iSuppli Warns Building Chip Inventories Could Be Dangerous Sign

The IT industry has begun to warm to the idea of a sustained recovery after the hammering it took in 2009 through the first part of 2010, but industry analysis firm iSuppli has warned that the current level of inventory buildup could cause problems if market demand slows in 2011.

At the end of 2010, inventory levels stood at 83.6 days, uncomfortably near to the 84-day level that kicked off the industry downturn in 2008. Current levels don't automatically mean a second downswing is imminent, but Sharon Stiefel, semiconductor analyst with IHS, notes that the situation bears watching. "Inventory levels arguably now are high by any standard, illustrating the difficulty of controlling chip stockpiles even with semiconductor suppliers’ arduous efforts to keep them in check," Steifel said. "The sharp increase of semiconductor inventory during the fourth quarter defied expectations of a decline for the period. This inflated level of inventory could become a concern if semiconductor industry growth falls short of expectations in 2011."

Much of what happens from this point forward will depend on just how much consumers want new tablets, phones, and MIDs. A number of manufacturers have used the iPhone's strong sales to justify high production targets for their own products—should that demand prove more Apple-centric than anticipated, the semiconductor market may take a hard left to the chin.