In a world that lives by the quarter, 2012 was quite a ride for distributors. In short, it could have been worse, but it sure could have been better.
It was another year of go-go quarters followed by abrupt pauses. That led to some interesting numbers on the annual Top 25 Distributors survey, but little ranking change.
(This story was originally published as part of EDN's Top 25 Global Electronics Component Distributors special report.)
Topping the list of the world’s biggest electronics distributors were Avnet and Arrow, followed by WPG Holdings, Future Electronics, and WT Microelectronics. (WT wasn’t included in the 2010 or 2011 top-distributors lists.)
Three of the top five (Avnet, Arrow, and Future) are Western companies that saw revenues dip in 2012 anywhere from 4 percent to 6 percent.
Electrocomponents plc, Digi-Key, Rutronik Electronics, and Mouser Electronics all fell one spot in the rankings from 2011 to 2012, while Premier Farnell fell two (from No. 6 to No. 8).
Stability, slow growth
That stability in ranking and, largely, in revenue, reflects the theme for distribution in 2012: essentially flat (−1.1 percent) at about $78 billion in an overall semiconductor market of about $300 billion. That followed a torrid 2011, where the top four distributors enjoyed double-digit sales growth.
Like gazing into the bottom of a teacup, some executives look at the numbers and see traditional challenges magnified.
“I’m not sure the challenges have changed a lot,” said Glenn Smith, CEO of Mouser, who celebrated his 40th anniversary at the company this spring. “The pressures are still there. We’ve got to have an efficient business. We’ve got to pull cost out of the supply chain. [The] challenge is we’re all doing it globally, and the complexities are increasing.”
But for other Western distributors, the numbers reflect what could be a significant shift in business mix that has wide-ranging consequences for the channel. In short, the global adoption of and passion for mobile electronics such as smartphones and tablets are threatening the traditional distribution model.
Harley Feldberg, president of Avnet Electronics Marketing Global, puts it into perspective: “Two phenomena collided in the September and December quarters. Somewhere near 100 percent of the growth that has occurred in the electronic component supply chain is coming from select industries and select customers,” he said in an interview.
Feldberg added that in a very short amount of time, tablets, phones, and other wireless mobile devices have experienced white-hot global demand. That’s driving business for distributors, but it’s largely high-volume, low-margin business.
At the same time, “the broader industrial marketplaces are exhibiting little or negative growth, primarily due to macro-economic issues.”
The shifting dynamic is affecting broadline distributors’ results.
“Why? Because… those [consumer electronics] supply chains are quite different than our traditional business. I’m not sure a lot of people make money except for the [OEMs]. They’re high-volume, low-margin businesses that can be attractive if you put a unique supply-chain solution around it,” Feldberg said.
Mark Larson doesn’t disagree, and indeed, as CEO of privately held Digi-Key, throws in a subtle needle or two to his huge public competitors.
“There’s so much volume in the long runs of consumer production that it looks good if you’re a public company to push your top line with huge sales,” he said. “Much of it is fairly high risk. The consumer buyer tends to change features much more rapidly and much more quickly than in industrial products.”
Larson added: “Large distributors have built the business on this longer-run business because that’s where the volume is. They have to come under a fair amount of stress. Volume is nice, but it doesn’t pay for the lights.”
He noted that concentration exposure is a problem for the large distributors. Digi-Key services 300,000 businesses across a range of industries with electronics components.
“They’ve [larger distributors] got fewer customers,” Larson said. “If they lose a customer, they may have to wear a black armband. If we lose a customer, we have to be careful we lose one we don’t miss.”
At Mouser, Glenn Smith is keenly focused on the higher-margin engineering services aspects of the distribution business as an antidote to end-market vulnerabilities.
“Our business model is primarily not high volume,” Smith said. “It’s to the industrial customer or the medical customer, who’s building thousands of units but not millions of units. We’re delivering information to engineers to help them in their design cycle.”
For Feldberg, at the moment, it’s less about competitive positioning and more about an industry’s potential tipping point in its history.
“Distribution’s got a strategic question it has to answer now,” Feldberg said. “If that’s our future, if so much of component semiconductor consumption is going to come from digital consumer devices, how does that affect the role of distribution looking five to 10 years out?”
Feldberg said the consumer electronics part of the puzzle becomes almost a moot issue if growth returns to the traditional industrial sector of broadline distribution business.
“Will we see growth is the big question, and if so when?” Feldberg asked. “That’s the $64,000 question today. If that growth does not occur and the West stays stagnant for two years, what does that mean for our model? What changes will we have to make?”
Distribution has had difficulty growing its share of the $300 billion global semiconductor market past $75 billion to $78 billion.
If the distributors can’t grow that so-called DTAM, they need to come up with a model to tap into the remaining $225 billion direct semiconductor business.
“The direct business is a different model. It doesn’t allow for FAEs or for local sales teams,” Feldberg said. “The margin is very low.”