Shell-shocked may be the best word to describe how electronics distributors felt after 2001. Weak end equipment demand coupled with high inventory levels resulted in most distributors having poor years.

The National Electronic Distributors Association (NEDA) says distribution sales overall were down 31% in 2001. Semiconductor sales were declined 46%; passives, 35% and connectors, 22%. The good news for distributors is that growth should return in 2002. The bad news is that growth will sluggish, mostly likely in the low single digits.

"I don't see us rocketing out of the downturn," says Fran Scricco, CEO of Arrow Electronics. "I see a gradual build. It will be better than 2001."

For electronics purchasers, slow growth for distributors may be a good thing. Because demand will be moderate, distributors will be eager for buyers' business and purchasers can expect greater responsiveness and service. A return to growth will also keep the distributor industry healthy although more consolidation is always a possibility.

NEDA says it looks as if distribution recovery has already started. "Our index shows that business has already bottomed and is now starting to creep up," says Robin Gray executive vice president of NEDA . NEDA tracks inventory levels, inventory turns, accounts receivable and shipments. The good news is inventory levels and accounts receivable are going down and shipments and turns are going up.

"The important thing is that nobody thinks we are in for another dramatic drop, but there is concern it's going to be a flat year," he says.

Distributors are cautiously optimistic about a recovery in 2002, albeit a small one.

"There is reason to believe that 2002 is going to be better than 2001," says Roy Vallee, CEO of distributor giant Avnet. "Forecasting is hard to do and some folks actually get paid to do that. My experience has been that they aren't accurate at all looking forward and only about 50% right looking backwards," he quips.

He says he expects demand for electronic end equipment to be slow for most of the year and for the recovery to accelerate in the last third of the year. "I don't believe July and August are ever good months to bank on anything good happening. What happens is end equipment demand really begins to recover in the last third of the year."

However, he says component business has already begun a recovery because much of the inventory will finally be worked off.

"In 2002 the buffer runs out and companies at least buy what they are consuming," Vallee says. "Component recovery will be moderate and I think end equipment demand will be mild."

Vallee says that information technology will lead the recovery.

"The IT supply chain is mature and there are not a lot of excess inventories at the end equipment level or at the supply chain level," he says. "A lot of IT spending occurred in the Y2K remediation era. Now that equipment is aging. It is time for some replenishment purchasing."

He also says that electronics manufacturing services (EMS) companies will continue to grow faster than the market and be important customers for distributors because they are handling much of the component purchasing in the supply chain.

He adds that demand from the communications industry will be weak. "In the telecom infrastructure space there is a surplus capacity in the end market and there is surplus finished equipment in between and then there is supply chain inventory of component materials. I look for communications infrastructure to be the weakest end market," says Vallee.

Other distributors echo Vallee's comments about the communications segment.

"Our expectation is that communications is going to be weak," says Tom Pitera, president of Pioneer Standard's Industrial Electronics Division. "There is still inventory burn off that needs to be done. That will ripple into CM segment. CM could be soft as we go into this year."

Pitera says he expect the computer business to pick up.

"We do a significant amount of business with the tier two tier tier three computer integrators and compute manufacturers. Intel has Dell, Compaq, IBM and Gateway direct. We deal with second and third tier, Selling them microprocessors, motherboards, and some systems. P4 systems will be hot this year."

Another area that offer promise are major global customers, according to Pitera. "Those tend to be manufacturing and industrial control, instrumentation companies. There could be 8-12% growth for that segment."

Pitera says overall there could be low single-digit revenue growth.

"The first half will be tough. We don't see any significant signs of recovery in the first half," says Pitera. "Our hope is that we see some signs in second calendar quarter. Things might begin to turn around then some decent growth in the back half of the year."

Scricco of arrow says he expects that Arrow's broad industrial customers will come back quicker than high profile customers.

"Everybody thinks that if microprocessors are down than Arrow is down," he says. "Or if Cisco is down Arrow is down. When you have 600 suppliers and 200,000 customers there is no one customer or supplier that you can look to and say this is happening so therefore the same thing is happening to Arrow. Everybody wants one indicator, but there is not one customer or supplier that you can look to and 'say they were down so Arrow must be down,'" says Scricco.

He says that because Arrow has thousands of small customers in many different industries many of whom have not been as impacted by the electronics industry downturn as some of the more high profile larger companies in the communications industry. As an example he says Arrow supplies components to a Midwest manufacturer of gas pumps.

"If you pop open the cover of a gas pump you will see large electronics content. There's a display, printer, a board, cable assemblies. While the pump manufacturer is small compared to Cisco Systems, Arrow has thousands of smaller customers whose business is steadier than networking equipment manufacturers."

Although distribution business will be slow in 2002, distributors say the industry is healthy and its longer-term outlook is bright.

"Distribution is here to stay," says Scricco. "Four years ago the dot.coms were going to kill us. Then it was the contract manufacturers were going to kill us. Neither did because we can do things that neither of them can do. We'll be around for a long time."