double-digit semiconductor market downturn in 1985. Their combined inventory ratio ballooned to over 70% from below 50% in 1999. Flextronics, the largest EMS company at the time, saw its ratio double from 44% in 2Q 1999 to 87% in 1Q 2001. The EMS companies reduced the ratio to 39% in 4Q 2004. As the semiconductor market slowed from 28% growth in 2004 to single digit growth in 2005 to 2007, the ratio jumped to 55% in 1Q 2007. Since 2007 the ratio has been fairly steady, even through the 2008-2009 semiconductor downturn. In the last few years the ratio has risen slightly from about 50% in 2011 to 57% in 2Q 2015. This latest increase in the ratio is likely due to deliberate plans to run higher levels of inventory following conservative inventory levels in 2010 and 2011.
Semiconductor inventories appear to be under control throughout the semiconductor device supply chain. Thus companies are making adjustments for the slowdown in the semiconductor market. Companies walk a fine line between carrying too much inventory – which can become a major burden when demand falls off – and too little inventory – which can lead to missed sales when the market is growing. The improved inventory management is largely due to better inventory management systems and better communications between semiconductor suppliers and the buyers of their products: electronics companies, EMS companies and distributors.