CPU Surplus Swells On Intel Inventory Glut

Research firm iSuppli reported July 31 that worldwide surplus semiconductor inventory--driven primarily by processors and chipsets from Intel--ballooned to $2 billion in the second quarter. That's up 77.6 percent from the first quarter and marks the highest level since excess inventory bulged to $1.6 billion during a troublesome glut in the third quarter of 2004.

The numbers illuminate what many in the U.S. channel have seen for at least the past quarter: drastic price cuts, more gray market activity and cautious buying. Yet they also indicate a complex product transition period for Intel.

The Santa Clara, Calif., chip maker moved up several product launches this year to stave off market share increases from rival Advanced Micro Devices. The most recent launch was Intel's Core 2 Duo desktop processors. Since that product shipped earlier than expected, Intel had to clear out excess supply of older chips, many in the system builder industry have said. Recent deep discounts knocked some Pentium 4 processors to as low as $74--a more than 50 percent reduction, in some cases--and Celerons to as low as $39. Sunnyvale, Calif.-based AMD countered with its own price cuts.

During Intel's second-quarter earnings call last month, company executives acknowledged the high inventory levels and addressed concerns raised by financial analysts. Intel's inventory position in the second quarter increased to $4.33 billion, up 21 percent from $3.57 billion in the first quarter. But executives said the company believes the inventory levels are adequate and will dissipate as demand rises in the second half.

An Intel spokesman offered this observation to CRN: "We are comfortable with our own inventory projections, which reflect the upside of delivering our new Intel Core 2 Duo product lines earlier than expected during the second quarter."

Some system builders said privately that gray-market activity has been on the rise with some of Intel's processors, particularly the P4 line. And most agreed that the excess supply and cost cutting mean big bargains for system builders, even though it can make managing inventory tougher.

Joe Toste, vice president of marketing at Equus Computer, a system builder in Minneapolis, said solution providers can use discounted products as a competitive advantage against aggressive price tactics of top-tier suppliers. "If you don't need to go all the way to dual core, the P4s are pretty-capable value machines," he said. Toste believes that some of Equus' solution provider customers will take advantage of ultra-low prices and availability for certain SKUs through the gray market. "The market will use this type of alternative services to leverage a competitive advantage," he said.

Several system builders said the Intel-AMD price war also has led to smaller, more frequent orders, which leaves inventory on the shelves longer. "Customers have been placing smaller, more frequent orders than normal in order to delay volume buys until they can get the best pricing," said iSuppli analyst Rosemary Farrell.

Still, system builders focusing on the new processors said they aren't seeing the telltale signs of a significant glut. Executives at system builders Seneca Data, North Syracuse, N.Y., and Velocity Micro, Richmond, Va., said they usually get phone calls from distributors offering deals when supply is unusually high. So far, the phones have been quiet, they said.

Though the prospect of elevated inventory has created some anxiety in the industry, Farrell said it's not as serious as the broad oversupply in 2004. This time around, the oversupply is limited to the PC industry and tied primarily to one supplier, whereas in 2004, the excess inventory stretched across a gamut of semiconductor parts, she said.

But many in the PC industry say what ultimately will determine whether the surplus becomes a serious problem is demand in the third and fourth quarters.

Velocity Micro President and CEO Randy Copeland, who's focusing products exclusively on Core 2 Duo, said customer demand is currently exceeding initial forecasts by 50 percent. "We are using all [the supply] we can get," he said.

Copeland noted that many third-party motherboard makers have yet to ship their own Core 2 duo products, and that may account for some of the supply issues.

Joe Cousins, vice president of component marketing at Bell Microproducts, a San Jose, Calif.-based distributor, said it remains to be seen if the oversupply will have a far-reaching impact. "I think it's too early to tell," he said. "But we think it will be a more stable environment in [the third quarter than the second quarter]. We think the bloodbath is behind us, and pricing will stabilize."

ISuppli's Farrell isn't so sure. "I think we will see more price cuts in the second half," she said.