New markets on the horizon
The mission of electronics distributors is crystal clear: find new customer segments in North America and expand to new markets in Asia and Europe.
By James Carbone -- Purchasing, 5/17/2007
'Fantastic.' 'Incredible.' 'Great.'
Those are the words that electronics distributors use to describe their sales revenue growth in 2006.
Buyers could well use the same words too. The reason: Distributors' strong revenue growth means they will be able to invest in supply chain, value-added and design services that can help buyers.
Results from Purchasing's annual Top 75 Electronics Distributor Survey reveal that 67 of the Top 75 grew revenue in 2006, with 44 reporting double-digit gains. Sixteen increased revenue 20% or more. Only four suffered revenue declines and four had flat sales.
Total North America revenue of the Top 75 distributors increased 9.2% as sales increased from $23 billion in 2005 to $25 billion in 2006. In 2005, revenue only increased 3.6%. Global revenue growth was even stronger. Sales increased 17.2% from $38.5 billion in 2005 to $45.1 billion in 2006.
But to maintain that momentum and grow further, distributors agree that they have to expand sales in what for them are nontraditional markets. Among those markets: transportation, medical and lighting. So, buyers in those markets can expect distributors to offer more products and services related to what they build.
One distributor that had strong global growth in 2006 was Arrow Electronics, based in Melville, N.Y. 'Our global revenue was the highest sales revenue ever at $13.6 billion, up 22% from 2005. It was a great year for us,' says Michael Long, president of Arrow Global Components. 'We have been growing at a rate of 17% per year for the last four years.'
Long believes Arrow will continue to post decent growth in North America. Arrow had a 'fantastic year in 2006 when it grew North American sales 10% by finding new customers that we haven't seen before.' He says transportation and lighting markets are examples of new types of customers for distribution. Transportation includes automotive, but also trucks, bulldozers, tractors and other large vehicles.
'They are using distributors because we are expanding into the path of electromechanical products that are used in such vehicles,' says Long. 'We are also finding new opportunities for connectors in transportation. There are a lot of connectors in the automobile and trucking industries. As our connector manufacturers have expanded their product lines, we can offer solutions to those customers who we did not have before,' he says.
He notes that LEDs are being designed into more dashboards, taillights of cars and trucks, climate control systems and navigation systems for cars and trucks.
In addition, more LEDs will be used in lighting fixtures and systems in homes and business and lighting companies will become customers of distribution.
Big and smallAvnet, the largest electronics distributor, will also focus on transportation and markets that use high brightness LEDs. However, Avnet will also try to grow its business within small and large OEMs.
'Our mindset is to leverage our scale and scope so we can grow faster than the market,' says Roy Vallee, CEO of Avnet, based in Phoenix, Ariz. Avnet grew its North American revenue by 10.8% to $7.2 billion in 2006.
 'Our mindset is to leverage our scale and scope so we can grow faster than the market,' says Roy Vallee, CEO of Avnet. |
Avnet is developing 'structures and services to penetrate both large OEMs and EMS providers' that need large or small production volumes as well as support with new product introduction, says Vallee.
For small orders, Avnet opened a business group for customers that require components for new product designs. That segment has typically been served by catalog distributors.
Vallee says communications is another customer segment that is a growth opportunity for Avnet although it was the 'most disappointing' segment last year. 'It is a fairly important segment for us,' he says. 'Our largest product line is Xilinx and field programmable gate arrays which are used by communications equipment manufacturers.'
He says in the first quarter, communications had not come back, but 'we believe it will because of competition' between cable operators and telephone carriers to provide high-speed Internet, phone and television services. Service providers need to upgrade equipment which will spur semiconductor demand.
A little help
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| “We can be a $100-$125 million distributor because we are niched in the high reliability military arena,” says William Cacciatore, chairman of the board of Astrex. |
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That's good news for any distributor that has design services because it provides the opportunity to sell a number of products to the OEM. 'When we walk into an engineering call, I've got lines to sell,' says Vallee. 'I can sell application specific standard products (ASSP) and interconnect or passive and electromechanical products as well as complementary semiconductors around the ASSP. My cost-per-design wins are far lower than what suppliers can do for themselves,' says Vallee.
More OEMs are also demanding supply chain services. 'The world keeps marching toward this notion of build-to-order and just in time,' says Vallee. At the same time, more and more OEMs want to manufacture at multiple sites around the world. 'And many times they outsource to electronics manufacturing services providers,' says Vallee. In fact, about 37% of electronics equipment manufacturing is handled by EMS or original design manufacturers, he says.
'Those companies are paying more attention to return on capital and are starting to look at us as a strategic partner,' says Vallee. That's because distributors provide not only parts, but a host of supply chain services that reduce cost.
Those services are often essential to companies as a way to reduce their operational cost. For instance, MC Assembly, an EMS provider in Melbourne, Fla., relies on its distributors, including Arrow, Avnet and TTI, to provide in-plant stores, says Stan Vogt, director of supply chain materials. The stores help MC Assembly lower its costs because the EMS provider doesn't pay for the parts until they are pulled from the stores, he says.
Services sellWhile large distributors use services to attract customers and grow revenue, so do small distributors. Case in Point: Astrex in Plainview, N.Y.
'We are an interconnect distributor. We sell military cylindrical connectors and do a decent business in radio frequency connectors,' says Frank Stalzer, president of Astrex. Such connectors require assembly, which Astrex does for customers as a value-added service. The distributor also provides various inventory management programs for customers.
Astrex grew its revenue 14% to $26.2 million in 2006, says Stalzer. Growth was strong because about 60–65% of Astrex's business is with military/aerospace companies and that segment was decent. 'It was a good year and we are optimistic about 2007,' he says. He forecasts double-digit growth again in 2007.
Stalzer says in order to grow long-term, Astrex will have to offer more products to customers. 'We may take on product lines that are a good adjunct to interconnect,' says Stalzer. He notes that passives specialist TTI was successful expanding into connectors.
William Cacciatore, chairman of the board of Astrex, says his company will never be a $500 million distributor. 'But we can be a $100–$125 million distributor because we are niched in the high reliability military arena.' He says that it will take more than just sales growth to reach $100 million.
'My formula to become a $100 million company is 50% organic growth and 50% acquisition growth,' he says. Cacciatore used the formula with Richey Electronics, an interconnect distributor he owned in the 1990s. He grew the company to $280 million before selling it to Arrow in 2000. He says he would be disappointed if Astrex did not make an acquisition within a year.
Think globalWhile distributors are optimistic they will grow North American sales, they are more confident about growing their global revenue.
'The global industry typically grows around two times the gross domestic product (GDP) and the U.S. grows around the same rate as GDP,' says Vallee. He says Avnet grew 17% globally in 2006.
Asia is the fastest growing region for both Arrow and Avnet. 'We continue to see Asia as the growth engine for the business,' says Long. 'We are expanding our presence in Taiwan, Hong Kong and mainland China and we are in other emerging markets like India. Our line card is starting to come together in Asia and the opportunities are widespread and electronics manufacturing services business continues to go to Asia,' says Long.
| Also read: Catalog distributors draw big imitators Trends in distribution 2006 North American Rankings Top 75 Electronics Distributors Alphabetical listing
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'It was similar for Asia-Japan. We did $51 million in Asia-Japan, up 70% from 2005. We expect to do $90–$100 million this year,' he says. Digi-Key will also expand into Australia, New Zealand and India.
Passives and interconnect specialist TTI, based in Fort Worth, Texas, also had strong global sales in 2006. 'Europe has been a smashing success for TTI,' says Craig Conrad, senior vice president and chief marketing and strategic planning officer. 'We have grown sales from $80 million to $225 million this past year.'
He says TTI has 20 locations in Europe and has been averaging 30% annual growth there, the fastest growth of any distributor in Europe. 'We are the number two or three pan-European distributor for interconnect, passive and electromechanical device sales,' he says.
TTI has a smaller presence in Asia, but expects its sales to grow. 'We are such a small player in Asia,' says Conrad. 'There are unlimited opportunities there.' He says TTI is in India and will expand to Vietnam.
'We just opened a branch in India, which is migrating from being just a service country to a country where manufacturing is becoming much more important. Over the next 5–s10 years it will be a good market opportunity for us,' Conrad says.
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