Distribution & Industry in Transition

Nobody has come up with a catchy alternative yet, but it is becoming clear that the term “electronics distributor” — harking back to the group's origin as middlemen linking component vendors with customers worldwide — has outlived its usefulness. The misnomer does little justice to the range of services that the sector's diverse participants perform nowadays, and it might be time to dump it altogether.

A look at the latest {complink 577|Avnet Inc.} annual filing with the Securities and Exchange Commission bolsters that argument. The filing states that Avnet “provides engineering design, materials management and logistics services, system integration and configuration, and supply chain services that can be customized to meet the requirements of both customers and suppliers.” Of course, it still functions as an “industrial distributor of electronic components, enterprise computer and storage products and embedded systems,” but it is no mere middleman. Rather, it is “a vital link in the technology supply chain.”

The description is not mere hyperbole. And it applies not only to distribution giants like Avnet, Arrow, World Peace Group, Future, Digi-Key, Mouser, and element14, but also increasingly to midsized and niche players. There's ample evidence that in all segments of the electronics industry, the companies we know today as distributors are critical resources for design and related value-added services. In short, today's distributors have taken on many more responsibilities than tradition has assigned them.

The expansion of distribution's role raises key questions not just about distributors, but also about the fundamental changes occurring in the industry and in society at large. As distributors add design functions to their offerings, what is the effect on their relationship with their constituencies — component makers, the OEMs that have traditionally handled design, the outsourcing community that equipment vendors rely upon for production, and the customers who rely on their services? How many more OEM and vendor functions can distributors absorb? What are the implications of this brand extension for the design and supply chain? Who benefits most from the new twists in relationships among suppliers, distributors, and customers? And how do the players get reimbursed for their services in an environment where goods and ideas crisscross national and corporate boundaries?

In future blogs, I will be examining these questions and offering some perspectives on how the industry can manage its evolving web of interrelated business models. The discussion is only just beginning. As technology innovations have accelerated, so has the complexity of the industry's relationships. The lines of demarcation are being erased not just between OEMs and their EMS providers, but across all segments of the electronics industry.

Even the definition of “OEM” is changing rapidly. The ranks thinned out during the recessionary Y2K period but have expanded fast since then to accommodate some players that bear little resemblance to the typical OEM of 2000. In addition to “traditional” companies like {complink 3426|Microsoft Corp.} and {complink 379|Apple Inc.}, industry participants now include the bookseller and Nook e-reader vendor Barnes & Noble; the online retail titan, Kindle creator, and (if speculation proves correct) aspiring smartphone market participant {complink 11480| Inc.}; and {complink 2294|Google}, which leveraged its high value in search engine optimization to launch Android and purchase a traditional OEM (Motorola Mobility).

I suspect distributors will somehow find new ways to serve everyone in the industry, whatever direction they pursue. That's because they've changed faster than any other segment over the past 20 years and have a depth of offerings and market penetration that few can match. Avnet alone says its roster of customers includes more than 100,000 OEMs, EMS providers, ODMs, and VARs, in addition to hundreds of component makers.

Such companies can rightly still be called distributors only in the context of how extensively their distributed services touch all segments of the industry.

14 comments on “Distribution & Industry in Transition

  1. Barbara Jorgensen
    December 15, 2011

    I agree, Bolaji–there should be a term beyond “distributors.” The problem is, almost any new phrase is more cumbersome than the original. “Contract manufacturer” became electronic manufacturing services provider. The “channel” is nice and compact, but maybe too inclusive. Wordiness aside, the scope of services distrbutors provide is expansive and I would expect to see that continue.

  2. bolaji ojo
    December 15, 2011

    Alex, Thanks for the comments. I wonder, though, who is driving this brand and service extension by Avnet. Do you see this as something the market is forcing on Avnet or is the company taking the initiative based on customer feedback with programs like this?

  3. Tim Votapka
    December 15, 2011

    Whatever became of the acronym VAD (Value Added Distributor)? Never did sound very high-tech as literally anybody could be carry the title even if they simply packed an order with twice the ESD wrappings. On the other hand, it was consistent with where the industry was heading as value added service revenue expanded beyond its early boundaries.

  4. mfbertozzi
    December 16, 2011

    Tvotapka, my personal opinion is VAD of which mission should be to put value on top of goods or products, have faced (and are still facing) as per other players in the market, in general, strong limitation in their actions due to financial crisis; as consequence, they have had to introduce considerable costs' cut then value added is becoming very small and sometimes, not perceived.

  5. bolaji ojo
    December 16, 2011

    TVotapka, The description value-added-distributor (VAD) is not any better than plain distributor. These companies began adding value added services more than 10 years ago but they've obviously gone far beyond that (Please see the comments from Alex). I believe they'll continue to integrate extra services as demand increase from customers, many of which either cannot afford these or just want a one-stop provider for non-core offerings.

  6. Barbara Jorgensen
    December 16, 2011

    I think we have to make a distinction between the systems side of the business and the components side. VAD/VAR is a term that applies mostly to the systems/IT side of the business and, in fact, Avnet and Arrow sell to VADs and VARs. I believe Avnet & Arrow would still be considered wholesalers in some systems markets. On the components side, you'd be hard-pressed not to find a distributor that provides value-added services.

    Here's an idea: W&D–wholesale and design?

  7. Taimoor Zubar
    December 17, 2011

    Interesting post, Bolaji. Besides absorbing the functions of OEMs and retailers, distributors have also created many new functions and roles that never existed before in the supply chain. I think it would be a good idea to shed light on these as well.

  8. SunitaT
    December 19, 2011

    How many more OEM and vendor functions can distributors absorb?

    @Bolaji, do you think eventually these distributors will start making their own products because they have full access to both component's and design, hence they are in better to position to optimize the cost of the product they build?

  9. Mr. Roques
    December 19, 2011

    I think there's something about maintaining QA. Additionally, in competitive markets, vertically integrated companies have an edge, reducing overhead and being able to lower costs (and maintain better margins).

  10. bolaji ojo
    December 19, 2011

    Tirlapur, Distributors haven't begun making self-branded electronics equipment but they didn't use to provide so many design services either. The executives will, for now, insist that's not likely soon. I believe this is the case but I won't be surprised either if they jump into OEM business.

  11. bolaji ojo
    December 19, 2011

    Barbara, I am interested in your opinion on a question Tirlapur asked. Do you foresee a time when distributors might start offering finished and self-branded electronics goods?

  12. Barbara Jorgensen
    December 19, 2011

    @Bolaji @ tiralupur: excellent question. The short answer is no–at least on the components side. Distribution for a short time offered turnkey contract manufacturing services and withdrew from that market because they were seen as competing with their customers (EMS compnaies). While distributors do design and put together reference designs and board-level designs, those are sold in limited quantities as design tools/aids for customers. It's a very sticky situation if you are seen to be competing with your partners, and the channel avoids this.

    On the systems side, distributors do assemble and configure entire systems. In this regard, the do overlap with some of their VAR/VAD customers. In those cases, it's usually when a VAR or VAD doesn't offer a product the end customer needs and a distributor can. Also, the brand will always be IBM, or HP or Microsoft–distributors wouldn't sell a system under their own brand or as a “white box.” They never want to be seen as in direct conflict with a supplier or customer.

  13. SunitaT
    December 20, 2011

    It's a very sticky situation if you are seen to be competing with your partners, and the channel avoids this.

    @Barbara, I totally agree with you. I think this is the same case between Apple-Samsung. Earlier samsung was giving service to Apple, but when Samsung released its own handsets Apple not only moved away from Samusng but they are also fighting legal battle.

  14. Barbara Jorgensen
    December 20, 2011

    good point tirlapur! I didn't see the parallel, but that is spot on

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