STAMFORD, CT — Semiconductor inventories are again on the rise and are headed toward "worrisome" levels," precipitating a correction in late 2011, Gartner warned yesterday.

Measured in days of inventory, semiconductor levels are forecast to plateau in the current quarter, driven by weaker-than-expected consumer and business demand, Gartner said.

The research firm expects the semiconductor industry to begin an inventory correction late this year. Earlier in the week Gartner cut its 2011 forecast to a loss.

Gartner's index puts days of inventory (DOI) at 1.12 in the third quarter, a point the firm deems "caution levels." A level above 1.10 indicates inventories are inflated, and likely downward pressure on average selling prices, the firm says. (Below the 0.95 level indicates inventories are low, components may be on allocation and double ordering begins.)

The Gartner index assesses "normal" inventory levels throughout the supply chain and compares them with current levels to evaluate industry trends.

"The semiconductor industry entered the third quarter with moderately high levels of inventory," said Gerald Van Hoy, senior research analyst. "Current levels are too high given the weakening economic sentiment, and the industry must rein in production growth and take action to reduce accumulated inventory. We expect that these actions will occur during the next few quarters with production and sell-through expected to return roughly to balance by the second quarter of 2012."

"The inventory correction comes at a time when average selling prices are tracking below trend levels, with overcapacity in the foundry space expected to prolong this weakness," said Peter Middleton, principal analyst. "Excess inventory levels helped buffer the impact of the Japanese earthquake; however, now action should be taken to rationalize stock levels in the face of macroeconomic weakness."

Gartner analysts said the industry will undergo a moderate inventory correction during the next few quarters, which will lower demand for semiconductor production in the second half of 2011 and early 2012. The proportion of total semiconductor inventory held by OEMs has begun to rise; however, it is still near historic lows, which will help reduce the impact of an order correction on semiconductor vendor sales.

Analysts also were worried last fall about rising inventory levels, although some of that was mitigated by the earthquake in Japan, which reduced production temporarily in March and April.

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