Top 75 Electronics Distributors: Distribution will weather economic storm
Most distributors expect double-digit revenue declines in 2009, but they are positioning themselves to ride the recovery in 2010.
By James Carbone -- Purchasing, 4/30/2009 2:00:00 AM
Electronics distributors acknowledge that 2009 is shaping up to be one of the worst years ever for sales revenue, but they believe they will thrive again when the downturn ends and will handle a greater percentage of total component sales.
Most distributors were hard hit by the economic and financial crisis that began in the fourth quarter of last year. Total revenue of the Top 75 North American based distributors declined 2.4% in 2008 due in large part to the drop off in component demand at the end of the year. About half of the top 75 are reporting sales decreases. However, 14 of the 75 managed double-digit increases, including Mouser, Richardson, The Genie Group and Powell (see listing p 32E14).
Few distributors are expecting sales growth in 2009 because demand for end equipment and sales is down drastically. Most distributors reported sharp revenue declines in the first quarter. Many expect double-digit revenue declines for 2009, even if business picks up in the second half as some analysts are forecasting. But most distributors don't expect a full-fledged recovery until 2010 and some say it will be in the second half of that year.
Distributors acknowledge the downturn will take its toll on the industry, resulting in some consolidation. In fact, it already has as Jaco Electronics sold most of its component business to WPG Americas, an Asian distributor that is hoping to make inroads in North America.
But overall distributors believe they will be stronger and better able to service OEMs and electronics manufacturing services (EMS) providers once the recession ends.
"Electronics distribution will weather the storm," says William Mitchell, CEO and chairman of Arrow Electronics in Melville, N.Y. "In fact, we are probably better able to do that than other industries because in a downturn we generate cash and cash really means something these days. A well-run electronics distributor will come out of this just fine," he says.
When the downturn will end is anyone's guess, but most say the banking crisis needs to be resolved first before the electronics industry and distribution can bounce back. "The thing that characterizes this downturn and makes it different is that the underlying financial system is in deep crisis," says Mitchell. "Until that gets sorted out, it is hard to see how confidence can return. Until money is flowing again, we will have more choppy weather ahead."
It could be worse
While this downturn is broad, affecting all industries, it won't be as serious as the 2001 industry electronics industry collapse, according to Roy Vallee, CEO and chairman of the board of Avnet Inc. in Phoenix, Ariz.
"This is nothing like 2001. So far this is having a milder impact on technology," says Vallee. Prior to the 2001 technology crash, the electronics industry had experienced several years of "significant spending evolving from telecom in 1996 to Y2K to the dotcom bubble," he says.
When the industry crashed, "we had enormous inventories and excess capacities that had to be worked through. With this slowdown, it is a macroeconomic led slowdown," says Vallee. He says this downturn feels worse because it is so broad, but in fact it is a milder slowdown in the electronics industry than 2001.
"The bubbles in this one are real estate and banking as opposed to technology," he says. "In 2008, real estate and banking crashed and tech is the corollary damage."
While this downturn may be milder that 2001, there is sill a "horrific correction" that is occurring in the industry, says Craig Conrad, senior vice president, chief marketing and strategic planning officer for passives distributor TTI in Forth Worth, Texas. He notes the electronics industry usually experiences a decline after a boom period, but with this downturn the industry did not have a boom.
"Most downturns are caused by overly optimistic forecasting which leads to high prices and too much capacity being added," says Conrad. "But this downturn was preceded by a period of only modest growth."
Lessons learned
The downturn may be different in a good way because lessons were learned from the 2001 meltdown, according to Arrow Electronics' Mitchell. "This time we didn't let supply chains get out of whack," he says. "Supply chains have been getting leaner over the years as we have learned to deal with less inventory."
The industry is in better shape in this downturn because suppliers reduced production and inventory levels quickly. When the recovery kicks in, there won't be a lot of inventory in the supply chain that needs to be worked off.
In preparation for the recovery, many distributors are building relationships with buyers at OEMs and EMS providers and with component suppliers. During the downturn, OEMs and contract manufacturers are looking to distributors to hold more inventory for them and provide flexible payment terms and lines of credit.
Component manufacturers are relying on distributors more to create demand for new semiconductors, passive components and connectors and to service customers that used to buy direct. OEMs, EMS providers and suppliers are trying to reduce their cost and are trying to leverage the services and expertise of distributors.
"We call this forward and backwards integration," says Vallee. "We leverage our core competencies for our customers to create value in the supply chain and to make the overall supply chain more efficient," he says.
Reducing TCO
For OEMs and EMS providers, distributors create value by offering bonded and consigned inventory programs, in-plant stores, and design services. During a downturn, such services are attractive because they help companies reduce their total cost of ownership (TCO). In fact, such services attract some customers that have large enough volumes to purchase direct from component manufacturers.
"Under normal conditions you have large customers buying direct. But in a downturn, the volume drops so they may not be quite as attractive to direct suppliers," says Vallee.
Some customers that have a high-volume, high-mix model will buy from distribution because distributors can provide them a lower TCO.
"That's where our services come into play and there is a split," says Vallee. "Some of those customers prefer to buy direct because they have enough volume. Others place value on distribution for supply chain services. Those customers look at total cost of ownership and determine distribution is a better fit," he says.
One reason OEMs and EMS providers will purchase from distributors is favorable terms.
"If you think about it, distribution offers financing at no charge as opposed to customers going to the bank or selling bonds or stock," says Vallee. "Many large EMS companies are using us for that purpose. Specifically giving them a line of a credit and it is in the millions of dollars," he says.
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