The Electronic Business Top 25 Electronics Distributors
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Staff -- EDN, April 1, 2001
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TOP DISTRIBUTORS
More work, lesspay
The roles of distribution companies are steadily expanding into supply chain management and other value-added services. Now if they can just figure out how to get paid for it
In his 22 years with Avnet Inc., Roy Vallee can't recall the electronics-distribution industry ever being in such a state of flux. "I've never seen the rate of change any higher than it is today," he says.
For Vallee, chairman and CEO of Phoenix-based Avnet, the biggest recent change has been the reorganization of his company's North American sales and marketing operations, which took effect in July. Following extensive customer surveys and strategizing with consultant Arthur D. Little, Avnet consolidated its Hamilton Hallmark, Penstock and Time Electronics businesses into a single component sales group that's organized, for the first time, around product types rather than suppliers.
"It's all driven by the need for customers to hit the market faster," he says, adding that customers don't just want a speedier procurement process, but a simpler one. Says Vallee: "They wanted access to all of Avnet's goods and services through a single account manager."
Avnet, the No. 2 distribution company with calendar 1998 revenue of $6.2 billion, isn't alone in rethinking its organizational structure and business relationships. Indeed, virtually all of this year's Electronic Business Top 25 distributors are revising their strategies and adding new services to better address customers' changing needs, while at the same time striving to cut costs after three years of slumping profits.
Likewise, top-ranked Melville, NY-based Arrow Electronics Inc. and 4th-ranked Cleveland-based Pioneer-Standard Electronics Inc. recently segmented their businesses into different operating units, each aimed at specific types of customers. Wetherby, England-based Premier Farnell PLC (#7) announced plans to invest $100 million on infrastructure to improve operational efficiencies. And even Santa Clara-based Veba Electronics Inc. (#3), a subsidiary of Germany's Veba AG, has strayed from its usual approach of operating independent businesses and set up a centralized group, called Atlas Services, to provide logistics support and other value-added services across all of its semiconductor distribution subsidiaries.
"We're going through a phase in our business where we are reinventing what the business is going to be--how distribution is going to play in the supply chain," says Michael Rohleder, chief executive of Irvine, CA-based distributor Wyle Electronics Inc., which was purchased by Veba in 1997. It's no longer enough, he says, to simply provide customers with the right parts on the right day. "That's just a given, you just do that," he says. "I think the battle for market share or customer relationships right now is built around a whole suite of services that a given business partner brings to the equation."
Avnet's Vallee agrees that distributors' roles are expanding as both customers and suppliers turn to them to manage more functions along the supply chain. OEM manufacturers are abdicating that role, he says, because increased competition is forcing them to focus their efforts on research and product development. The same thing is happening, he adds, with component suppliers, who are relying more than ever on distributors to develop new markets for their products. At both ends of the supply chain, "outsourcing is taking place at an unprecedented rate," says Vallee.
Increased market share
Distributors have been taking on myriad new functions in recent years, from just-in-time parts delivery to logistics planning, product design, kit assembly and even contract manufacturing, says Rob Damron, a distribution-industry analyst with Milwaukee brokerage Cleary Gull & Reiland Inc. The net result, he says, is that distributors are capturing a greater share of the overall electronics industry's revenue. He notes that while U.S. factory sales of electronics grew by a compounded annual rate of 8% from 1990 to 1997, the value of distributor shipments grew 13% annually during the same period.
"Clearly these services are needed," says Damron. "And no one else in the channel has the ability to provide them other than the distributor."
Yet ironically, even as distributors' roles expand, their profits are shrinking. "One of the challenges for the distribution group as a whole is: How do they get paid for providing these incremental services?" says Damron. "Distribution is taking on more functions and becoming more important in the channel, but nobody wants to pay for it."
Damron believes much of the profit decline is cyclical rather than structural, and is directly related to over capacity in the semiconductor industry, which for the past three years has drastically reduced average component sales prices and led customers to hold less inventory. As conditions improve, he expects distributors' profit margins will at least stabilize. "It's going to be difficult to see the gross margins in this industry improve, but what I would hope is that the decline would decelerate and we'd get some flattening," he says.
Analyst Clarke Walser, principal at Arlington Heights, IL-based market consultancy Walser & Associates, doesn't expect distributors' profit margins to ever return to the 25% range of a few years ago, when product shortages encouraged buyers to build up huge inventories and even place multiple orders for the same parts. "The long-term trend of gross margins in this industry is--as it has been--down," he says.
Walser agrees that the past three years have been unusually difficult for distributors, and adds that he's not expecting much improvement in 1999. "I just don't see anything that's going to kick this industry back in gear, at least not in the first half," he says. Walser estimates that North American distributor sales grew 7% last year, well below the long-term growth rate of about 13%, while overall profits declined. "Nobody had a very good year in 1998, except perhaps Veba," he says.
Demand creation
Indeed, Veba Electronics, the one-year-old holding company that encompasses several electronics distributors--including Wyle and Insight Electronics Inc. in the United States, U.K.-based Memec Inc., and Germany-based EBV Elektronik Europe and RK Systems Group Gmbh--reported 21% sales growth in calendar 1998, from $3.6 billion to $4.3 billion. What made last year's growth notable, says Veba President and CEO Ferdinand Pohl, is that most of it came from existing operations rather than acquisitions. That's a marked change from the previous year, when the group's distribution business vaulted to the No. 3 global spot due largely to the $810-million purchase of Wyle.
"We approached the weak 1998 market differently than other distributors," Pohl says. Instead of scaling back, Veba continued to invest heavily in staff expansion and improved information technology. He says that for several years now the group has been hiring some 700 new employees annually, while it invested $30 million in IT improvements last year alone.
Aside from such counter-cyclical investment, Pohl attributes the group's growth to its strategy of "demand-creation," or helping suppliers find new markets for their products. Key to that strategy, he says, is the company's use of multiple sales and marketing companies. "If you sell proprietary products, you have to have a sales organization that really knows the products," he says, adding that he believes the only way a distributor can maintain the proper level of expertise and focus is to limit itself to no more than 15 to 20 suppliers' product lines.
Taking ownership
Pohl says Veba's separate sales organizations also help it to encourage a greater sense of entrepreneurship and ownership among employees and executives. "They have this feeling that this is their company," he says. An added benefit of keeping line cards relatively limited, he adds, is that it helps prevent conflicts between competing suppliers.
Arrow Electronics may have had such conflicts in mind when it varied from its usual consolidation strategy after its $185-million acquisition in January of El Segundo, CA-based Bell Industries Inc.'s Electronics Distribution Group. While Arrow is merging Garden Grove, CA-based Richey Electronics Inc. (#16)--acquired for $165 million at about the same time as the Bell distribution group--into one of its existing product groups, the Bell business is slated to retain its own identity, focused on small and emerging customers.
It's worth noting that Bell's semiconductor suppliers include Seoul-based Samsung Electronics Co. and Japan's NEC Corp., while one of Arrow's long-time customers is Schaumburg, IL-based Motorola Inc., which until recently barred its U.S. distributors from carrying competing Asian lines alongside its products. After Motorola relaxed its longstanding shelf-share ban in late 1997 by allowing each U.S. distributor to carry one Asian line, Arrow quickly struck a distribution deal with Japan's Toshiba Corp. While shelf -sharing concerns are clearly less of a concern these days with Motorola, it's unclear whether the company would stand for the addition of two more Asian competitors to Arrow's main line card. "It looks like the way Arrow is going to work through this is by keeping Bell a separate operating unit and not mixing line cards," says analyst Damron. "That may be good enough for Motorola."
Aside from Arrow's two purchases, 1998 was a relatively quiet year for mergers and acquisitions after several years of furious consolidation. Granted, Pioneer-Standard bolstered its computer-products distribution business last year with the purchase of Atlanta's Dickens Data Systems. And El Monte, CA-based Marshall Industries (#6) closed its purchase of Sterling Electronics Corp. of Houston. But that deal was essentially done the previous year.
San Jose-based Bell Microproducts Inc. (#8) bucked the trend with the December acquisition of two computer-products distributors. "We had a good growth year in the distribution business," says CEO and founder Don Bell. He notes that Bell Micro's purchase of Philadelphia distributor Almo Corp.'s computer products division brought the company $140 million in new revenue, while its acquisition of Toronto-based distributor Tenex Data added $40 million more to its already strong sales of mass-storage components and systems. Together, Bell says, the two deals boosted Bell Micro's sales from $534 million in 1997 to $661 million in 1998 and put the company on track for about $1 billion in sales this year.
One of last year's biggest potential combinations fell apart last October when 14th-ranked Reptron Electronics, Tampa, FL, and 16th-ranked All American Semiconductor Inc., Miami, cancelled their planned merger because of slumping stock prices. The deal, announced last June, would have created a new top-10 player with combined sales of more than $500 million.
Avnet's Vallee says distributors' depressed stock prices, which approached 52-week lows last fall and again early this year, make it harder for mergers to succeed. "CEOs and boards of these companies have been unwilling to sell at these prices," he says. Yet despite the temporary lull, Vallee and others expect the industry's consolidation to continue.
Analyst Walser says distributors with sales of less than $1 billion remain prime acquisition targets. "I believe there has to be some consolidation in that group," he says. Already, from 1995 to 1997, according to the National Electronics Distributors Association, the top 10 North American distributors have increased their share of the overall market from 65% to nearly 80%. (See chart on p.74.)
Yet Walser's not convinced some larger distributors, particularly Marshall and Pioneer-Standard, have the necessary size and resources to compete in the long-term with the industry's giants--Arrow, Avnet, Veba and possibly privately held Future Electronics. "In my mind they [Marshall and Pioneer] may have the most difficult challenges," Walser speculates. "They're more or less forced to play with the big boys but they don't have the scope of any of those four--particularly the international scope."
Pointe Claire, Quebec-based Future Electronics Inc. (#5), with estimated 1998 revenue of $2.2 billion, is only slightly larger than Marshall and Pioneer Standard, but its components business is significantly bigger since, unlike most of its competitors, it doesn't distribute computer products. And Future has been aggressively expanding overseas, particularly in Asia. In 1997, Future acquired two Chinese distributors, and last year it launched operations in Thailand, Australia and New Zealand, as well as additional offices in Japan and Taiwan.
Targeting Asia
"We think that Asia represents a very strategic long-term market for our company and for the industry," says Stephen Segal, Future's executive vice president and chief operating officer. He sees Asia as particularly ripe for the introduction of value-added services like demand-creation and supply chain management, which are still relatively new there.
Marshall and Pioneer-Standard have ventured into Europe and Asia in recent years through joint ventures with established local distributors. Although Pioneer doesn't accrue direct revenue from its minority interests in Europe's Eurodis Electron PLC and Taiwan's World Peace Industrial Co. Ltd.., Pioneer Chairman and CEO James L. Bayman says the joint ventures are producing "significant incremental business" for his company. He says the overseas relationships help Pioneer get new customers and better serve its U.S. customers' overseas operations.
Marshall has similar overseas ties through a 16% ownership of Paris-based Sonepar Electronique International and through its 10% investment last year in Singapore's Serial System Ltd.. "Our strategy is to try to service customers wherever they need service," says Rob Rodin, Marshall's president and CEO.
The company is further extending its global presence through an online venture it calls ENEN.com, or the Education, News and Entertainment Network. Aimed at engineers, the service broadcasts live voice and video training seminars, which also are archived for later access. Rodin says the network's database is growing 20% per month and it has already registered some 320,000 participants. "We're trying to be a connection, and not just a distributor," he says, adding that the service provides a valuable link between customers and suppliers.
Analyst Damron says ENEN.com and Marshall's other well-publicized Internet ventures may help the company survive as an independent player, although they have not yet brought much benefit to the company's bottom line. He argues that the only way mid-tier distributors will survive is to differentiate themselves from their peers. "If these mid-tier distributors can carve out a unique niche, that may help them survive, but it will also make them more attractive to the larger distributors," he says.
Among the more successful niche-oriented distributors are storage specialist Bell Microelectronics, connector specialist Kent Electronics (#9) and passive-component specialist TTI (#13). "The whole key is to differentiate your product offerings to your customers and provide them with services they can't get someplace else," says Bell Micro's Bell.
Yet even a solid niche strategy is no guarantee of success. Both Kent Electronics Corp., Sugar Land, TX, and TTI Inc., Fort Worth, TX, for instance, reported lower revenue in 1998, after several years of rapid growth. Larry Olson, Kent's president and chief operating officer, blames the disappointing results on "the most severe price pressures we've seen since 1985," particularly in the passives market.
Avnet's Vallee notes that as the offerings of his own company and other global distributors steadily expand, products and services that used to be unique are increasingly being drawn into the mainstream. Already, he says, "the geographic specialist is dead." On the other hand, he admits, there is still plenty of room for smaller distributors to specialize in difficult-to-automate jobs like cable assembly, where size, centralization or global reach provide little advantage. Says Vallee: "There will always be a role in every channel for the high-value specialist distributor."
Russ Arensman is a Glenwood Springs, CO-based business and technology writer. He can be reached at arensman@compuserve.com.
