Velocity in October: Is this Distribution's New Golden Age?

I daresay Charles Avnet, if he were still around today, would recognize neither the components distribution business he founded in 1921, nor Manhattan, the city where he opened the first store for what has since turned into a Fortune 500 company.

In fiscal 2012 ended June 30, Avnet Inc. (NYSE: AVT), the company that today bears Mr. Avnet's name, had $25.7 billion in revenue, compared with the $85,000 it posted in its first year of business selling components to the then nascent radio world. The founder would have found the latest numbers stunning, but I bet he would have been proud of his company too.

Avnet's history and the evolution of the electronics component distribution market is worth reviewing, if only to understand how distributors have responded to changes and how the top players used a well honed and aggressive acquisition strategy to consolidate the market and become dominant enterprises. With more than 300 sales offices worldwide and 17,000 employees selling products and services from hundreds of partners to over 100,000 customers globally, Avnet clearly has moved far from its humble origin in New York City. Click here for a timeline of Avnet's growth over its 91-year existence.

Distribution is not a market where even the biggest and most dominant players can afford to rest on their laurels, however. While many still refer to companies like Avnet and North American arch-rival Arrow Electronics Inc. (NYSE: ARW) as distributors -- deceptively giving them the image of mere middlemen -- these companies are anything but transition points for products moving from manufacturers to end equipment producers and assemblers. Over the decades, distribution has changed dramatically, and the range of services offered has expanded to almost all segments of the electronics manufacturing and information technology markets.

That's why this month on Velocity we will be offering a wide range of articles on the distribution market with the goal of helping the industry better understand this critical segment. EBN writers and industry experts will explore topics related to the growth of the industry, its future in key market regions -- especially in developing regions like China and Brazil -- and focus on issues and challenges facing distributors.

Of key interest to me personally is how the industry is responding to changes at many of its customers and suppliers; addressing the problem of counterfeiting and how to build effective supply chain systems; and forecasting inaccuracies and the demand-supply imbalances that have in the past crippled the industry. I would like to also explore the evolution of the distribution business in Japan and whether the same round of M&A activities that dramatically shrank the ranks of distributors in North America will occur in China. I believe this is inevitable and that the events will also be led mostly by the industry giants.

Of course, M&A activities can have downsides. It decimated the ranks of semiconductor vendors, for example, but as new fabless chip makers emerged, their presence strengthened wafer foundries, while the emergence of independent design firms has created opportunities for new businesses. We'll also be exploring strategies for the relatively slower-growing European and North American markets where the biggest distributors have solidified their position via both Greenfield expansions and acquisitions.

Today, the leading distributors are still the major sellers of electronic components, but they also offer numerous value-added services, including subassembly, inventory management, vendor management, logistics, and other supply chain and design chain functions. Avnet generally doesn't describe itself anymore simply as a distributor. Here's how the company sees itself, according to a statement on its investor relations site:

In addition to its core distribution services, Avnet markets, adds value and creates demand for the products of the world's leading electronic component suppliers, enterprise computing manufacturers and embedded subsystem providers. Avnet brings a breadth and depth of service capabilities, such as supply-chain and design-chain services, logistics solutions, product assembly, device programming, and computer system configuration and integration.

That description of Avnet may change again in future. In another decade or two, the distribution market itself probably would have evolved again as today's executives hand over the baton to another set of leaders. Already distributors are offering services that go deeper into the electronics supply chain and helping customers come up with product concepts -- well before anyone even imagines what components would be needed.

Charles Avnet, in a YouTube narration dramatized by Avnet, said the late 1920s were the "golden age of radio [and] golden for the Avnet family." I wonder how he might describe distribution and Avnet today.