Chip Inventories Continue to Pose a Threat (AMAT, SLAB, TSM, UMC)

After (IDC) issued a report on rising chip inventories, InfoWorld picked up the story. According to the piece:

There will soon be a day of reckoning for the rising inventories of semiconductors globally, but chip makers are likely to take the brunt of the pain, an IDC researcher said Tuesday.

We have been beating this drum for a while now. Our last look, which was republished at Seeking Alpha, gained some notice (and comments from readers.) The questions asked were sound, and after reflecting further on them we believe a full post addressing them is in order.

David Jackson wondered where all of the new orders for semiconductor equipment were coming from, given that Intel reduced its guidance for capital expenditures. Applied Materials CEO Michael Splinter says it is the Asian foundries, and we’ll take his word for it. We suspect there will be some order cancellations down the pike, though.

Then, CrossProfit asked (sub. req.) whether the high level of equipment orders reflected new capacity or replacement of existing capacity?

We don’t know and aren’t even sure if there is a way to find out. For one thing, the new equipment (300 millimeter wafers and 65 nanometer lithography) can produce far more chips per wafer than the older technology, so replacing equipment also boosts capacity.

For another, even as cutting-edge fabs require the newer process for microprocessors and memory there are other types of chips (analog, etc.) that do not require the latest technology. Companies producing these chips tend to absorb the trailing-edge capacity and keep the equipment in production for another generation.

Finally, even though there may be a need to replace semiconductor equipment, there is also a need to replace the semiconductors themselves. This need is reflected in our chart as well, via the year/year growth in end demand for semiconductors.

So in the end we still believe the change in supply relative to the change in demand is a valid metric, and we thank IDC for seconding the opinion.

Semiconductor yr/yr change in equipment orders less change in chip sales: