Supply chain challenges and opportunities abound in Asia-Pacific

By Suzanne Deffree, News Editor -- Electronic News, 5/22/2007

LAS VEGAS – In days gone by, companies could count on distribution being a North American or European-based sport of sorts, where major players focused their energies and their acquisition budgets. The game is changing, however, and as the electronics supply chain continues to expand globally distributors face new challenges and new rules, especially in the Asia-Pacific region.

“The [Asia-Pacific] market has grown up as a trading market,” Mike Long, president of Arrow Global Components, said during a panel presentation at the Electronic Distribution Show (EDS) last week. “There has been very little supply chain activity. It has been primarily transaction-oriented, wheeling and dealing for each individual part. But now the market is starting to mature and the need for services in the future is pretty tremendous.”

That opinion is shared by executives at Avnet, Arrow’s chief rival in Asia-Pacific, as well as the rest of the world.

“It’s a much different market [than the Americas],” said Phil Gallagher, president of Avnet Electronics Marketing Americas, one of Avnet’s operating groups. “It’s maturing. The biggest learning curve we have collectively is in the supply chain. The supply chain in Asia is relatively new, versus a buy-selling type of market, which is traditional distribution, or almost a trader’s market going to managing complex forecast and demand around the supply chain.”

Despite the learning curve, playing in Asia-Pacific is not optional for distributors that want to remain a vital part of the electronics supply chain. China alone accounted for $551 billion in electronics sales last year, according to Technology Forecasters Inc. (TFI), which estimates 2007 sales will hit $674 billion. The firm said China accounted for a distribution total available market (DTAM) of $51.8 billion in 2006. Of that, 52 percent was sourced locally (local orders filled by local distributors); 35 percent was transfer business by international distributors; and 13 percent was business international distributors conducted via local orders.

While consolidation in the Asia-Pacific distribution market of smaller local players can be expected, the overall market growth is surging and will be highly dependent on services provided by distributors. For one thing, distributors typically act as the industry’s bank to provide products on credit. Large distributors, such as Arrow and Avnet, also have the service capabilities to distribute products on a global scale, and they develop reference designs that can be turned into products in local markets.

“You need to be positioned in China to ship to China to support the kind of service levels the engineer is looking for going forward,” Jeff Shafer, senior VP of product at catalog distributor Newark, said during an EDS panel. “We don’t feel today that there is going to be any one product leader when it comes to electronic catalog distribution. It will be a period of time for each market to invest and positioning in China and it will take some time for a lot of these distributors to ramp up.”

Shafer also warned of the intricacies of working in China, particularly the Chinese law “Management Methods for Controlling Pollution by Electronic Information Products.” More commonly known as China RoHS, the regulation follows last year’s implementation of the European Union’s Restriction of Hazardous Substance (RoHS) directive. While the two are often compared – as both have tremendous impact on the supply chain by regulating the amount of hazardous or toxic materials in electronics and both focus on the same six substances (lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyl and polybrominated diphenyl ether) – they vary greatly, most notably in terms of scope, exemptions and product markings.
 
“Just because there is a lot of design going into China and there’s a shift [from North America and Europe], it doesn’t mean that those products are actually going to be the same,” Shafer said.

Of course, there is more to the Asia Pacific region than China. Arrow’s Long cautioned that it is hard to group Asia into a single bucket. He said the market is so vast it takes 12 hours to fly from one part of Asia to another. Within that span, Asia now accounts for about 50 percent of the DTAM, he said, and so far countries such as Vietnam and India are just beginning to rev up their electronics production.

“The need to be there for this market place is very important. It also has very tough compliance issues with the local governments and regulations, but moreover, within the highly fragmented market the competition is probably more fierce than anywhere else in the world,” Long said. “Today, Asia-Pac counts for nearly 50 percent of the total electronics spend in the world. The incredible nature of this marketplace requires infrastructure to afford that and supply chain opportunities exist to make sure we get product to manufacturing.”

For more on this subject, see “New markets, new problems.”