High Inventory Slows August Chip Sales Growth

Global semiconductor sales growth slowed to 1 percent in August as electronics makers reacted to growing inventories in Asia by limiting orders of chips, an industry trade group said Thursday.

The chip industry is widely expected to ease into a cyclical downturn over the next two years, though some analysts have warned that swelling inventories could send chip sales spiraling down, repeating a painful slump that began four years ago.

August's sales figures from the U.S. Semiconductor Industry Association appeared to be in line with analysts' bearish expectations.

"It appears many of the leading indicators of a downturn... are materializing," said J.P. Morgan analyst Christopher Danely in a note to clients.

An especially weak summer for chip makers has sparked a flood of sales warnings from major chip makers, including Intel Corp. (INTC), Texas Instruments Inc. (TXN) and Xilinx Inc. (XLNX).

Most of the blame has been placed on inventories — primarily from surpluses of electronics in the Asian supply chain. Indeed, sales of chips to Asia, excluding Japan, grew only a tenth of one percent from July to August to $7.65 billion, making its growth the weakest of all regions.

George Scalise, president of SIA, said the entire electronics supply chain has acted to avert a long-term inventory problem by cutting chip orders quickly.

"Semiconductor producers and their customers have reacted with unprecedented speed to recent reports of excess chip inventories," he said in a statement. "In previous market cycles, it has generally taken several quarters for the supply chain to take corrective action."

Semiconductor stocks have been whipsawed for the better part of the last three months as investors debate whether the industry is in for a hard landing next year after a strong 2004. Since the beginning of July, Philadelphia Stock Exchange Semiconductor index (search) fell as much 28 percent, before rebounding in early September.

Since then, the index recovered 16 percent of those losses only to give back 6 percent in the last week and a half.

The trade group's figures are prepared on a three-month moving average basis. Wedbush Morgan analyst David Wu said the SIA's next monthly update would likely show a sequential decline because the period will include July, which was a weak month for chip sales, while June, a stronger month, will be removed.

Sales growth in the Americas was the strongest, rising 2.2 percent to $3.37 billion. European sales rose 1.6 percent, and sales in Japan increased 1.5 percent, the group reported.

Overall, August sales rose 1.1 percent from July and increased 34 percent from the same month last year. In July, month-to-month sales grew 2.8 percent.

"It's benign. Growth is slowing down a bit, but not too much, and a decline was expected anyway," said Nicolas Gaudois, an analyst with Deutsche Bank in London.

The semiconductor index was up 0.8 percent in early afternoon trading. Intel shares were unchanged, while Texas Instruments fell 5 cents, or less than 1 percent.

Micron Technology Inc. (MU), a maker of computer memory chips, declined 13 cents, or 1.1 percent, a day after reporting a lower-than-expected profit.