Avnet's Harley Feldberg: Encouraging design despite the discouraging economy
By Suzanne Deffree, Managing Editor, News -- EDN, August 18, 2009
Electronic Business spoke with Harley Feldberg, president of Avnet EM (Electronics Marketing), about distributorAvnet Inc'srecently closed fiscal Q4, staying open to growth outside Asia/Pacific, inventory reduction and end demand, and why it's important to continue with design work, even if the recession is holding back immediate revenues. What follows are excerpts of that conversation.
Electronic Business: It seems like Asia/Pac is still a major driver of growth. EM's 20% sequential growth in Avnet's recently closed fiscal Q4 came from Asia. Is that still where you will focus when it comes to growth and merger and acquisition activity?
Feldberg: When you say focus on growth, we are not biased to turn down growth anywhere. But clearly the growth in our industry is occurring primarily in Asia today. We are looking for indicators of either stability or some minor growth in the Western regions. So far, I think it would be fair to say that we have an improving level of predictability and consistency in the West but clearly the growth is occurring in Asia. We're looking for growth anywhere, not just Asia. We continue to invest where necessary in the Western regions. We have no intention, nor do we want to give the impression, that we are diminishing our commitments to those markets. But clearly the growth over the last four or five months has been Asia.
Electronic Business: Are there any specific segments in the West that you are looking at?
Feldberg: There are some areas that are less prone to moving offshore, things like defense and medical. But specifically what we are really watching is the broad industrial marketplace. That's really the core of Avnet's distribution business in both America and Europe. We are looking for any indications -- which we have not seen yet, by the way -- that that broad industrial accounts base is going to start to accelerate. We haven't seen that yet, but that's critical to our profitability.
Electronic Business: It doesn't sound like you think we are at the bottom of this cycle.
Feldberg: I'm not an economist, so I'm very reluctant to make predictions. I guess I'll read the signs that we see, which is a reduced rate of decline in America and Europe and continued strength in Asia, and maybe the last positive point is improved book-to-bill ratio in all regions, but most notably in the West. If you isolate the West, we are seeing a better book to bill and a diminished rate of reduction, both signs of which we take as positive but obviously not euphoric.
Electronic Business: Let's discuss inventory. I believe on your call it was Avnet CEO Roy Vallee who said EM's inventory turns are near record levels and that the bulk of the inventory reduction seemed to be behind the company. Are we returning to end demand or is this a replenishment phase? Where are we?
Feldberg: First off, none of us knows. Roy was responding to questions primarily designed at whether EM was going to increase its inventory in the September quarter. It's hard to say. What we said on the call was we are watching very, very closely lead times and shortages. There has been an increase in both, but I wouldn't categorize the increases as dramatic, such that we should radically change our position. We are going to continue to take a conservative posture.
We are trying to have the right inventory where lead times are expanding trying to avoid shortages. But here's the tricky part of the current environment: The bulk of the industry increase that has occurred over the last couple of months is being driven by digital consumer industries -- laptops, cell phones, LCD TVs, etcetera, etcetera. Those end products use a certain types of semiconductors and connectors that may or may not be the same parts that are used in the broad industrial market. One has to be very careful in managing their inventory so that you don't over read a handful of signs, albeit they could be very big visible signs.
This is a time when general management is going to earn its pay. They have got to try to guess correctly on lead-time expansion and shortage opportunities for two reasons: One, we have become important to our customers, and second, we can make money. Those are opportunities and we have to be smart about that, but at the same time we have to continue to manage the broad accounts base prudently. It's a bit of a schizophrenic environment we are in right now. What we tried to convey on the call is that we don't see any dramatic change to our inventory profile in the September quarter, but we are watching it even more aggressively than normal.
Electronic Business: How does design chain—the use of distributor-supplied suites of engineering services to encourage product training and guidance—fit into your overall strategy and has that strategy changed at all in the last six months?
Feldberg: We took a risk through the downturn by -- I won't say 100%, but very, very close to 100% -- continuing with our investment in all of our engineering resources in the West where business was dropping so precipitously. That wasn't easy because we had to find other opportunities to make our expense-reduction requirements. The reason we did that was we didn't believe there would be a fundamental shift in the makeup of the market, which says that although revenues have dropped in the West, because quite a bit has moved offshore, customers are still doing design work. This is going to be a really interesting one. If there was a way for you to measure two quarters down the road and see if Avnet gained or lost share because of the way it handles its design resources in the [global] design regions, [the measure would show that] if we have done the job right we have kept people working on designs even though they haven't turned into revenues through this downturn. The company that did the best job in that balance is going to come out of the downturn the strongest. That's my prediction.
Electronic Business: How do you think that FAEs (field application engineers) fit to overall distribution strategy as more and more business moves online?
Feldberg: I am not one who believes that the Internet is the next version of FAEs. I think FAEs will continue to be extremely valuable but their role will change as the new generation of engineers utilizes what's available on the Web and as, by the way, we all get better at offering more capabilities on the Web. Do I think the expense as a percentage that we put into field-based technical FAEs will flatten out? Probably so. What's happening is they are required to be more technical, more specialized, ie more expensive, but not in a diminished role. My belief is that the Internet will give our customers a lot of what they are looking for cheaper, faster, and quicker, but help in designing circuits, making decisions, [and understanding] how things work together will still require a higher degree of expertise and a human being.
Electronic Business: Anything else before I let you go, Harley?
Feldberg: As a general comment, clearly the bias and the color of the industry has turned positive. Everyone is speaking in a tone of cautious optimism. Why? Because the last year or so has been brutal. No one wants to step out and announce happy days are here again. But clearly there are more positive bias then there were even 90 days ago. That sure is exciting. I'm now looking forward to seeing how we and the rest of our competitors come out of this and who comes out the strongest.
