Chip inventory at semiconductor suppliers hits 'alarmingly high levels,' says analyst

Poor PC sales have hit semiconductor suppliers hard, leaving them with "alarmingly high levels" of chips held in inventory. If things don't pick up in 2013, this will mean significant inventory write-downs throughout the year.

A slowdown in PC sales left semiconductor suppliers with "alarmingly high levels" of chips held in inventory during the third quarter of 2012, according to analytics firm IHS.

During the second half of 2011, chip supplies held by semiconductor suppliers had fallen, but since then inventories have steadily risen to 47.5 percent of total revenue in the second quarter before going on to the current peak in the third quarter.

"The uncomfortably high level of inventory among semiconductor manufacturers of nearly all stripes is a result of key demand drivers failing to materialize," said IHS semiconductor market analyst Sharon Stiefel.

"Demand for semiconductor devices has typically come from new products that consumers feel compelled to purchase," continued Stiefel, "but going into the holiday season last year, no such new products marshaled enough impetus to overcome consumer fears about lingering economic woes. Two months prior to Christmas, consumer purchases of electronics had grown by only 0.7 percent, the worst performance since 2008."

Some segments performed better than others. While PCs declined, and ultrathin PCs did not produce the demand for semiconductors originally, feature-rich smartphones and tablets provided the strongest demand in the final quarter of 2012.

It's not clear what 2013 will mean for the semiconductor industry. According to IHS, if global economic forecasts perform according to positive expectations, semiconductor revenue could grow by 4 percent in the second quarter, and by 9 percent come the third quarter. That said, if demand evaporates, IHS said that semiconductor suppliers will find themselves in "a deplorable oversupply situation," which would mean significant inventory write-downs throughout the year.