Manufacturer says a recession has hit the semiconductor industry

on Monday, October 17, 2011 with 0 comments
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GEORGE TOWN: The inventory of global chip suppliers and a low book-to-bill ratio have reached an alarming level that will have severe worldwide repercussions and impact on chip producers and semiconductor equipment manufacturers in Malaysia.

The latest Colorado-based IHS iSuppli Inventory Insider inventory report published in early October revealed that the inventory of global chip suppliers had now reached 81.3 days of inventory (DOI), a very unhealthy level.

In the second quarter of 2011, the DOI reached 83.4 days, exceeding the last record high of 83.1 days seen in the first quarter of 2008 at the start of the worldwide downturn.

The IHS iSuppli report said the inventory levels raised “concerns over the near-term outlook for the chip market.”

The Connecticut-based Gartner research house also said that the DOI of semiconductors were at “worrisome levels given current conditions” and that the industry would undergo a moderate inventory correction during the next few quarters, which would lower demand for semiconductor production in the second half of 2011 and early 2012.

According to the San Jose-based SEMI, the global industry association serving the manufacturing supply chain for the micro and nano-electronics industries, the book-to-bill ratio of North America-based manufacturers of semiconductor equipment in August was 0.8, down from 0.85 in July.

A book-to-bill ratio of above 1 indicates that more orders are received than filled, and hence a strong market where demand outpaces supply. Similarly, a book-to-bill ratio of below 1 points to weaker demand.

Mini-Circuits Technologies (Malaysia) Sdn Bhd chairman and president Datuk Seri Kelvin Kiew said for chip manufacturers the normal DOI would be around 30-45 days.

“Anything beyond that will be abnormal and shows that there is a more inventory stockpile than sales.

“Even if there is a recovery tomorrow, it will take at least two quarters to deplete the inventory excess, so there still won't be any new orders.

“In realistic terms, the global semiconductor industry has entered a recession period, and the impact on the chip makers and semiconductor manufacturers in Malaysia will last till mid-2012,” he said.

Mini-Circuits, which manufactures radio frequency components for wireless network infrastructure and mobile telecommunication devices, expects its sales to decline by about 15% in the fourth quarter compared with the same period last year.

Mini-Circuits' products are manufactured in Penang, Taiwan and India, and are largely sold to Japan and China.

“Compared with the recent third quarter, our sales in the fourth quarter are expected to come down by about 10%.

“For 2011, we expect to achieve US$325mil in sales, compared with US$350mil last year,” he said.

Globetronics Technology Bhd chief executive officer Heng Huck Lee said the DOI of over 80 days for the chip industry was on the high side.

“The normal inventory for chip manufacturers should be 45 days or less. The inventory at Globetronics is managed to around two weeks.

“The excess inventory in the chip-making segment will influence the consumer electronics goods producers worldwide and, in Malaysia, they will adopt a built-to-order' business approach to keep inventories from rising further,” he said.

Globetronics' core business is manufacturing integrated circuits and light-emitting diode (LED) chips.

Pentamaster Corp Bhd executive chairman C.B. Chuah said the group's inventory was presently 80-90 days.

“It is normal for semiconductor equipment makers to have a higher inventory due to the shorter business opportunity window frame, which requires delivery to customers in four weeks, compared with eight weeks a year ago.

“Our inventory comprises semi-finished electronic components and finished components.

“The high inventory level in the chip-making sector will mean less orders for semiconductor equipment worldwide, which are required for handling and testing the chips,” he said.

Chuah said orders for the group's semiconductor equipment, such as material test handlers, for the fourth quarter were expected to drop by 50%, compared with the preceding quarter and the previous corresponding quarter.

“Next year, in order to compete for customers, we may have to lower the pricing for semiconductor equipment with less complex functions and maintain competitive pricing for equipment with enhanced features,” he added.

Meanwhile, Elsoft Research Bhd managing director Tan Cheik Eaik said the group's specialisation in building customised testers did not permit the stockpiling of high inventories.

“We build only when there are orders. This year our sales should be better than in 2010, driven by market demand in Malaysia, Taiwan and China.

“However, for 2012, we expect the LED tester market to soften,” he said.

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