Mr. Pitzer: After a pretty severe decline in the calendar fourth quarter of last year and the calendar first quarter of this year, the semiconductor industry hit a cyclical bottom in late February/early March, and we have seen a fairly dramatic cyclical recovery since then. The downturn, in terms of its depth, was as severe as the 2001 downturn, despite the fact that the 2001 downturn was preceded by probably the biggest amount of overspending in the history of IT. I think investors have been somewhat surprised by the strength of the recovery that we have seen since February. I think the bounce off the bottom was more dramatic than most people anticipated. There probably are a couple of reasons for this. First, we went into this downturn with significantly less inventory throughout the supply chain than we've historically seen.
TWST: Were inventory levels lower because of better inventory management?
Mr. Pitzer: Yes. It's clearly better inventory management. If you compare this
downturn with the 2001 downturn, a big difference this time around is that all
the ERP systems within the supply chain are doing a better job tracking
inventory. Another more important and less well-understood factor is that semis,
throughout the last five to eight years, were forced to take on much more of the
inventory burden throughout the supply chain. This dynamic has both good and bad
aspects.
We have actually done work to quantify this. Prior to 2001, semiconductors
represented about 12% of total tech inventory on average. We looked at inventory
dollars on semiconductor balance sheets versus the inventory dollars on the
balance sheets of all other companies within hardware; and semis were 12% of the
total. In the last five years, however, this number actually grew to 24% of
total. So the inventory burden of semiconductor companies almost doubled over
the last five years.
Now, there are some good things about this as well as some bad things. One of
the negative implications of the increased inventory burden is when a company is
forced to hold on to that much inventory, it actually looses revenue growth and
ties up working capital. The good news, however, is that historically during a
downturn, there are inventories that throughout the supply chain that need to be
brought down. But this time, a lot of the inventory sat with the semis; so
there wasn't a lot of excess inventory in the supply chain I think, in general,
the recovery off the bottom was faster than a lot of people anticipated because
of this inventory dynamic. The other benefit is that typically, going into a
downturn, unit volume is the first casualty, pricing is the second. We clearly
got the unit casualty. But because there wasn't a lot of excess inventory,
pricing has actually held up significantly better in this downturn than we have
historically seen.
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