NEDA's Robin Gray: components of opportunities and challenges

Interview conducted and edited by Suzanne Deffree -- EDN, October 21, 2010

We’re into the fourth quarter of 2010. Has the electronics supply chain recovered from 2009’s economy?

A: It depends on your perspective. Last year was a down year, but it wasn’t an abysmal year for distributors and manufacturers of electronic components. Business was definitely off from the previous year, but it didn’t go negative [as it did in] a lot of other industries. This year has been a strong growth year in sales profitability and average selling prices. On the other hand, customers saw longer leadtimes and increasing prices. So, depending on your perspective of the supply chain, 2010 is a good year or a not so good year. Even having said that, for a lot of sectors in 2010, business remained good. In our electronics-components industry, things looked positive overall compared to the overall economy.

You mentioned leadtimes. Some leadtimes are at 20-plus weeks. Do you see supply and demand stabilizing any time in the near future?

A: Not really. A lot of companies learned the lesson of 1999/2000 and the dot-com/telecom implosion. That downturn was the biggest we had seen. The lessons we took away from that [downturn] were: Watch your inventory levels, and don’t expand capacity so much that you are caught with an oversupply of inventory. Right now, inventory levels remain lean. You don’t see many manufacturers ramping up production. There is an uncertainty about where the economy is going. Most people I talk to are uncertain month to month about where things are going. I doubt that many companies want to invest in expansion to shorten leadtimes.

One of the continuing trends in manufacturing to lower costs is outsourcing. How does migrating manufacturing overseas impact distributors and distribution, traditionally a North America-based business?

A: That trend is already 10 years in. For all intents and purposes, that migration is over. To a certain extent, there is a movement to other low-cost regions other than China. There’s little impact now. High-volume [distribution], which followed your big-time customers that did outsource or move to Asia, switched to design functions or expanding their presence overseas, whether that was through acquisition or starting up new distributors. As for manufacturers, a lot that moved to China did so to take advantage of low-cost labor but also to get an entry into the Chinese market. With increased government regulation in China, a lot of companies are rethinking their commitment to China. If they are there only for the low-cost labor, they can go elsewhere now. If they want to stay in the market and sell into the market, then they are probably going to stay.

Low-cost labor and government regulation are challenges, but movement into China has also brought some big problems to the electronics supply chain.

A: Huge problems. The principle one is counterfeiting.

Counterfeit components are an ongoing problem for electronics supply chain and an important issue. Has there been any improvement in thwarting counterfeiting globally?

A: Not in the sense that there has been much of a dent made in stopping counterfeiting. On the other side, the government and more large customers, particularly customers that sell to the military or to aerospace and aviation, have become concerned about counterfeit [products]. The government is increasingly doing things about that problem, whether it is through enforcement or mandating through regulation government-procurement practices that would prevent or minimize the risk of getting counterfeit products—and that would be first buying from authorized sources, whether that’s directly from the manufacturer or from an authorized distributor.

Have things such as outsourcing, moves to China, and counterfeiting encouraged distributors to focus more on design chain, also known as demand creation?

A: One would like to think so. That issue remains the topic du jour. If nobody is out there doing demand creation, then [manufacturers don’t introduce] new technology … to customers as rapidly or in as efficient a procedure as possible. The real challenge for the industry is not a lack of desire or interest to do that; it’s a lack of sufficient money in the supply chain to compensate for that work. The question is: How much time, money, and talent are you going to invest in demand creation if you don’t get compensated for it?

What are the biggest market opportunities and challenges for distributors in the design chain and fulfillment as we move into 2011?

A: Finding the right partnership expertise and suppliers to gain entry into emerging markets, such as alternative energy and lighting, for example. There’s a learning curve that’s involved, and, because a lot of these customers are not established or well-known, there’s a lot of work to be done to develop those companies and find the right ones. A lot of them are going to fail, but some will emerge as winners.

Telecom infrastructure and broadband are growing strongly right now. With so many smartphones being built and so much bandwidth being needed to support that [technology], telecom companies are rapidly building their infrastructure. There’s a lot of goods being sold into the consumer side in smartphones and other devices, such as iPads, that are heavily using broadband access, and the telecom-company customers are buying finished goods and components to build that infrastructure. The risk of that approach is, of course, too-optimistic forecasts by phone manufacturers that they are going to grab market share from [their competitors] or to have technology that the consumer doesn’t invest in or too much expansion, which leads to a glut of inventory.

Another sector that may prove to be active and robust in 2011 and beyond is automotive. There’s a lot of new technology going into cars these days. It’s a great opportunity for the industry, but, again, automotive tends to be more sensitive to booms and busts than the overall economy. But, given that so many electronics [components] are likely to end up in those products, there’s a huge opportunity. We’ve just begun in the last few years to touch that.

How’s the NEDA merger with ECA going?

A: Great. Both boards [in September] voted to approve the recommendations of the merger committee and vote to allocate start-up funding. We appear to be on target for a Jan 1, or shortly thereafter, implementation date.

Talk to us about NEDA’s October event.

A: It’s our Executive Conference. It is designed for senior managers or owners of distributors and manufacturers of all sizes to hear the latest trends and outlooks. We’re not your traditional industry conference, meaning that we don’t have motivational speakers, we don’t have sales training speakers, or entertainment. It’s basically: “Here’s what’s going on in the industry.” More often than not, they are all terrific speakers. We have everyone from Steve Kaufman, former chief executive officer of Arrow and now on the Harvard Business School faculty; an associate editor at Popular Mechanics magazine; the head of GE Alternative Energy Systems manufacturing; Barry Lawrence, PhD, from Texas A&M University talking about research NEDA helped fund on optimizing sales management; Paul Kasriel, the economist we had last year, is coming back. It really is a terrific place for distributors and manufacturers to meet with each other at a senior level. Typically, they use the opportunity, one that they wouldn’t normally get, to meet with their peers.

Find out more about the NEDA Executive Conference here.