Excess stock bolsters chip market after Japan disaster

Usually a negative in the semiconductor industry, excess inventory actually bolstered the chip market in the wake of the devastating earthquake and tsunami in Japan.

Excess inventory of chip supplies alleviated the severe component shortages stemming from the March disaster , according to a report Thursday from market research firm IHS iSuppli. Inventories in the first quarter of 2011 represented a two-year high, with inventories reaching a level not seen since the first quarter of 2009.

"Efforts by suppliers to build inventory during the seasonally slow period from the fourth quarter of 2010 through the first quarter of 2011 proved to be fortuitous," said iSuppli analyst Sharon Stiefel, in a statement. "These efforts resulted in a two- to-four-week cushion of raw materials, work-in-process goods and finished products, which came in handy when chip supplies were disrupted by the Japan disaster ."

Stiefel noted that normally a large inventory overhang is a negative because it pushes down prices and reduces profits. However, in this instance, it turned out to be a positive, making up for what would have otherwise been a damaging shortage.

Japan is struggling to get back on its feet and back to business after the country was devastated by a series of disasters that hit the country starting on March 11. The disaster, including earthquakes, a tsunami and the crisis they caused at the country's nuclear power plants, has not only damaged semiconductor manufacturing facilities, but also affected Japan's electrical supply and transportation infrastructure.

No other disaster has hurt the worldwide computer chip industry more than the March earthquake and tsunami in Japan, according to analysts.

In April, Dale Ford, a senior vice president with iSuppli, said it could be four to six months before semiconductor production fully resumes in Japan. That delay could have a major impact on worldwide supply since Japan is a major cog in the global semiconductor manufacturing process.

Now iSuppli analysts are saying excess inventory could ease some of the pain the disasters are causing in the semiconductor market.

Since the Japan disaster hit so late in the first quarter of the year, the number of weeks of direct disruption to the supply chain was limited for that quarter, Stiefel said.

So far, the second quarter is getting that same benefit. Excess inventories have kept the supply chain running more normally as chip manufacturing facilities damaged in the earthquakes and tsunami get back on their feet or divert their work to other facilities.

However, those bulging inventories can only last so long.

Stiefel pointed out that the supply outlook becomes less clear further in the future. "Once internal inventories dwindle, the pipeline may not be replenished quickly enough to meet all of the end demand, creating risks for participants in the supply chain," she added.