The New Distribution Hot Spots
Even as they grow their business in Asia, electronics distributors are competing harder than ever for North American customers. And they see their growth here coming from lower-volume manufacturers.
By James Carbone -- Purchasing, 4/20/2006 2:00:00 AM
For most electronics distributors, 2005 was definitely not a boom year.
On the other hand, it wasn't a bust either.
North American revenue for the top 75 electronics distributors grew last year to a modest 3.6% to $23 billion. Distributors say it could have been worse because business in the first half of 2005 started out slowly, but finished strong.
The good news is that the strength in the second half of 2005 carried over to the first quarter of 2006 and distributors are cautiously optimistic that 2006 will see a return to healthy revenue growth.
While total revenue growth for the top 75 was modest, only 13 distributors suffered revenue declines from 2004. In fact, 30 distributors reported revenue gains of at least 10%, according to Purchasing's annual survey of the electronics distribution industry. In addition, many distributors reported increases in non-North American sales. Global revenue of the top 75 grew nearly 10% to $38 billion in 2005.
A lot of distribution growth is occurring in Asia because so much manufacturing has transitioned to China and other low-cost Asian countries. Many larger North American-based distributors will continue to beef up their capabilities in Asia and some are making a greater effort to service the eastern European market. But that doesn't mean distributors are abandoning North America. Many are trying to identify new growth opportunities in North America and are re-dedicating themselves to serving midtier OEMs and electronics manufacturing services providers.
"High-volume manufacturing has shifted to other regions so there is a greater focus on smaller accounts in North America than in the past," says Roy Vallee, chairman and CEO of Avnet, the largest North America distributor with $6.5 billion in sales. He says Phoenix-based Avnet is putting more resources into its emerging accounts team. "When we talk about expanding, we mean paying more attention to customers who have less than $100,000 a year in purchases from us."
Avnet isn't the only company focusing on smaller customers in North America. Nu Horizons, a semiconductor and system distributor, has formed a new division to service buyers who purchase smaller volumes of parts.
Dave Bowers, president of Nu Horizons' distribution division, in Melville, N.Y., says the idea of Nu Horizons Express, is to make sure all levels of customers receive the same level of responsiveness and service options, "regardless of the size and quantity of their order."
Focusing on midtier
Buyers at midsize and smaller companies can expect to see greater competition for their business and more willingness by distributors to offer supply chain and design services that in the past may have been reserved for larger customers.
"In North America, there is a shift to demand-pull manufacturing, which is driving us to more supply chain engagements with customers as opposed to traditional transaction-based distribution," says Vallee. A lot of those engagements are with midtier companies.
"Midtier is our bread and butter. We're doing more and more supply chain and design chain services with midtier. Every year a higher percentage of our revenue comes from that type of activity," he says.
Demand for supply chain services is growing because more OEMs and electronics manufacturing services (EMS) companies are working off of lean inventories and need help managing their supply chains.
Companies are also looking for design help because product lifecycles are shrinking. "Helping customers get the right devices designed in and right products designed in time to meet their market windows is a rising priority," says Vallee.
Vallee and other distributors say that while demand for supply chain and design services will increase in North America in 2006, so will component demand due in part to investment by business in capital equipment.
Bill Mitchell, president and CEO of Arrow Electronics, is bullish on the North American distribution market, although electronics manufacturing has changed. "The high volume stuff is gone and gone forever and the medium volume stuff has gone to Mexico," he says. Low-volume manufacturing will continue to be performed in the U.S. and Canada, he says.
"I believe that plays to our strength," says Mitchell. "The companies that make those low- and medium-volume products are small and medium size businesses that we service. Such products include instrumentation, test and measurement equipment, medical equipment and industrial controls."
Some distributors report that some manufacturing, which had been done in Asia, is coming back to North America and will help drive component demand in 2006.
"We see more midvolume production that had transitioned offshore coming back to the Americas," says Bowers of Nu Horizons. "It includes some high reliability systems such as medical equipment and we expect to see that trend continue in 2006," he says.
Another trend buyers should watch is distributors carrying higher value-added products, such as flat-panel displays. Nu Horizons and Jaco Electronics, which are primarily semiconductor distributors, are seeing strong growth in their flat-panel businesses.
Jaco's flat-panel business is growing at about 25% per year, says Joel Girsky, president and CEO of Jaco, in Happauge, N.Y. "We developed into one of the foremost suppliers of flat panel displays for the industrial marketplace in the U.S.," he says. "We probably have the largest breadth of franchised suppliers: Samsung, AU, NEC, Sharp, Hitachi, Kyocera are glass suppliers to us."
He says Jaco has installed a 20,000 sq ft value-add center for flat panel displays along with a 1,200 sq ft clean room. Buyers can expect even more distributors to offer more higher value-added content.
Asia hot
While North American revenue growth should improve in 2006, distributors' Asian growth will be stronger.
Mitchell did not forecast how much growth he expected for Arrow in Asia in 2006. However, in 2005 Arrow's Asian sales increased by 30% to $1.5 billion.
"Asia is well above 15% of our business and is approaching 20%," he says. "A few years ago it was less than 10% of our business."
The good news for distributors is that the amount of components sold through distribution in Asia is relatively small. That means there is plenty of room for growth and that percentage will increase.
"We had close to 3,000 new customers in Asia last year," says Mitchell. "Most of those customers were small or medium size. As those businesses grow, it will become a larger piece of the total available market and that's distribution business."
Complications arise
Vallee says the growth in global distribution business has resulted in more complex, demanding requirements for distributors.
"When we used to call on a customer, engineering was in one part of the building, purchasing in another and manufacturing in another," he says. "With one visit we could talk to all of them. Today engineering may be an independent design house, or it could be done by the OEM anywhere around the world."
Manufacturing is probably outsourced and occurring with more than one provider in more than one geographic location, says Vallee. Procurement is done on the global and local levels.
"There is a rising level of complexity that goes with this notion of globalization and it needs to be supported. It's much more demanding or complex than the old days when we had an integrated OEM account base," says Vallee.
Avnet and Arrow aren't the only distributors going after global business. Midsize and smaller distributors including TTI, All-American, Digi-Key, Nu Horizons and Jaco among others also are growing their non-North American revenue. However, competing for business in Asia can be tough sledding for smaller North American distributors because they aren't just competing with large global distributors, but with Asia-based distributors as well.
"We have a quality line card but how do you convince an Asian customer that they should be doing business with a $220 million components distributor in the U.S. when they can buy from an Arrow or an Avnet or from Asian distributors?" says Girsky. Jaco has grown its Asian business because of relationships it has established with North American customers.
"We keep tabs on the business that we have helped developed in the U.S. as our OEM customers moved manufacturing to Asia. We have been able to maintain the business because of our relationship with them," says Girsky. He says Asia accounts for about 30% of Jaco's total revenue.
What about Europe?
While many distributors say the strongest growth opportunities are in Asia, passives, electromechanical connector distributor TTI in Fort Worth, Texas says its European business is growing.
While many distributors say the overall European electronics market will post modest growth in 2006, TTI expects to grow its European business by taking market share and by further expanding into Eastern Europe.
Craig Conrad, senior vice president, chief marketing and strategic planning officer at TTI, says European OEMs and EMS providers have "embraced TTI's model. The TTI model as a specialized interconnect, passives and electromechanical distributor has been extremely well received," says Conrad. "There isn't a similar model in Europe. You generally have broad line distributors and the catalog distributors."
TTI grew its European revenue 21% in 2005 and is now one of the top 10 pan-European distributors, says Conrad. TTI has come a long way in a short period of time. In 1998, TTI had $10 million in revenue in Europe. Today it has more than $200 million, he says.
The RoHS factor
TTI and other distributors doing business in Europe are trying to determine what impact the upcoming ban on the use of lead and five other substances will have on their business. Its impact on revenue is unclear, but RoHS could cause an upheaval in the supply chain as the deadline approaches.
The European Union's Restriction on the use of Hazardous Substances (RoHS) goes into effect July 1 and prohibits the use of the six substances in electronics equipment sold in Europe.
"It's unclear what the net effect of RoHS will be," says Conrad. "It's a wildcard. Large customers are well on their journey to RoHS compliance, but there is a category of customers that doesn't think it will affect them."
He says TTI surveyed its customers about RoHS late last year and found that 50% had no current plans concerning RoHS. Those customers did not sell into Europe and did not see how the law could affect them.
In fact, many suppliers will phase out non-RoHS compliant products so even companies not selling into Europe will have to use RoHS-compliant products. The RoHS-compliant products often have different solder requirements than noncompliant products such as a higher soldering temperature.
"Distributors are kind of caught between a rock and a hard place with RoHS," says Rob Birse, director of marketing communications at catalog distributor Allied Electronics in Fort Worth, Texas. "Component manufacturers are driving compliancy into the market and we have to educate our customers to the benefits of moving to a compliant product. But we still have to create demand to clear out the old parts. RoHs is the biggest challenge that distribution has faced," he says.
Most distributors expect RoHS to create some short-term confusion and pain, but many see it as an opportunity to get closer to customers by offering them information and advice what they need. Such a service can develop customer loyalty which may be key to distributors' success in North America.
Success in North America may be difficult in 2006 as the market will likely grow slowly compared to Asia. However, overall the distribution industry is healthy and will likely post double-digit growth in worldwide revenues, according to many distributors.
Vallee notes that a lot of growth in the electronics industry has been due to the proliferation of "lifestyle products" such as cell phones, MP3 players and other consumer electronics equipment.
"What we are seeing now is more spending by corporations on capital equipment which includes electronics equipment," he says. "As a result of that we are seeing growth in America and Europe which hasn't been there with the exception of a couple quarters in 2004. It should be a decent year."
Top 10 global distributors
| Rank 2005 | Company | 2005 calendar year ($ millions) | % change from previous year |
| (1) Purchasing estimate (2) Sales from 11/04 to 10/05 Source: Purchasing |
|||
| 1 | Avnet | $12,611.0 | 17.1% |
| 2 | Arrow Electronics | 11,164.0 | 4.9% |
| 3 | Future Electronics (1) | 3,675.0 | 5.8% |
| 4 | Bell Microproducts | 3,194.0 | 12.9% |
| 5 | Newark InOne (2) | 1,459.7 | 4.3% |
| 6 | TTI | 835.0 | 7.7% |
| 7 | Digi-Key | 630.0 | 18.8% |
| 8 | Richardson Electronics, Ltd. (1) | 602.9 | 15.9% |
| 9 | Nu Horizons Electronics | 534.0 | 16.6% |
| 10 | All American Semiconductor | 435.0 | 6.4% |
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CP - 5/18/2006 3:02:00 PM EDT
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