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Regional Integration Will Drive Future Distribution M&A

In the nineties and the early part of the last decade, news about the electronics distribution industry was dominated by merger and acquisition. The genealogy of the most dominant distributors of today include companies that still carried the name of their founders when they were acquired, such as Schweber Electronics, Marshall Industries, and Bell Microproducts.

Geographic expansion was the driving force behind M&A, and this remains true today. Although the acquisitions aren't as dramatic as Arrow-Lex or Avnet-Marshall, distributors are reaching into new businesses, such as reverse logistics, and new geographies, such as Brazil, untapped areas in the Far East, and the Middle East, via acquisition.

The ability to bring a network up quickly is one of the hallmarks of electronics distribution. In most cases, acquired companies have an infrastructure in place, but systems have to be integrated to manage the highly complex supply and demand flow of the global electronics industry. One of the more limiting factors has nothing to go with geography; instead, it is due to the fact that regional supplier franchises often make it difficult for distributors to provide the same products and service worldwide.

However, the customer needs of 2012 aren't all that different from 1995. In a just-released survey of supply chain executives, The Chief Supply Chain Officer Report of 2012, customers identified the attributes they value most in a supply chain partner:

    For new geographical market expansion, efficient distribution of products to customers and the ability to satisfy local regulatory requirements are both viewed as highly relevant, particularly in the CPG, healthcare and pharmaceutical sectors. Since many of the new markets are likely to be in emerging economies where logistics and distribution infrastructures are not as well developed, successful penetration requires the ability to establish efficient channels.

    This requires well-managed information systems, the use of local distribution partners, effective warehouse and trade management processes, and so on. Other levers, such as the ability to customize for local needs, the use of local manufacturing or sourcing capacity, and after-sales service support, are valued highly by the hi-tech sector.

In addition to expansion, acquisitions bring to distributors customers who may be concerned about losing their local sales and service contacts (even if they are gaining a global distributor). Distributors try to retain local employees whenever possible. Markets have distinct personalities, as Avnet Electronics Marketing Americas President Ed Smith told me in a recent interview.

{complink 577|Avnet Inc.} tries to tailor its sales and support staff and services to regional needs. Avnet EM Americas recently announced some reorganization activities that may or may not be duplicated elsewhere in Avnet. “When something makes sense, in terms of our structure, we will roll it out globally,” says Smith. “The [Avnet] embedded business got started in the Americas and is being introduced in Europe and China — some things can be engineered in Europe and dropped anywhere in the world.” (See: Avnet Americas Reorganizing.)

Distributors, like most electronics companies, are constantly weighing new market opportunities. The global market is experiencing an uneven recovery from 2009, and there is still room to expand. According to the SCSO report:

    In the current economic climate, countries such as China, Brazil, India, Turkey and Mexico are experiencing faster growth than the more mature markets of North America, Europe and Japan. Hence, it is important for western companies to find ways to expand their business in these newer markets. For the second year in a row, more than two-thirds of our respondents say that supply chain excellence is providing an important means to support such expansion for their companies.

Avnet has literally written a handbook on merger and acquisition. Integration is handled with both local needs and economy of scale in mind. In addition to customers, distributors also serve other constituents, including suppliers and shareholders. Transitioning customers into a newly-merged organization can be challenging, but the CSCO survey reports customers are willing to reward companies that manage that well with their business:

    Customers are willing to pay a premium price if they value speed, flexibility and reliable supply. Supply chain excellence must therefore encompass such levers. The hi-tech sector, as expected, values speed in the form of quick response, while the retail sector values reliable supply in the form of on-time and dependable delivery.

3 comments on “Regional Integration Will Drive Future Distribution M&A

  1. FLYINGSCOT
    October 10, 2012

    It makes a lot of sense that successful companies are able to tailor their product and service offering to the local markets they serve.  I imagine supplying a myriad of small remote Asian companies is much different from large Western multinationals.

  2. Ariella
    October 10, 2012

    Customers are willing to pay a premium price if they value speed, flexibility and reliable supply ” That would be the corollary of The Project Management Triangle (called also Triple Constraint or the Iron Triangle) “You are given the options of Fast, Good and Cheap, and told to pick any two.”

    The project triangle as a "pick any two" Euler diagram.Here, “reliable” would take the place of “good.” If you want it fast without compromising quality, you have to give up cheap. 

  3. Barbara Jorgensen
    October 11, 2012

    Ariella: love the graphic. It reminds me of the motto distributors used to have, maybe 20 years ago: “Free, Perfect and Now.” That's also the title of a book a distribution exec, Rob Rodin, wrote on the industry. It really hasn't changed all that much.

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