High semiconductor inventory levels are expressions of change and anxiety 

semiconductors inventory

The news is full of stories about supply chain congestion, above all in the semiconductor sector. Reports in the Nikkei newspaper in Japan suggest that the reality is somewhat different. An article on Friday stated that “total inventory at the world’s nine leading chipmakers hit a record high of $64.7 billion as of the end of June, as companies quickly move to ramp up production to alleviate a protracted shortage that has disrupted supply chains in the auto industry and beyond”.

The Nikkei is right. Looking at the inventory of the largest manufacturer, TSMC, inventory measured by value has leapt from T$85.79m in Q2 2020 to T$170.44m. Stock-turn has also risen, from 55 days in Q2 2020 to 85 days in Q2 2021. The industry generally is seeing high levels of inventory by historic standards.

Yet many sectors report a shortage of semiconductors. Certainly, demand is rising, with the major manufacturers seeing quarterly growth running at between 15-20%. Normally it would be expected that higher demand would lead to lower inventory, at least of finished product. This clearly is not happening.

One reason may be a desire to create higher operational buffer-stocks as a response to supply chain uncertainty. For example, the Nikkei article quotes Seiji Kuraishi, an Executive Vice President at Honda who commented that “We may need to change the way we approach inventory, like by cultivating more chip suppliers”. In a different way, this may also apply to the semiconductor manufacturers themselves, who seem to be anticipating continued strong sales in the short-term and are creating higher volumes of finished product in order to exploit the opportunity. This underlines the role of inventory as being as much the expression of uncertainty as supply.

One possible explanation for such uncertainty and supply chain friction seen over much of the past year is the effects of economic change. Demand for semiconductors, in particular, has leapt as such technology has become increasingly central to products such as cars, however, such violent change is also seen elsewhere in the global economy in areas such as e-retailing.

It might be suggested that it is not the overall volume of economic demand that has changed, rather it is the pattern of demand that is different. This is creating a localised lack of capacity, friction and uncertainty which in turn is driving supply chain managers to create higher inventory.

T$1 = €0.30/US$0.36

Source: Transport Intelligence, August 24, 2021

Author: Thomas Cullen