But for OEMs, industry tapers inventory glut

Chipmakers had cut down their inventories in Q2, giving the sector a rosy outlook for the remainder of the year, although a surge in parts at the OEM front could complicate the supply and demand situation. This is according to Kevin Kessel, an analyst with Bear, Stearns & Co. Inc., in a report.

Led by Intel Corp., the world's biggest chipmaker by revenue, IC vendors burned through inventories in the quarter ended June 30, reducing their combined days of inventory to 80.8 from 85.4 in Q1.

"The overall semiconductor inventory day decline was attributed mainly to PC semi company Intel, which reduced its inventory by 3.5 days on a weighted basis, reversing a 3.2-day build during the March quarter," said Kessel.

Lower inventory tallies at Advanced Micro Devices Inc., Texas Instruments Inc., and Qualcomm also contributed to the decline in stocks at chip manufacturers, Kessel noted.

Aside from OEMs, which increased their days of inventory 7 percent during the recent quarter, all other segments of the electronics industry supply chain also reduced their stocks, led by component distributors.

Arrow Electronics Inc., the world's No. 2 component distributor by revenue, cut its inventory by about $95 million Q2, ending the period with $1.58 billion of inventory compared with $1.67 billion in Q1.

Although total company inventory rose at Avnet Inc., the leading component distributor, the company's electronic marketing division drove down its component stocks during the quarter, according to Roy Vallee, chairman and CEO of the company.

"Electronic marketing reduced inventory by $48 million sequentially while growing sales slightly, which resulted in record working capital velocity and a reduction in its cash cycle by more than five days from the fourth quarter of fiscal 2006," Vallee said while presenting the company's results for the fiscal fourth quarter ended June 30.

"We are encouraged by the activity at our large EMS customers where sales were up globally by over 3 percent sequentially," Vallee added. "This appears to indicate that the excess inventory situation at our large EMS customers, which significantly impacted the Americas region in fiscal 2007, may be improving."

EMS improvement
EMS providers cut their inventories in the June quarter in a bid to improve their competitive position in the traditionally stronger Q3 and Q4.

Bear, Stearns' analysis showed inventory days for the EMS sector fell to 49.4 days in Q2 from 53.5 days in the March quarter. The improvement was attributed partly to the positive results of Lean manufacturing activities implemented by Cisco Systems Inc., the world's leading manufacturer of data and networking equipment.

"For the June quarter, overall EMS inventory dollars are down 4.3 percent, or $382 million sequentially versus a 4.1 percent sales increase," Kessel said. "Furthermore, days and inventory-to-sales levels actually decreased 8 percent sequentially, which was better than expected given that these levels typically decrease only 3 percent sequentially for a June quarter."

Inventories at Celestica Inc. fell $126 million during the June quarter due to "tighter inventory management efficiencies and some improvements in Mexico," Kessel said, adding that the "company still has a long way to go to fixing these operations."

OEM inventories ticked up however during the second quarter. Total inventory days for the group of telecommunications, computing, networking, high-end storage, semiconductor equipment and disk drive makers analyzed by Bear, Stearns rose to 62.5 in Q2 from 58.5 in the prior quarter.

"While the four-day increase for OEMs overall is less than the 7.6-day build in the prior quarter, it is worse than the five-year historical 0.5 day decline for a June quarter," said Kessel.

- Bolaji Ojo
EE Times