The battle for dominance in the North American electronics component distribution business is over.
Two companies, Arrow Electronics Inc. and Avnet Inc., have emerged as the dominant players, although several smaller rivals are making strong headway by differentiating themselves in key market segments such as interconnects, passives, and electromechanical (IP&E), power, and energy components.
Companies like Digi-Key, Future Electronics, the UK's Premier Farnell, and its North American division, Newark, have a wide breadth of services (intense focus on the design engineering community, for instance) that set them apart and will help them remain competitive in the West.
However, while Europe and North America remain enormously significant markets for component distributors, the new frontier and the one that is likely to trigger a massive shakeup in the sector is in Southeast Asia and Japan. China is the next battlefront. The market for electronics components in the region is bigger than in North America, due to outsourcing of manufacturing to the region by Western companies and also because of surging local demand for consumer electronics products such as mobile phones, LCD TVs, and personal computers.
Arrow and Avnet are not as dominant in Southeast Asia as they are in the West, but they are already gearing up for a showdown with WPG Holdings, the region’s top player. On Monday, Oct. 4, Avnet announced the latest in a string of acquisitions, this time in China where it is buying certain assets of Eurotone Electric Ltd., a 16-year-old China distributor focused on the wind and solar power market.
We will see more strategic acquisitions like this in the future from Arrow and Avnet as they fight to displace WPG Holdings, the Taipei-based company that has emerged in recent years as Asia’s top electronics component distributors. Analyst Horse Liu at market researcher iSuppli Corp. believes WPG could soon displace its top rivals to clinch the No. 1 spot worldwide.
WPG had a headstart on Arrow and Avnet through its proximity to China’s major manufacturing centers and its laser focus on the region. Over the last five years, however, Arrow and Avnet have expanded their presence in the region and extended this even to Japan, a traditionally tough component distribution market but one where they have both made significant inroads.
Still, the focus for the near future is going to be in China, and I believe Arrow and Avnet will need to intensify their challenge to WPG’s lock on the region or see their overall market shares decline. WPG has already pulled away from them: In 2009, WPG recorded sales of $2.9 billion in China, up 33 percent, from $2.2 billion in the previous year.
Arrow and Avnet, by comparison, grew 26 percent and 18 percent, respectively, in China. iSuppli estimates Avnet had China component sales of $1.63 billion in 2009, compared with $1.4 billion in the prior year, while Arrow posted $1.58 billion, up from $1.25 billion in 2008. China’s electronics component distribution market remains fragmented, however, and I am convinced Arrow and Avnet will lead its consolidation over the next few years much as they did in North America and Europe.
WPG, too, has indicated it is going to fight to maintain its leadership in the region. In March, WPG bought Yosun Industrial Corp. though a share swap. Combined, the two companies had 2009 sales of 316 billion New Taiwan dollars (US$10.2 billion) in Asia/Pacific semiconductor component sales, making the merged company by far the largest distributor in the region and perhaps globally.
The field is chock-full of candidates for potential consolidation, including Yuson Group, the No. 4 authorized distributor in China, Wintech, SAS Dragon, and SAMT. Why would any of these companies consider merging with a bigger rival? Easy. Competition is stiffening, and small and medium-sized companies will get squeezed in the consolidation ahead. Furthermore, the distribution market requires large inventory financing, which smaller companies may not have.
The size of the market makes it a compelling battleground. Semiconductor sales alone in China last year, for instance, were $49.5 billion, and more than half of this, or $25.7 billion, went through component distributors, according to iSuppli. The remainder represented direct shipment from semiconductor vendors to OEMs and contract manufacturers.
Of the approximately $26 billion worth of semiconductor components that distributors handled in China in 2009, only $9.6 billion, or 37 percent, went through the top 11 distributors, indicating room for M&A opportunities.