Distributors are cautiously optimistic about 1999
By Staff -- Purchasing, 1/14/1999
Buyers can expect more consolidation in electronics distribution in 1999. Distributors also will become more global as many of their OEM and contract-manufacturing customers insist on overseas support. Increased electronic-commerce capability is also a priority with many distributors in 1999.Distributors, for the most part, are cautiously optimistic about business this year. They expect prices to stabilize or rise a bit, and they expect demand to be healthy, especially from the computer and communication-equipment segments. In addition, semiconductor and passives suppliers are relying on distribution more and more to service not just small accounts, but more medium-size and large OEM customers as well.
By most accounts, 1998 was a difficult year for distributors. Average selling prices fell for most components and gross margins were down dramatically. Robin Gray, executive vice president of the National Electronic Distributors Association, says many distributors finished the year with modest single-digit sales growth. In 1997, distributors sales were up 9.9% over the previous year.
"Nineteen-ninety-eight was a very tough year," says Steve Kaufman, CEO and chairman of Arrow Electronics, the largest electronics distributor. "Unit demand in the first half of the year was slightly positive, but not enough to offset falling prices. Profits were under extreme pressure."
He says prices fell so sharply that no amount of unit demand could keep revenues going up. Some distributors--like Arrow--may report positive results for the year, but it was because of acquisitions. Arrow reached an agreement to acquire Bell Industries and Richey Electronics. "But the core component business was down for everyone," he says.
More consolidation is likely in 1999, according to Kaufman. "Consolidation tends to get a little more active at the end of a down cycle where mid-size companies that have a difficult strategic position look hard at whether their prospects are better served as part of another organization," he says.
Kaufman says price declines seem to have bottomed out, and he is expecting prices to stay flat in 1999 and for unit volume to start driving revenue. He adds that wireless communications and networking are hot and will be more important to distribution in 1999.
Kaufman says that distributors are being asked to do more for customers, especially in supply chain management. "We continue to see a shift of [what were] direct customers coming to distribution because they want more complex and integrated logistics and supply chain management solutions," he says.
Avnet, the number-two distributor, also sees the trend toward more supply chain management. Avnet's Integrated Materials services, which provides supply chain management solutions, is growing 30%-40% per year, says Steve Church, president of Avnet's OEM marketing group. Avnet is also seeing increased demand for Avnet Design Services which offers a variety of engineering services to OEMs. "Avnet Design Services is a new value-added service for us, and we are going to expand that," he says.
Church says he expects the semiconductor market to become more in balance in 1999. "We are planning Q1 to be similar to Q4 1998 in terms of business conditions. We think business will start to get better in Q2, where you will see more of a balance between supply and demand. Leadtimes will start to move out as capacity begins to be used up," he says.
He adds that networking and communications will be strong, instruments will come back, and contract manufacturing will continue to grow in 1999.
Buyers can expect distributors to add resources to certain market segments that are growing. Case in point: Pioneer Standard. "We have developed a dedicated model to contract manufacturing," says Arthur Rhein, president and chief operating officer. "But we also have specific resources dedicated to the datacom and telecom markets, computers, and industrial controls. They have allowed us to increase our market share. Those resources include field salespeople who are trained in the products that those specific segments buy.
Besides offering customers more technical expertise of products, Pioneer Standard also will offer them more information management. "We we will add tools that will reduce cost of acquisition and add more value in supply chain management," he says. Such tools will use the Internet and allow automated data interchange between customers, Pioneer Standard, and suppliers.
Rhein says while customers are looking for more value added and material management programs, suppliers also are putting more demands on distributors. "[Component] manufacturers are asking us to develop customers, to do demand creation at specific customer segments. In the long term, the differentiation will be between those of us who do that well and efficiently and those that don't do it well," says Rhein.
For many smaller distributors, value-add capability is a differentiator and is much in demand from a key customer segment: Contract manufacturers. Mark Poncher, president of Calswitch, says his company is doing more business with contract manufacturers who require a lot of value-added services.
"We are doing more assembly work where smaller manufacturers outsource their wave soldering and board production and just do the box build themselves. Box-build manufacturers are looking for a switch panel interface environment. They want the connector sealed or soldered. We are finding a lot more of that business," says Poncher.
He says despite increased demand for value added, Calswitch's sales were flat in 1998. However, many distributors saw flat to 2% sales increases.
Poncher says he is not sure what to make of 1999. He expects greater demand for non-switch products such as filters and circuit protection devices. "They are required for any products that go into Europe, and everything in the U.S. is going to need an electromagnetic interface filter," says Poncher. He adds that connectors are a growing portion of Calswitch's business. In fact, switches comprise only about 45% of Calswitch's total business.
While value added will be important to small distributors, globalization will be significant to larger ones. With more and more electronics manufacturing heading to Asia and Europe, top-tier distributors are following those customers overseas.
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