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Economy, counterfeiting top concerns for distributors
NEDA's Robin Gray reports that the economic situation is weighing on the minds of distributors, as anxiety rises as to whether there will be any fallout in the electronic component marketplace. Gray also discusses why counterfeiting continues to be a big, looming issue for the electronics industry.
By Suzanne Deffree, Managing Editor, News -- Electronic Business, 4/1/2008

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The verdict may still be out as to if the United States economy is in a recession, but whether an economic slowdown is weighing on industry minds is inarguable.

Within the distribution link of the electronics supply chain, the economy is the top concern, according to Robin Gray, executive vice president of NEDA (National Electronic Distributors Association), a trade association representing authorized distributors.

“They [authorized distributors] are not seeing a big fall off yet in sales, but everybody is concerned and watching other sectors,” said Gray (pictured). “They are a little anxious as to whether there will be any fallout in the electronic component marketplace. That’s probably their number one issue right now.”

Indeed, distribution only performs well if product is bought and sold within the electronic supply chain. If demand from consumers and businesses for electronics drops on an economic downturn and production of electronics slows, rationale would suggest demand for components would decrease as a result.

At this time, however, most distributors are not expected a big fallout in sales, Gray said. “Their sales are relatively flat, but they don’t see a down swing,” he said. “Some are doing a little better, but it often depends on what market you are in.”

Opposed to the 2001 bubble burst, inventories are more balanced this time around, Gray said. “It’s not like 1999 and 2000 when everybody thought that there was no end to the growth in sight so they were ramping up in terms of employees, inventory, and investments. Most distributors have kept their inventories lean, they haven’t expanded rapidly with employees. They are better prepared to weather a downturn because they don’t have the expenses or overhead that they had before, especially in the inventory side of things,” he said. “That’s not to say that there can’t be a downturn, but they are certainly not in the same position they were in before.”

By and large, Gray projected the image of a “flat” distribution industry. “I haven’t heard anybody say, ‘Wow, the bottom is falling out of the market.’ What they are saying is that sales aren’t great, but they are flat. Now, when they say that, they are comparing it with the last several years, which have been great years. [Flat’s] not necessarily a bad thing, given what else is going on. That’s not to say that in the next quarter [Q2] they might see the bottom fall out. But so far, no one has.”

A year later, counterfeiting still a top concern

While it may currently be overshadowed by the economy, counterfeit goods remain a top concern within the electronics supply chain, according to Gray.

Gray at the May 2007 Electronic Distribution Show and Conference (EDS) called counterfeiting the “number one threat the industry faces.” Nearly a year later, it’s still a principal problem.

“It particularly affects manufacturers because it’s their product that is being counterfeited,” he said. Meanwhile, authorized distributors have an opportunity to benefit. As customers become increasingly concerned about the risk of buying from a non-authorized source, “authorized distributors are the beneficiary of that anxiety,” Gray said, as customers turn their purchasing power to authorized distributors.

“It [counterfeiting] is a big, looming issue for the industry. It’s an issue that’s going to be in the spotlight politically as the government and law enforcement officials take a more active role in stopping it,” Gray said. “Not only does it mean lost sales, but lost sales translate into lost jobs, less money spent on innovation and new technology, loss of IP, and damaged brands and reputations.”

Indeed, the threat has become so great that the United States and European Union partnered to seize more than 360,000 fake ICs and components in a joint operation at the end of 2007. The ICs and components included more than 40 trademarks from the likes of Intel and Philips and were worth more than $1.3 billion. The US Patent and Trademark Office estimates that counterfeiting and piracy drain about $250 billion out of the US economy each year along with some 750,000 jobs.

Unfortunately, counterfeiters become very sophisticated, and Gray reminded that weeding counterfeit product is not an easy task. “To be able to spot their product requires some very extensive testing in many cases,” he said.

It is for that reason that Gray encourages members of the electronics supply chain to stay away from grey market brokers.

“Brokers are a greater cause of concern for customers who aren’t buying from authorized sources because they rarely see or touch the product. The only thing [brokers] can rely on, and therefore the customer that buys from the broker, is the reputation of the broker. But the broker is only as good as who they buy from,” Gray said. “The fact of the matter is there is an increased risk for any customer who buys from anywhere other than an authorized source, either directly from the manufacturer of the product or from their authorized distributor. Brokers and independents are unauthorized distributors.

“The problem they face is that they can’t test every product. It’s uneconomical,” Gray continued, “and visual inspections and guidelines are a joke because, for starters, they can’t tell whether a product is ROHS compliant. The only way you can do that is extensive laboratory testing.”

Even the best brokers, Gray said, will let something slip through, regardless of their efforts.

Gray will present on distribution industry trends including counterfeiting at NEDA’s annual EDS distributor breakfast at on May 6.