By Kevin Kessel
On February 23, Bear Stearns published our updated Inventory Tracker which pointed to a meaningful decline in inventory days in the electronics manufacturing services (EMS) or, electronics contract manufacturing sector, a big improvement in wireless OEM inventory levels, and a continued semiconductor inventory decline led by Intel.
Overall, OEM inventory days were down by approximately six (6) days sequentially which was inline with the historical average one week decline for a fourth quarter, but still remained roughly eight (8) days above ideal fourth quarter levels. This indicates to us that more OEM inventory still needs to be flushed out of the supply chain. We believe distribution and retail inventories remain healthy despite being slightly worse than trend.
EMS inventories improve
EMS inventories took a nice step down in the fourth quarter. EMS inventory was down 3% sequentially while sales rose 5% on a sequential basis. Both inventory days and inventory-to-sales levels declined meaningfully. Flextronics drove the majority of the decline and Benchmark Electronics also contributed significantly, virtually erasing its sharp inventory build during the first nine months of 2006.
For the March quarter, EMS inventory days are typically up 7% sequentially, however, we expect better performance out of EMS given the focus on reducing days back towards the mid-to-low 40 day range.
Wireless OEM inventory improves, but wireless semi’s remain mixed
Last quarter, the Bear Stearns Inventory Tracker pointed to high wireless inventory at both the OEM and semiconductor level. For the fourth quarter, OEM handset sell-through appears to have been strong which could be a result of solid Q4 new subscriber adds or potential channel stuffing.
For example, cell phone distributor Brightpoint saw its inventory increase 37% sequentially and 214% year-over-year. Meanwhile, Motorola, Nokia, and Ericsson’s inventory days and inventory-to-sales are all now at very healthy levels and near three-year troughs. However, the wireless semiconductors are much more mixed with Texas Instruments and Qualcomm’s inventory days continuing to reach multi-year highs.
Could the Chinese New Year be a swing factor?
Chinese New Year began February 18th, three weeks later than last year’s start of January 29th. Did the timing of the Chinese New Year create an artificially strong start to the year for component orders as companies ordered ahead of the New Year to avoid the time that the plants close down?
We won’t know until the Chinese New Year ends and new orders for March begin to come in, but many throughout the supply chain are citing strong January bookings and book-to-bill’s above 1.0x as a reason for their increased confidence that the inventory correction will soon come to an end.
Kevin Kessel is Associate Director with Bear Stearns & Co.
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