Tech inventory elevated. We publish our 3Q21 tech inventory analysis, which shows an above-seasonal pick-up in 3Q21, with total tech up 4 days (vs. normal flat QoQ) to 55 days vs. the 45-49 day 3Q range and tech hardware up 4 days to 50 days, vs. the 41-46 day 3Q range, both at 20-year highs. Higher inventory is caused by: (1) shortages on select components constraining complete shipments across most tech products throughout 3Q; (2) a build-up by downstream suppliers to manage disrupted supply chains; (3) inflation of semiconductor pricing vs. units and COGs purchased 1-2 quarters earlier; and (4) supply chain optimism on growth drivers continuing. We expect some inventory built-up from the mismatch to flush out, as bottlenecks alleviate to allow hampered production to resume.

Semiconductor inventory still mild, but rising in China. Semiconductor inventory is still well off highs on strong downstream procurement amid tight IDM/foundry capacity.

Inventory was up 1 day QoQ (vs. normal down 5 days) to 89 days (vs. 70-103 days postcrisis) to prepare for above-seasonal 4Q growth. Global fabless inventory was down 3 days QoQ to 83, (vs. its 67-99 day range) although China fabless (see separate report from CS analyst Chaolien Tseng) grew by 21 days (vs. seasonal down 7 days) to 145 days putting some risk on China foundries. IDM inventory ex-Intel was also down 2 days QoQ to 98 exiting 3Q21 (vs. its 95-136 day, 10-year range), driving auto tightness.

Cyclical correction still takes time to materialise. For the first time in 20 years, we are seeing a structural shift back towards downstream carrying more inventory to better secure their supply chain, a reversal of the behaviour since the 1999-2000 tech bubble when chip companies managed more of the inventory and kept the downstream lean. While investor fears are growing for an imminent classic 2-3 quarter inventory correction, still-good demand drivers, rising silicon content and the desire for companies to secure supply chains with still-mild foundry supply growth until 2023 should keep capacity tight into next year.

Cycle still to moderate, structural drivers to sustain. We maintain our view for moderating cyclical momentum as inventory rises, bottlenecks ease and some COVID-19 drivers from PC and home consumer come off. Our stock positioning shifts within foundry more to TSMC with advanced capacity drivers for CPU and modem gains, AI and 5G upgrades + recent price hikes, bare wafers with limited supply in the next two years and fabless with product cycles (ASpeed, Alchip and ASMedia) albeit overbought near term.