Most nonfranchised independent distributors say that 2005 is proving to be a challenging year for them because it is a buyer's market for components. However, while business is not booming, independent distributors say many electronics buyers are using the independent channel to make opportunistic purchases.

During a buyer's market, there is a glut of parts on the open market. Cost-conscious buyers can often find large volumes of parts selling for significantly less than through franchised distribution.

In addition, some independent distributors say the upcoming ban on the use of lead in electronics may positively impact their business. The European Union's Restriction on the Use of Hazardous Substances (RoHS) law will ban the use of lead and other substance in electronic equipment. The ban is effective July 1, 2006, but many manufacturers plan to be lead-free by January 1.

"Lead-free products are going to create some opportunities as we get closer to deadline," says Doug Kelly, CEO of Smith and Associates, an independent distributor in Houston. "Lead-free is not going to be a universal standard where everybody does the same thing."

The ban on lead affects equipment sold in Europe. Equipment manufacturers not selling into Europe may still want to build products that contain lead. However, if the majority of manufacturers phase out leaded products, there could be a shortage of parts.

"As suppliers go end-of-life with leaded product and move over to lead-free, we anticipate buyers will need help finding leaded components," says Kelly.

Fusion in Andover, Mass. is another independent distributor that sees opportunity from the lead-free rules.

"We are seeing some supply shortages because there is still demand for leaded product," says Carleton Defoe, sales manager at Fusion. "There are going to be certain OEMs selling their end products to certain areas of the world other than Europe that won't be RoHS-compliant," he says.

Chuck Magee, executive vice president of independent distributor America II in St. Petersburg, Fla., says the transition to lead-free parts will be difficult and spot shortages are likely. He says part manufacturers have done a poor job of communicating to buyers their plans and time frames of RoHS implementation. "There is no common practice for part markings that would standardize the industry," he says. "Spot shortages will occur in leaded parts because of the lack of an organized approach."

Buyers may also see spot shortages unrelated to RoHS later in the year as demand picks up. Memory ICs could come up short if major manufacturers switch capacity between DRAM and NAND flash memory. If too much capacity is switched to NAND flash, buyers can expect a short-term tight supply for DRAM.

In fact, while no serious long-term shortages of parts are expected in 2005, there are usually temporary shortages, according to Kelly.

"There are still shortages every day. It is not every product and every manufacturer, but there are imbalances where buyers have to correct the difference of what they have on the shelf and what they need today," says Kelly. He says the largest part of Smith's business is still filling shortages.

Besides filling shortages, some independent distributors say there is demand for consignment programs. With consignment, an independent distributor takes the inventory of an OEM or EMS provider and sells it off gradually. The distributor and customer share the proceeds.

Consignment is one program offered by ixes AG, a Germany-based independent distributor that is trying to make inroads into the North American market. ixes has consignment programs with companies such as Alcatel, Solectron and Sanmina, says Gerd Bruegel, CEO.

"We physically take over inventories with our Integrated Consigned Partner program," he says. The parts are sold over time usually at a higher price than if the OEM sold the parts all at once just to get them off the books.

"We may get 70¢ on the dollar and that is split with the customer, so the customer may get 40¢," he says. However, it may take a year to sell the parts. Often a customer wants to sell excess inventory quickly.

"If the customer wants a quick and dirty solution, they may get 5¢ on the dollar," says Bruegel. "Big OEMs who have $5-10 million of excess inventory are looking to get a better return rate out if it." Consignment is about 20% of ixes' business.

ixes' North America headquarters is in Boston. It has a relatively small operation in North America, but plans to grow its U.S. business over the next two years to 20-25% of its total sales, says Bruegel.

Another company that plans to compete for North American and global business is Jameco based in Belmont, Calif. Jameco has a unique business model. It is an independent catalog distributor, but is adding product lines and expects to go after more volume business. Most of its products are passives, electromechanical and connectors, but it has some semiconductors. In addition, last year it started offering its own house brands of components that are manufactured in Asia.

As a catalog distributor, it has competed more with Digi-Key, Allied and Newark InOne than major independent distributors. But as it adds more lines it may go head-to-head against the volume independent distributors.

"One of our shortcomings has been breadth of our product." says Ray Ballantoni, director of direct marketing for Jameco.

"We wanted to do business with larger companies, but our product line was small. Over the past two years, we tripled the number of product lines we have and by end of this year we will double the number of stock keeping units (SKUs) that we have," he says. "So we'll have six times the product we had two years ago. That lends itself to more of what the typical buyer will want."

Jameco will go after volume business but it will remain a catalog distributor.

"The engineer has been our bread and butter and we are not out to abandon any part of our business," says Bellantoni. "We just want to fill out the layers of the business."

To do so, Jameco will sell more of its house-brand products including capacitors, resistors and connectors. The distributor is apparently borrowing from the playbook of leading component manufacturers. "Large companies such as AMP will have a Chinese company produce a product for them," says Bellantoni. "In the past, AMP would take that product in-house and then send it to distribution. Now it sends it straight to distribution without taking it in-house," he says.

Jameco is doing the same thing. It is sourcing the same types of equivalent products and selling them under its own house name. But instead of going through the brand markup and having a franchised distribution markup, Jameco is selling it products directly to end customers. Jameco's product cost 20-30% less than the name-brand products, says Bellantoni.

Jameco will continue to sell name-brand products in addition to its own house-brand products.

While 2005 will be a challenging year for independent distributors, most believe that the long-term outlook for the channel is good because nonfranchised distributors play a key role in the supply chain. They handle demand fulfillment.

"Buyers continue to demand choices and won't be forced into dealing with a few large franchised distributors because of the continued consolidation of that channel," says Magee of America II. "The franchise model is driven by demand creation. Their gross profit margins are dependent on success in this area. I believe there is a need for fulfillment distributors."