Texas Instruments CEO in Denial Over Semi Inventory Glut

Includes: SMH, TXN
by: William Trent, CFA

Our readers are quite familiar with our concern that excessive capacity additions are going to make an already bad inventory situation even worse. Texas Instruments (NYSE:TXN) CEO Rich Templeton begs to differ, as MarketWatch reports:

The semiconductor industry doesn’t appear to have a serious problem with excess inventory, Texas Instruments Inc. Chief Executive Rich Templeton said Tuesday. “I don’t think we have an inventory situation that’s out of control compared to what we’ve seen in the past,” Templeton said at a Credit Suisse conference for investors.

He said many customers are comfortable with trimmer inventories, meaning they reorder more slowly knowing they can get additional chips from suppliers if needed.

What Templeton is saying is that semi manufacturers need to carry more inventory because their customers don’t want to. While that is fair enough, it doesn’t mean the companies should pile up their own inventory forever. The reason customers don’t want to hold semiconductors in inventory is that they generally decline in value over time. That doesn’t change just because it is the manufacturer holding it rather than the customer, but simply reflects a shift in the risk profile of supplier and customer.

Texas Instruments has said as much themselves, as the article notes:

In its third-quarter financial report issued in October, TXN said declining orders led it to expect slower fourth-quarter growth than normal. Customers had broadly replenished their inventories and were operating with a lower backlog of products, the company said. Buyers believed chip supplies had improved. The company also said an inventory correction continued in Japan, where manufacturers were building more low-priced cell phones.

So there you have it. There is no glut, unless you count Japan, the customers that have inventory but no backlog and the inventory on manufacturer’s balance sheets (that amounts to the “improved supplies”).

TXN 1-yr chart:


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