Top 75 Electronics Distributors: Distributors' supply chain role grows

Suppliers are relying on distributors more than ever to service North American OEMs and electronics manufacturing services providers. Distributors look for similar growth in Asia.

By James Carbone -- Purchasing, 5/8/2008

North American sales growth of the Top 75 electronics distributors increased 15% to $28.1 billion in 2007, due in large part to strong growth in computer products and connectors. In fact, 35 of the Top 75 distributors had sales gains of 10% or more.

And, as for this year, many distributors reported healthy component demand and positive book-to-bill ratios in March.

But, distributors interviewed in connection with Purchasing's annual survey of the electronics-distribution industry say they are not optimistic they can repeat that level of growth in 2008 because of the economic slowdown.

Moreover, some large distributors say it will be hard to post strong growth rates in North America because so much electronics manufacturing, especially high-volume manufacturing, has moved offshore to low-cost countries. Other distributors point out, however, that high-volume manufacturing was never a big market for most distributors because large OEMs and EMS providers tend to buy direct from component manufacturers. Still, industry experts admit, even if a large company like Hewlett-Packard purchases only 2-3% of its electronics from distributors that would amount to millions of dollars of business. (See details on survey results on page 28E27.)

Nevertheless, in North America mid- and small-size OEMs and EMS companies are the bread and butter customers for distributors. Despite the migration of large-scale manufacturing to Asia, North American revenue of the Top 75 distributors has grown consistently since the 2001 downturn.

And, both large and small distributors say there is still room for growth in North America, although revenue growth will be stronger in Asia. For example, distributors are growing revenue in North America by seeking out new opportunities such as solid-state lighting and embedded systems. Some have divisions dedicated to light-emitting diodes, which are being used in more equipment and in lighting fixtures.

Avnet, headquartered in Phoenix, expects its component business to improve in 2008 after its component business in North America slipped in 2007. Its overall North America revenue, including systems, increased 16.9%.

Weak capital equipment purchases by companies is one reason why Avnet's component business was down, says Roy Vallee, CEO. “It was not a robust capex year for America,” he says. “It contributed to lower sales for us.”

There was low spending on capital equipment such as communications infrastructure, Vallee says. Equipment manufacturers buy components from Avnet and other distributors. Vallee says he expects that Avnet's component revenue growth should rebound into the mid-single digits in 2008. He notes that Avnet's North America revenue is about $4 billion, so 5% growth would be about $200 million—which, he says, would be decent revenue growth.

Vallee says such growth is possible for years to come. “Some would call the North American distribution market mature, but others might suggest it is a cash cow. So I think it is still a viable business,” he says.

It will remain a viable business because component manufacturers need distributors to service their small- and medium-size OEM and electronics manufacturing services accounts.

Service is key

Component manufacturers are servicing fewer OEMs and EMS providers directly. The manufacturers they do service are very large and most of them have moved manufacturing to Asia or other low-cost areas. Component manufacturers are relying on distributors more to service more of their customers, especially in North America.

“Distributors have become responsible for literally 99% of the customer base,” says Vallee. “Most suppliers we deal with now sell to 50-250 accounts directly. And we are servicing over 100,000 customers.” About five years ago suppliers would service between 1,000-2,000 customers directly, he says.

Suppliers want to reach those hundreds of thousands of customers that distribution services, says Bill Mitchell, chairman and CEO of Arrow Electronics in Melville N.Y. “Our sweet spot is small- and medium-size customers, and suppliers want to partner with us to reach that customer base,” he says.

Many of those companies have between 100-1,000 employees, don't have the purchasing, engineering and logistics staffs or IT capabilities and need a distribution partner to provide those services, according to Mitchell.

Growing pains in Asia

While distributors may post low- to mid-single digit revenue growth in North America, many are growing their businesses in Asia because component demand is stronger.

“Asia now represents 22% of our components business, up from 13% just three years ago,” says Mitchell. “We expect that growth rate to continue.” Longer term, that percentage will grow to the 30-35% range. In 2007 Arrow sold $2.4 billion of components in Asia, says Mitchell.

A lot of those sales were in China, where demand continues to be strong. “What we saw last year for the first time was that the domestic Chinese economy was bigger than the export economy,” says Mitchell. The Chinese economy is growing 5-6% per year and “that shows no signs of slowing down.”

Mitchell expects component growth for Arrow will be in the low double digits in China while North America will have low single-digit growth over the next several years.

“We have said consistently that we would outgrow that market organically. We have done that for five years in a row,” says Mitchell.

He adds Arrow will also focus efforts on Eastern Europe. “We have expanded into former Eastern Bloc countries. That is a small portion of our business right now.” However, Arrow plans to grow its business there and expand into more countries.

“The big prize is Russia. It is the fastest growing large economy in the world,” he says.

Avnet also is seeing strong growth in Asia. In 2007 it did nearly $3 billion of business there. “We have lower market share in Asia than the U.S., but it is higher than it was five years ago,” says Vallee. Asia is just under 30% of Avnet's overall revenue, the Americas just under 40% and Europe is just over 30%, he says.

He says Avnet will likely gain share in Asia by organic growth and by acquisition.

Think globally

But it's not just large distributors like Arrow and Avnet that have boosted their presence in Asia and Europe.

For instance, Digi-Key, based in Thief River Falls, Minn., expects to do about $100 million in sales in China and Europe and expand to India, according to Mark Larson, Digi-Key's president.

“We are seeing some really nice growth in southeast Asia,” he says. “We are looking at growth in range of 50% for those regions.”

TTI has been consistently growing its European business. “Europe has been phenomenal for us,” says Craig Conrad, senior vice president and chief marketing and planning officer for TTI, based in Fort Worth, Texas. “Ten years ago, TTI was doing $10 million in Europe and this year we will do $450 million.”

He says before TTI, there were no passives and connector specialist distributors in Europe and its specialist business model was quickly accepted.

“We started fresh and carried the TTI business model over there. We immediately centralized our purchasing and inventories in Germany,” says Conrad. From Germany TTI services its European customers, who appreciated TTI's approach of having large inventories of passives and connectors.

Distributors believe because demand for components keeps growing and because they serve a vital function in the supply chain, distribution will continue to grow in 2008 and beyond.

“Business in 2008 is going to be better than 2007 and perhaps more like 2006,” says Vallee. “On a global basis growth will be in the high single digits in 2008,” he says. Growth will continue because “the recognition of the value proposition of distribution has never been greater,” says Vallee.

What It Means to Buyers:

Distributors will compete more for business of small- and mid-size companies because large-scale manufacturing has left the U.S.
Distributors will seek out new growth areas and customer segments such as solid-state lighting and embedded systems.
Buyers will find it harder to buy directly from component manufacturers as more component sales will be pushed through distribution.

Distributors see Vietnam as potential hot spot

Many electronics distributors are thinking about Vietnam as the next potential growth area for their global businesses. The problem being so far there isn't a lot of electronics manufacturing there. (See related story on Page 28E30.)

“Vietnam is the hot topic,” says Mark Larson, president of Digi-Key. “Everyone in Japan, Hong Kong, and Singapore talks about Vietnam.”

He says Vietnam is eventually going to be a good market for the electronics industry because it offers low labor rates and a pro-business government that is willing to give tax breaks to businesses.

A handful of electronics OEMs and electronics manufacturing services (EMS) providers have operations there and those companies would welcome the presence of global electronics distributors. These companies now have to import all of the electronics they need from Singapore or other Southeast Asian locations.

“I have talked with distributors in Singapore and they are all talking about doing business in Vietnam eventually, but they haven't started doing so yet,” says Jason Craft, general manager of EMS provider Spartronics, a subsidiary of Sparton Electronics based in Jackson, Mich. Spartronics has a factory near Ho Chi Minh City that builds printed circuit boards for various OEMs.

He says that the infrastructure in Vietnam, including roads and ports, needs to be built before distributors, OEMs and other EMS providers open facilities there. Distributors agree and they also want to see EMS providers and OEMs move there first before they open up facilities.

Bill Mitchell, chairman and CEO of Arrow Electronics, says Arrow will open a facility in Vietnam “when it makes sense.”

“We have not established a presence in Vietnam, but we have been clear that we will,” he says.

If more electronics manufacturing moves to Vietnam it would provide Arrow with “opportunities to provide supply chain and logistics and other types of services to those companies operating there.” But first logistics in the country needs to be improved and more EMS and OEMs have to move there, he says.

Counterfeit concerns mean tighter screening of returns

Many of the Top 75 electronics distributors say that the problem of counterfeit parts is getting worse and they are more carefully screening returns from customers to make sure they don't receive bogus components.

Robin Gray, executive vice president of the National Electronics Distributors Association, says distributors are at risk of receiving counterfeit parts if they don't screen returns properly.

He says since distributors buy parts direct from component manufacturers, there is very little risk they will pass on bogus parts in the supply chain unless they receive them from customers returning parts.

Distributors have tightened up their return policies. “You can only return items in the original packaging that match the date codes of the parts they sold to that customer,” says Gray.

In the past there have been instances of authorized distributors receiving fake parts in returns and some of them were resold to OEMs and EMS suppliers. Gray says the problem is getting worse as more counterfeit parts are finding their way into the supply chain. “Even lower-value passive components are being counterfeited,” he says. Such parts are in the supply chain because of reselling of parts by brokers and other unauthorized sources, according to Gray.

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