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Market research firm iSuppli Corp. has issued its first ‘Red Alert’ on semiconductor supply chain inventory. Revised figures for 4Q08 indicate a massive increase in semiconductor stockpiles that are building rapidly. iSuppli believes excess semiconductor inventories could reach US$10.2 billion in value, up from US$5.3 billion at the end of the third quarter. Using iSuppli’s previous 3Q08 projection of US$3.8 billion excess, a 268% rise would have been recorded.

It would seem that the rapid and significant fall in IC demand in the last few months has meant many chip manufacturers have been caught with production levels much higher for the fourth quarter than the market now requires. Typically, leading-edge production operates in a 12-week start-to-finish cycle with added time for test and assembly.

The market research firm believes that the excess inventory levels projected will delay an industry recovery as these will need to be sold before a recovery can be started. This is similar in nature to the 2001 downturn and recovery dynamics, though the inventory levels have yet to reach that past high.

At the beginning of the dotcom bust, iSuppli said it had measured $13.4 billion in excess inventory, which took two years to work down to manageable levels.

iSuppli said that this current inventory build will reduce growth for the industry by several percentage points in a 2009 ‘recovery.’

Much has been said in recent years regarding the industry's being able to manage the supply chain better than in the collapse of 2001. However, the rapid decline in demand and the length of time required for IC fabrication remains vulnerable to both shortages and over supply. With excess inventory projected to be close to 2001 levels, the myth that inventories are now better managed has been exposed.