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Avnet to Analysts: Reasons for Continued Optimism

Reading signals from both suppliers and customers is often a matter of survival in the electronics distribution channel. {complink 577|Avnet Inc.}, which has more than 600 suppliers and hundreds of thousands of customers worldwide, sees no reason to adjust its forecast that the electronics supply chain is in for a period of sustained growth.

“As long as we don't see anything alarming — such as massive cancellations from our customers — there is nothing to tell us we should be worried,” said Harley Feldberg, president of Avnet Electronics Marketing, Global, at Avnet's annual Analysts Day Wednesday at the NYSE. “We see a moderation in the rate of growth [compared with 2010] but we continue to be encouraged by the future.”

While the focus of the meeting, appropriately, was Avnet's strategy for continued growth, the global distributor cast its position against the backdrop of the macro-economy and the overall electronics industry. Some of the reasons Feldberg is optimistic:

The global total available market (TAM) for components will grow by 6 percent in 2011, from $274 billion this year to $291 billion. By 2013, the global TAM is expected to reach $331 billion.

The components TAM will also grow consistently by region. Between 2010 and 2013, the components TAM is forecast to grow by 4.8 percent in the Americas; 5.2 percent in Europe; 9.1 percent in the Asia/Pacific region; and 4 percent in Japan. Worldwide, that's a combined annual growth rate (CAGR) of 7 percent.

Consolidation will also play a role in the channel's growth. The largest suppliers of interconnect, passive, and electromechanical (IP&E) components are in the process of paring down their distribution relationships to fewer key players. {complink 5844|Tyco Electronics Ltd.} — soon to be TE Connectivity Ltd. — has discussed its intention to engage with fewer partners, and the rest of the IP&E market is expected to follow suit.

“Some of the key players are getting very serious about managing such broad-based channels and are working to reduce their number of channel partners,” Feldberg said. This is similar to the pattern the semiconductor industry followed more than a decade ago and effectively channels more products through fewer distributors. Global distributors are well positioned to benefit from this trend.

The Japanese distribution market, which has been very quiet for the past few years, may also be poised for change. The Japanese channel is typically a captive market where the major makers of semiconductors — {complink 5648|Toshiba Corp.}, {complink 3462|Mitsubishi Corp.}, {complink 3642|NEC Electronics Corp.}, etc. — own their own narrowly focused distribution companies. Among the top 32 distributors in Japan, the largest hold only 7 or 8 percent of the market each.

However, Feldberg says, there are indications that Japanese distributors are trying to reach a bigger share of the export market. A highly fragmented distribution model is inefficient compared with the more consolidated models of global distributors such as Avnet, {complink 453|Arrow Electronics Inc.}, and {complink 2164|Future Electronics}. Design activity out of Japan accounts for 20 percent of the global spend on semiconductors, Feldberg notes. Overall, he says, customers' supply chains are becoming more complex, and that requires better supplier collaboration to service global accounts. Again, global distributors are well positioned to benefit from this.

It is also highly likely that Avnet will make an acquisition in Japan, but no time frame has been given.

In terms of reading the signals, Avnet has a pretty good track record. The Phoenix-based distributor is celebrating its 50th year on the NYSE and is one of only a few hundred publicly traded companies to reach that milestone.

5 comments on “Avnet to Analysts: Reasons for Continued Optimism

  1. SP
    December 16, 2010

    9% growth in asia/pacific region, thats not very surprising. These are the regions with many untapped potential. Their economies are growing reapidly and becomes a lucrative market for distribution.

  2. Barbara Jorgensen
    December 16, 2010

    Indeed, SP. That 9 percent is also a very narrow slice of the pie because Avnet measures total available market (TAM) and distribution total available market (DTAM). Avnet admits to being a little conservative in its estimates because everyone is still gun-shy from the recession. My guess is the potential is actually bigger.

  3. eemom
    December 18, 2010

    These numbers are very encouraging coming from the supply side.  Hopefully the semiconductor market estimated growth will translate into more consumer buying power which will continue to encourage economic growth.  As I stated before, I just hope that we start to see this translate into companies investing in engineering and product development which will translate into lower unemployment numbers. I do understand that companies are proceeding with caution which is totally understandable, hopefully, they will gain some confidence back in 2011.

  4. Taimoor Zubar
    December 19, 2010

    You mentioned that electronic manufacturers are looking to 'consolidate' and reducing their distribution to 'few key players'. While having less number of partners may mean simplicity for the company, it may also lead to a rise in the cost of final product because of the intermediary commission involved. In terms of supply chain effectiveness and from a long-term perspective, how would you compare the option of distributing through a bunch of distributors versus supplying to a large number of customers directly?

  5. Hawk
    December 20, 2010

    Barbara, Go back in time and tell me please the last time any of these companies sounded the alarm about the future. The electronic supply chain is chock-full of optimist until things fall apart. They press the panic button typically after they run into trouble. The electronic supply chain is not operating in isolation from the rest of the global economy. Growth is almost certain in Asia and perhaps even in Eastern Europe — maybe even in Africa — because high-tech equipment adoption is still going on and they can benefit from the productivity improvements.

    However, a quick review of what has fueled growth in the US and in Europe over the last couple of years will indicate it has been government spending. Now, Europeans are pulling back and trying to fight their growing debt and deficit problems. The United States must soon follow. Are Avnet executives aware any debt fighting actions in the U.S. plus the pullback in government spending will hurt the general economy and by extension, their own operations?

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