In this excerpt from TWST‘s interview with Tristan Gerra, a senior analyst covering semiconductors at Robert W. Baird, Gerra outlines the challenges currently facing the semi supply chain, highlighting how this may impact the industry going forward.
TWST: What is the status of the semiconductor component sector right now?
Mr. Gerra: We continue to expect an upcycle for most of this year, which would be a continuation of what we saw since last February of 2009. The reason we believe the cycle would extend a few more quarters is that the inventory levels remain at historic lows in the supply chain. We’ve seen a slow resumption in true end demand, and the supply chain hasn’t been able to catch up. So we think that until we see the supply chain normalizing, we think trends are going to continue to be above seasonal for semiconductor companies.
TWST: What are the challenges in the supply chain?
Mr. Gerra: Because the supply chain to some extent overreacted late 2008/early 2009 by drastically cutting down inventories below what was the real trend of end demand, the supply chain is trying to catch up with the ongoing recovery in end demand but hasn’t been able to do that. So lead times, as a result, have expanded pretty drastically for some components. In some cases, lead times are stretching over 20 weeks, and we’re not at a point yet – even after a few quarters, where we are seeing replenishments – where lead times are coming down. So we are in an environment where demand is stronger than supply at this point.
TWST: Did supplies go down because of the economy?
Mr. Gerra: Well, the triggering point was retail sales in the U.S. well below expectation in October and November of 2008, and that was in the context of people having significant concerns about the economy and what was happening in terms of banks. So as soon as people saw the weakness, they drastically cut orders in order to reduce inventory levels.
TWST: What else is happening in the component sector?
Mr. Gerra: I think we are likely to see potential increases in wafer pricing this year, which is the result of utilization rates being around 100% at some of the major foundries in Taiwan; that’s one issue. Component pricing could pick up a little bit, particularly on the commodity side, which would be the first time in several years we have seen that. So net-net, it’s about ramping capacity but gauging what real end demand is, and being in a situation where we could potentially have overcapacity again exiting this year.
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