Expect distributors to add more OEM, EMS customers
James Carbone -- Purchasing, 2/19/2004 2:00:00 AM
The electronics distribution industry was hit hard by the economic downturn. Oversupply and high inventory levels crushed prices, leaving many distributors reeling. Revenue declined 24% in 2001 and 22% in 2002 for the Top 75 distributors surveyed annually by Purchasing magazine.
While the 2003 Top 75 figures are still being compiled, most distributors say their businesses improved in 2003, especially toward the end of the year. Distributors are optimistic that a recovery and healthy growth will return in 2004 and say the long-term outlook for the industry is bright.
However, some distributors are concerned that the industry has matured and the glory days, when distributors enjoyed 20%-plus sales growth annually, are over. Others are worried about the migration of manufacturing from North America to China and what it will mean to North American distribution.
One thing is for sure. Buyers can expect distributors to be more customer-focused and to provide more services. Distributors will try to expand their customer bases and forge closer partnerships with existing customers. More distributors will provide more supply chain management programs and value-added services even to smaller customers as they compete to be the most efficient product and service providers.
Robin Gray, executive vice president of the National Electronic Distributors Association (neda), says distributors expect 2004 to be a good year. "All signs point to a very positive year. Prices are starting to firm. A few parts are on allocation, leadtimes are stretching, and we may finally have some price increases," he says.
However, the last downturn may have changed some rules for distributors and buyers, says Gray. "Just-in-time ordering seems to have become the new model." Buyers are reluctant to purchase any more than they need immediately for production except for a few parts that are on allocation. As demand builds, distributors will be wary about double and triple ordering. The practice occurred before the last downturn and contributed to a huge inventory buildup when end equipment demand dropped off.
Look to China
Gray says with the recovery of the economy and rising demand for electronics equipment, distribution will likely achieve double-digit growth in 2004. However, large distributors who have a major presence in China may see the greatest revenue growth.
"China is one of the strategic imperatives for Arrow as well as the whole electronics industry," says Bill Mitchell, CEO of Arrow Electronics. "The shift of manufacturing capacity to China coupled with the rapid growth of a very large, though a relatively immature local market means Asia-Pacific and Japan make up the largest single market for electronic components in the world." In the next four or five years, China alone may become the single largest marketplace for electronic components in the world, according to Mitchell. "You don't have to be a genius to figure out that, if you are going to be a global player, you had better be successful in China," he says.
Mitchell expects more manufacturing will transfer to China, although the rate of transfer will slow. "OEMs have transferred their big products. There aren't any more cell phones or personal digital assistants or notebook computers to transfer."
He says the developing Chinese domestic market is similar to markets in the more mature economies of North America and Europe in terms of what it needs from distribution. The domestic market needs distributors with broad line cards, logistics, product availability, inventory management and technical support.
Mitchell says doing business in China is challenging because of its legal structure, logistics, banking, financing and regulatory issues. "But who better than Arrow to sort all of that out because, if we find it complicated, everyone else does, too," he says.
Arrow is the leading distributor in China today with about 10% market share, adds Mitchell. "We expect Asia to be a growth engine for Arrow and the keystone to Asia is China," he says. "Right now our business is about 60% North America, 30% Europe, and 10% in Asia. We expect Asia to grow as a percentage of sales quite substantially. Those percentages will change over time," says Mitchell.
There is no question that Asia, especially China, has become a manufacturing Mecca for high-volume production, and large distributors who are serving that market will see huge growth. However, the effect of the transition of manufacturing to China on electronics distribution may not be as severe as some think.
Much of the manufacturing that has transferred to China has been high-volume manufacturing such as notebook computers, cell phones and consumer electronics equipment. Much of that business involves the top five contract manufacturers who buy most of their components and production materials directly from component manufacturers and use distributors very little.
Roy Vallee, CEO of Avnet, notes that, typically, EMS providers get 80% of their revenues from just 20 OEM customers. "The top five EMS companies combined get 80% of revenue from fewer than 50 customers," he says. Most of that business much of which has transitioned to Asiais direct business. "Globally EMS companies, which have the ability to source direct, are typically serving tier one OEMs. Distributors are serving tier two and tier three customers. There is an enormous account base for distribution, 100,000 plus customers," says Vallee.
DTAM rises
Vallee also says that despite the downturn and the transition of manufacturing to China, distributor total available market (dtam), the amount of components sold through distribution, is rising despite the fact the EMS and original design manufacturing (ODM) industries are growing at faster rates than distribution.
"ODM business is growing faster than any other segment," says Vallee. "It has a compound annual growth rate (cagr) of 34% though 2006. EMS is second at 16% and distribution's cagr is 13%," he says. "Even though EMS and ODM providers are growing faster than distribution, we show distribution's share of the total components market growing from 21% in 1996 to 23% in 2002 to 25% in 2006," says Vallee.
"Distribution is gaining market share by being responsible for a greater percentage of the total number of customers in the technology supply chain. With more than 100,000 customers, there is still a huge role for distribution," Vallee explains.
Many of those customers are small- to medium-size EMS companies. "Smaller and medium size contract manufacturers need partners who have the expertise in managing a complex supply chain, managing availability, providing vendor managed inventory, in-plant stores, supply chain services, credit and financing," says Mitchell. "All of the things that distribution does."
Buyers can expect distributors to focus more on supply chain management, design and information services in the coming years especially in North America. "The Americas continue to be a leading design in region even with manufacturing moving offshore," says Vallee. "The Americas market will be dominated by new product introduction, research and development activities, and manufacturing for lower unit volume, higher mix types of products," he says.
Successful distributors will be the ones who can provide products as well as design and materials management, logistics and information services. "A few years ago, the Internet guys were going to take us out, but without the invention of the molecular transporter they had no way to move product into the marketplace," quips Vallee. "Distributors have the ability to move product and to leverage the power of the Internet to become information distributors," he says.
Some industry watchers say moving information may be the most valuable thing distributors do in the technology chain. Information includes everything about parts, ranging from spec sheets, quality, availability, pricing, end-of-life information and shipment status. In some cases it involves reference designs and hardware evaluation kits to accelerate time to market for new technologies.
"Distributors are getting into the business of distributing intellectual property (IP) cores," says Vallee. "This is another version of distributing information, but it is the buying and selling of information for resale in the form of software that gets embedded in a semiconductor."
Buyers can expect distributors to beef up all of their services, ranging from physical value-added services such as IC programming and kitting to more sophisticated design, supply chain management and information services. Distributors know that it will be harder to profit by just selling parts. Distributors who can supply products with the most efficient and needed services will be the most successful.
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