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Distributors Battle for Control in China

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.

8 comments on “Distributors Battle for Control in China

  1. Jennifer Baljko
    October 5, 2010

    Bolaji –

    Besides China, I wonder how the distribution segment will emerge in other developing regions, namely Brazil and Russia. Maybe it's still too early for those markets, especially with China grabbing so many of the headlines, but I suppose in the not faraway future, executives will want to start drawing lines in the sand and shaping market strategies.

  2. bolaji ojo
    October 5, 2010

    The biggest distributors are truly global companies. Arrow has its Arrow Brasil and it is in central, eastern and western Europe. Avnet is also in most parts of the world and has over 300 locations globally. Even WPG Holdings, though it sells mostly in Asia, now has a presence in North America. WPG figures it needs a presence in the backyard of its North American rivals because the region is still a major generator of design-wins for component suppliers and distributors. Despite the importance of the rest of the world, Asia-Pacific is still the place where the biggest distributors will fight their next duel. China is just too big to ignore and its market is growing faster than any other part of the globe. Distributors will keep a leg straddling North America and Europe but their other foot will be planted firmly on Chinese soil.

  3. Barbara Jorgensen
    October 5, 2010

    Although many companies categorize India as “Asia,” it deserves the same billing as China as a country (and a market). China was targeted a little more than decade ago as an emerging market with a potential customer base of more than 5 billion. While India has made huge strides in the IT market, component distribution and board-level manufacturing opportunities are still largely untapped in that region.

  4. tioluwa
    October 5, 2010

      Jennifer,

    Owing to my bias as one residing in a developing economy, i share your view. China is definately the focus of the world now but just as China sprang up, other developing economies are bound to spring up too. As Bolaji mentioned, large companies like Arrow and Avnet have an eye on some developing economies (Arrow even has a strong leg in South Africa as well) to ensure that when these underdogs manage to surface and create a name for themselves in the global market, they will be there to reap the fruits.

  5. bolaji ojo
    October 5, 2010

    TIOLUWA, Thank you for bringing up South Africa and Arrow's presence there. The company isn't leaving anything to chance in the developing economies. The design community in South Africa is a lure for companies like Arrow and, who knows, it could stand to make a bundle in the region if a local OEM strikes gold.

  6. SP
    October 5, 2010

    I agree Avnet and Arrow are the biggest distributors of electronics component. I guess they are quite dominant in this from last 10years. They will definitely get a business solution in China too.

  7. Steve Saunders
    October 6, 2010

    how does the quality of WPGs products compare to those of its major western competitors?

    I assume the Chinese can beat the Westerners when it comes to price?

    p.s. you get a prize for the best name for an analyst: a man named Horse.

  8. bolaji ojo
    October 6, 2010

    Steve, WPG distributes more or less the same products as its biggest rivals. In the distribution business, electronic component suppliers depend on distributors to reach small, medium and even bigger equipment manufacturers and the EMS providers who service them. Distributors often have literally thousands of OEM, EMS and design engineering customers and most suppliers cannot reach these people without distributors. Where distributors add value and how they differentiate each other is in the value-added services they provide to customers and suppliers alike.

    Your question raises an important issue, however. How was WPG able to separate itself from the pack in Asia and what differentiates the company from its closest rivals. I will address this in a future article. For now, I can definitely say the fact that it is a homegrown Chinese company (though based in Taiwan) has worked tremendously in WPG's favor. Additionally, Arrow and Avnet were a bit tardy in getting geared up for the Asian expansion. They will probably dispute this. However, they've been on steroid in Asia over the last five years and WPG (which may similarly dispute this also but I am entitled to my opinon and I am not hesitant to express this) is going to have a fight on its hands for every dollar in the Asia-Pacific market from now on.

    Arrow and Avnet are practiced at growth through consolidation and natural expansion and they will deploy all tools in their arsenals to be competitive in Asia. The fun is about to begin.

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