Top 75 Electronics Distributors: Independents hope for rebound in 2008
Many independent electronics distributors took it on the chin in 2007, because of falling chip prices.
By James Carbone -- Purchasing, 5/8/2008 2:00:00 AM
It was a rough year for many independent electronics distributors in 2007 as most of them were impacted by falling prices for memory chips, microprocessors and commodity semiconductors.
“Prices for memory and microprocessors in 2007 plunged 50-60% in some cases,” says Frank Cavallaro, CEO of Converge in Peabody, Mass. “That had an impact on revenue from a top-line perspective,” he says. “We obviously would like to see the free fall in the memory market settle.” Converge's revenue fell 19% last year to $365 million.
Sales of most independent distributors were affected by falling prices. Revenue for the top 10 independent distributors fell from about $2 billion in 2006 to about $1.92 billion in 2007, according to Purchasing's annual survey of the distribution industry. However, independent distributors are optimistic that prices for many parts will firm in 2008 resulting in higher revenue growth in 2008.
To optimize growth some independent distributors will focus on services such as asset recovery and disposition. Some have improved their websites to make it easier for buyers to do business with them and manage purchases. A few independent distributors are franchised for some product lines and will try to get authorization to carry more lines.
Independent distributors can no longer rely on component shortages to drive growth. Traditionally, independent distributors thrive when parts are in short supply.
“There have not been a lot of gaps or shortages in the supply chain, which is where independent distributors made their name,” says Peter Krauss, CEO of Chip 1 Exchange USA in Aliso Viejo, Calif.
“The companies that are doing well have found new ways to bring value to the customers, most notably through cost-saving initiatives,” he says.
OEMs and electronics manufacturing services (EMS) providers are always looking for cost savings. “They buy factory direct or from franchised distributors. Suppliers will negotiate pricing on a quarterly basis, but OEMs and EMS providers don't want to wait every quarter to negotiate down their prices so they will use the open market to find opportunities to save money,” says Krauss.
He says a buyer at an OEM or EMS provider may buy a part from a major authorized distributor for $1, but the part may be available on the open market for 85¢. “Buyers are taking advantage of those opportunities to put savings to their bottom line,” says Krauss. “This is especially true in the EMS sector where these guys are working on single-digit margins.”
Krauss says EMS providers spend about 10% of their total distribution buy with independent distributors. “It almost looks like it is by design. It has been between 5-7% and it is up to 10%.”
He says EMS providers want to take advantage of the value they can get from independent distributors, but not damage the relationships they have with franchise distributors and direct suppliers.
More services wanted
EMS providers and OEMs are also interested in asset management, recovery and disposal services, says Cavallaro.
He says Converge's services business grew 100% in 2007 and the services helped Converge grow its market share with the top five EMS providers by 5-10 percentage points.
Cavallaro says OEMs and EMS providers have assets in their facilities they no longer need. Assets could be parts, computer systems or subsystems.
“We go and get the products. We dispose of the products that need to be disposed. We make sure data is destroyed in a thoughtful and compliant manner,” says Cavallaro.
He says all the assets are either re-used or recycled. “We have a no-landfill policy. Plastics get ground and recycled. Metals get recycled or smelted. Hard drives are literally ground and shredded and smelted for their metal content or they are wiped by a software system and then get resold,” he says.
Services help independent distributors become the preferred independent distributor of major OEMs and EMS providers.
Some independent distributors also hope to attract buyers by being a franchised or authorized distributor for some lines.
For instance Chip 1 Exchange USA has four franchised lines and they will add more in the future, says Krauss. The company is franchised for ZF Micro Solutions, Littelfuse, STMicroelectronics and Epcos.
He says that about 20% of Chip 1 Exchange's total revenue is derived from franchised lines and eventually he expects that to be about 50%.
Another distributor that is authorized for some lines is Area51-ESG, a small minority owned independent distributor based in Irvine, Calif.
The company is authorized to sell NEC, Micron, Spansion, ISSI and Rohm products to the auto industry, says Ronald Hayes, director, automotive business development for Area51-ESG. He says the company became authorized to sell those lines after Chrysler wanted its supplier, Harman/Becker Automotive Systems, to increase its number of minority suppliers.
“Due to the lack of any minority-owned component manufacturers, the solution was to use a minority-owned distributor,” says Hayes, who used to be the purchasing director at Harman/Becker before joining Area51-ESG. However, there were no minority distributors that were authorized to buy direct and provide a supply-chain solution to the automotive industry.
“So, we identified and qualified Area51-ESG as a minority-owned distributor and asked several semiconductor manufacturers to authorize Area51-ESG as a distributor to automotive,” he says. The companies agreed.
Hayes says Area51-ESG sold $4.5 million of ICs to Harman/Becker last year. Its total sales were $14 million.
Dealing with counter parts
While some independent distributors may offer more services and some may become franchised for some lines, all have to deal with the issue of counterfeit parts.
By most accounts, the problem of counterfeit parts in the electronics supply chain is getting worse. Independent distributors are often blamed for the problem. Independents counter that reliable independent distributors have rigorous processes in place that screen products and ferret out bogus or substandard parts. Many have adopted the Independent Distributors Electronics Association (IDEA) 1010 inspection and screening standard for parts.
Deborah Eggeman, general manager of IDEA, says there is a lot more recognition by buyers at OEMs and EMS providers and by chip manufacturers that counterfeiting is a problem. Buyers want to make sure that the independent distributors they do business with have processes in place to guarantee the integrity of parts, she says.
“Some end customers are requiring independent distributors to be IDEA members. Others are requiring that parts be inspected to the 1010 standard and others are requiring parts be examined by an inspector who passed IDEA's inspector exam. IDEA has trained members on how to inspect parts to make sure they are genuine.”
She says independent distributors have no choice but to be proactive in guaranteeing the integrity of parts because end customers are more sophisticated concerning the open market.
“Buyers are much smarter and more proactive when they go to the open market. They are more selective about which independents they use,” says Eggeman.
| Ranking | Sales Breakdown % | |||||||||||||
| 2007 | 2006 | Company | Global 2007 calendar year ($ millions) | % change from previous year | Sales per employee | Total employees | % order $ received through EDI | % of sales derived from VA | Active Components | Passive Components | Electromechanical | Interconnect | Computer products | Others |
| 1 | 1 | Converge Inc. | 365.0 | -18.9% | 1,042,857.1 | 350 | N/A | 15% | 80 | 5 | 0 | 0 | 15 | 0 |
| 2 | 2 | N.F. Smith & Associates | 301.0 | -26.2% | 946,540.9 | 318 | &1% | 0% | 70 | 24 | 0 | 0 | 6 | 0 |
| 3 | 4 | Advanced MP Technology | 286.0 | 7.9% | 1,176,954.7 | 243 | 18% | 20% | 63 | 20 | 4 | 11 | 2 | 0 |
| 4 | 3 | America II Electronics | 284.0 | 2.9% | 525,925.9 | 540 | 3% | 5% | 74 | 21 | 2 | 2 | 1 | 0 |
| 5 | 5 | Classic Components Corp. | 249.0 | 0.6% | 830,000.0 | 300 | 1% | 3% | 62 | 30 | 2 | 2 | 1 | 3 |
| 6 | 6 | Fusion Trade Inc. | 200.0 | 5.8% | 2,857,142.9 | 70 | 5% | 10% | 80 | 10 | 0 | 0 | 10 | 0 |
| 7 | 7 | Rand Technology Inc. | 95.0 | 5.6% | 1,055,555.6 | 90 | N/A | 3% | 87 | 6 | 2 | 0 | 5 | 0 |
| 8 | - | Chip 1 Exchange | 60.5 | 15.7% | 366,666.7 | 165 | 2% | 5% | 40 | 10 | 10 | 10 | 15 | 15 |
| 9 | 9 | Commodity Components International Inc. | 51.0 | 50.0% | 1,040,816.3 | 49 | N/A | N/A | 82 | 10 | 0 | 0 | 8 | 0 |
| 10 | 8 | SG Industries Inc. | 34.1 | -4.7% | 577,966.1 | 59 | N/A | 80% | 85 | 10 | 1 | 1 | 3 | 0 |
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