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Distributors’ Share of China Chip Sales Is Shrinking

In significant contrast to prevailing trends in the rest of the world, distributors' share of semiconductor sales in China are on the decline, according to a recent report from IHS iSuppli:

    Semiconductor sales through distributors in China rose to $34.4 billion in 2010, up an impressive 31.3 percent from $26.2 billion in 2009. However, supplier-direct sales increased by an even more notable 54 percent during the year. This caused distributors’ share of total semiconductor revenue to decline to 48 percent in 2010, down from 52 percent in 2009.

IHS iSuppli analyst Horse Liu says the key reason for this shift is the increasing use among customers of direct contracts with chip suppliers to ensure delivery.

This is discouraging news for the US distributors {complink 453|Arrow Electronics Inc.} and {complink 577|Avnet Inc.}, which have been striving to increase their sales in the valuable China market. Both companies have increased their presence there via acquisition. Avnet acquired two Taiwan companies, Prospect Technology Corp. and J.C. Talley Trading Co., last week. Arrow bought China's Seed International Ltd. in late July.

Both Avnet and Arrow have also been trying to advance the consolidation business model they have established over decades in the US and European markets. Unlike the traditional distribution model in China, in which supplier-distributor-customer relationships are very fragmented, Arrow and Avnet have been trying to establish one-stop shops.

In China, customers traditionally buy one or two product lines from a single distributor. Through companies such as Arrow, Avnet, {complink 2164|Future Electronics}, and {complink 12835|WPG Holdings}, customers can buy a full array of products from a single distributor.

Arrow and Avnet have also acted as global consolidators, acquiring local and regional distributors in the US and EMEA markets. As a result, both distributors have an increasingly global lineup of semiconductor, systems, and interconnect, passive, and electromechanical (IP&E) products. Future provides the same one-stop model but has expanded organically, rather than through acquisition.

In the semiconductor segment, Arrow, Avnet, and Future have also expanded their value-added and design service offerings overseas. Asia-based WPG Holding has done much of the same in reverse, expanding its semiconductor-focused business into the Americas.

Distributors increasingly have been called upon by customers to program components near the site of consumption, so the channel has established programming sites in all major global regions. Suppliers are increasingly relying on distributors to assist customers in component selection, so design engineers have been deployed by distributors worldwide. The overall trend in semiconductor distribution has been a transition from supplier-direct relationships with customers to distribution, which makes the trend in China all the more contrary to the rest of the world.

The disparity, according to IHS iSuppli, occurred after semiconductor sellers offered guaranteed supplies to key clients following component shortages in 2010. Additionally:

    This trend is expected to continue in the future. While distributors’ semiconductor revenue will increase at a compound annual growth rate (CAGR) of 6.1 percent from 2010 to 2015, direct sales will increase at 9.6 percent CAGR during the same period. As a result, share among distributors of total sales will decline to 44 percent in 2015, down from 47.5 percent in 2011. Despite their rapid growth, the major distributors last year encountered stiff challenges, including component shortages, prolonged lead times, increasing product costs, and complex markets. And because of soft demand in some markets, including cellphones and computers, sales revenue for large distributor entities declined in April and May 2011. Distributors will continue to experience difficulties during the next five years in their attempts to increase sales as the market undergoes slower growth.

In spite of this troubling trend, the world's three largest electronics distributors are expected to maintain their dominance, Liu writes:

    WPG Holding, Avnet, and Arrow will maintain their leading roles for some time to come, based on their merger and acquisition strategies, while also aggressively developing new markets in order to maintain growth of sales. With broad product lines and better customer resources than their smaller competitors, the Top 3 possess strong forecast capabilities and healthy inventory levels.

13 comments on “Distributors’ Share of China Chip Sales Is Shrinking

  1. SunitaT
    August 13, 2011

    key reason for this shift is the increasing use among customers of direct contracts with chip suppliers to ensure delivery.

    @Barbara,

     I agree with you that this is discouraging news for the US distributors, but wondering why are customers directly approaching chip suppliers ? Is it because it will give they cost advantage ?

  2. JADEN
    August 14, 2011

    “the key reason for this shift is the increasing use among customers of direct contracts with chip suppliers to ensure delivery”, and semiconductor sellers offered guaranteed supplies to key clients.  Avnet, Arrow strategy of establishing one-stop shops is good but they have to consider cost in their services.

  3. Nemos
    August 14, 2011

    I believe that the key that leads the consumers to commit direct sales and over passing the distributors is the price of the product and how much it costs. Even if the price is a bit more I don't think the customer should choose to do a direct sale (given the transport costs).

  4. saranyatil
    August 14, 2011

    Many of the design engineers are oriented towards faster design and development in order to shorten the product life cycle. In tact with that they feel they can get more clarity on the chips chosen with direct contact so that they have not been confused by distributor as there are many chip companies offering the same soluition.

  5. SunitaT
    August 15, 2011

    @saranyatil, the whole purpose of distributor is you will get access to data from many chip companies so that you can choose the best. How else do you think design engineers can choose the best solution available in the market ? 

  6. SunitaT
    August 15, 2011

    @JADEN, are you suggesting that the distributors dont offer guaranteed supply ? I feel many of them dont mind paying extra if they get one-stop solution because they dont have to worry about searching for the data.

  7. _hm
    August 15, 2011

    One more reason for this trend may be that supplier like to serve key customers by themselves directly. I have experienced this for many years. Many time distrubutors come with FAE from supplier and introduce product to you. However, distributor comes to you with many FAEs from competing chip supplier. Some chip supplier do not want to miss opportunity and they feel that distributor is not putting required effort for their products and start interacting directly with cusotmer.

    Customer also has time to market limitations and may need to keep in close contact with chip supplier. Some time they have to bypass distributor to get the lowest price.

    Distributor can reverse this trend if they add more value to process in all technical, price and delivery.

     

  8. saranyatil
    August 15, 2011

    Tirlapur,

    Its my personal experience  I am sharing many at times I feel distributors promote few companies and even at times turns out to be complusive.

  9. Eldredge
    August 15, 2011

    It makes a lot of sense for a supplier to handle their largest customers directly.

  10. Daniel
    August 16, 2011

    I think, trust worthiness is a major factor in any business. Due to the presents of counterfeit components in market, most of the companies are trying to get the components directly from the manufactures. Another major factor is, if third partyor distributors are not involved in this chain, companies can get the components with a better price tag and hence the procuring expenses can be reduced considerably.

  11. Barbara Jorgensen
    August 16, 2011

    Thanks for readers' input regarding suppliers selling direct. The fact that several of our readers say that suppliers prefer the direct approach is very interesting to me. For the most part, the opposite is true in the West–and I have had suppliers tell me this. Dealing with the demands of small to midsize OEMs is difficult for suppliers in terms of manging demand and delivery, and, for a period, issuing credit as well. Reluctant customers have even come to belive they get better service through distributors. I'd like to hear more about how suppliers in China manage to maintain direct realtionships with customers–it's a tough task

  12. garyk
    August 16, 2011

    First of all CHINA understands where countfiet chips come from, thats why they want to buy direct.

    Seconded Distributors in the US act as the Bank, CHINA has money, doesn't need a Bank!

    Third, CHINA can control the manufacturer for pricing or the manufacturer will be out of business.

  13. Barbara Jorgensen
    August 17, 2011

    It sounds like customers have a lot of clout in China, which is consistent with what we have been hearing. I'm curious about the bank comment, however: companies in China never buy anything on credit?

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