News and New Products

Distribution’s balancing act

By Suzanne Deffree, News Editor -- Electronic News, 10/30/2007

Harley Feldberg, president of Avnet Electronics Marketing (Avnet EM), discusses the Avnet Inc. operating group’s recent quarterly numbers, the distribution industry’s overall competitive landscape, and the global balancing act that the company uses to gain sales and market share in a challenging business environment in this one-on-one interview with Electronic News. What follows are excerpts of that conversation.

Electronic News: How does the competitive landscape for distribution look going into calendar year 2008?
Feldberg: What [Avnet and its closest competitor Arrow] said on our calls was that Asia is performing well. We are both seeing double-digit growth in that environment. We both spoke positively about how we are seeing good progress in turning that double-digit growth into the creation of a profitable Asia distribution business, which has been one of the lingering questions for our industry for the last couple of years. Everyone understands that the distribution market is shifting and that all of us are going to be getting a larger portion of our global revenues from Asia. What hasn’t been clear was whether that would be viewed as a negative to our overall profitability, because everyone knows margins and prices are much lower there. How do we see that going into the December quarter and into 2008? We personally think that the growth will continue. Typically September is the strongest quarter for everyone in the distribution business because so much of our role is providing components that ultimately make their way into digital consumer type end products that get sold off right now. So we tend to be the leading indicator to the holiday season. Based on the September that we both had, it looks like it should be a pretty good holiday season for electronics end products manufacturers. Now the risk is that all of those gadgets will end up sitting on shelves at Best Buy and the equivalents all around the world--then you could see a disappointing December. But based on what we know, we are very please with what’s happening in our Asia business and we think that will continue into 2008.

Electronic News: How about the West?
Feldberg: The more controversial part of the answer is the West. Typically, you’ll get some slowdowns in Europe and America this time of the year, as the holidays in December seem to have an impact on everyone’s business. Normal sequential patterns are a small degree in deterioration in our Western business as Europe and America, but that we typically see a return to good strength in the March and June quarter. We see some slowdown in Europe and America, but we don’t see any indicators that it’s a recessionary type of slowdown as much as pretty normal seasonal patterns. What’s not clear is: Are we seeing the continuation of what I’ve been calling a ‘rebalancing’? We’ve been saying for some time that what we see happening is a global rebalancing of the global electronics business. If you use Avnet for example and just go back six or seven years, less than 10% of our business was in Asia. In September, we exceeded 30%. Our feeling is for distributors, a healthily balance is going to end up being a pretty split across the regions. You’ll see your normal ups and downs, but we think we’ve been experiencing a rebalancing. Some people believe, we are heading into a more recessionary period and they point out things like the real estate melt down in America and the very high Euro-to-dollar trading ratio in Europe as reasons for why the market is going to cool more significantly. We don’t see it that way, but, again, we’re not always right.

Electronic News: Will North America continue to be the nerve center for distribution in the future?
Feldberg: If you’re reference point is design—the Apples of the world that still do the bulk of their design work in North America then manufacture in Asia—I think that’s true. But I still see that as a declining rate, as well. I think it’s unrealistic to think that Asia won’t further its involvement in design decisions and corporate decisions. But I think for the foreseeable future, America and Western Europe will continue to play a very important role.

Electronic News: How is Avnet EM dealing with that?
Feldberg: We haven’t treated the migration to Asia as if business was leaving. What we have tried to do is readjust our resources such that we continue to have significant capabilities in America and Western Europe, believing that we still needed to provide design services to customers who are going to continue to be here, but then we also had to figure out how to manage their consumption and fulfillment when it went elsewhere. It’s figuring out how to connect the regions, instead of looking at this as a migration.

Electronic News: How does your merger and acquisition (M&A) strategy fit in with that?
Feldberg: Today there aren’t a lot of global distributors left. Short of the three big players, anyone else of any substance is regional. When you think about our M&A strategy going forward, what we are really looking at is a strategy that is more about filling gaps than about getting bigger. Memec was really the last big guy to acquire. We made a couple of small acquisitions in Europe in the last quarter. We have a couple of similar ones in the pipeline. And we’ll probably make some similar announcements next year in Asia. The M&A announcements will probably be more numerous, but smaller.

Electronic News: Are you happy with Avnet EM’s 2.3% year-over-year sales growth?
Feldberg: The positive side of that is that in the June quarter we were around 1% year-on-year growth. The September quarter we were 2.3% organic year-on-year growth. And the projections we gave on Thursday for December were for between 4 and 5% year-on-year growth. Taken into context of an improving environment, we are happy. With that said, no one is particularly excited about an industry that is growing low single digits. We need to grow faster. Our objective is to grow 10% profitability per year. You’re not going to get there with 2.3%. The direct answer to your question is, no, we are not happy with that. On the other side, as we think about the market going forward and into 2008, we actually see growth accelerating, not decelerating.

Electronic News: So market growth through M&A and Asia?
Feldberg: Yes. And you will see M&A in both America and Europe, which is really consolidation based. A market that is growing in low-to-middle single digits seems to be conducive to more consolidation, not less consolidation. We think you’ll see more of that over the next couple of years. When the business is growing at 20%, everyone is happy, everyone feels good about their business. When a business is growing 2%, that’s a different story.

Electronic News: Sales to EMS (electronic manufacturing services) customers were flat. The trouble in that market has been pretty widely publicized. Is this a concern?
Feldberg: When those numbers are published and when most of us talk about EMS being flat, what we are really talking about are the large global EMS guys. I’m not aware of anybody who tracks total EMS, the large, medium and small ones. The data is really saying is that the global EMS guys are flat and in some cases down. It’s dangerous to look at that industry as a total macro, unless you are focusing in on one end market. The thing that continues to be a drag on the global contract manufacturers are the communications manufacturers. The Ericsons of the world. And clearly that business does not exhibit growth. On the other hand, if you look at local or even regional EMS, their backlog seems pretty solid. They just don’t make the headlines. You really have a tale of two cities in EMS where the local guys continue to be doing very well, and in all regions, by the way, and the global guys clearly are flat to up or down a point. That’s probably not going to change until the comms sector turns back around.

Electronic News: When is that going to happen?
Feldberg: We’ve all been predicting it for two or three quarters now and none of us have been right.

Electronic News: What about second and third tier EMS in Asia? Is there a possibility there for growth?
Feldberg: Absolutely and it’s going on there now. We find ourselves in a bit of a matchmaker role with second and third tier guys in America and Europe who want to partner with someone in Asia. That’s turned into very significant activity for us, where we are looking to be the connection the glue between those two possibilities. We think that is going to be a high area of activity for us in 2008.

Electronic News: How do product lead times look? Is book-to-bill solid?
Feldberg: Book-to-bill is fine. Look at September and include October and it continues to hover right around one, which is good. Lead times really are unchanged and that’s an issue. We’ve got an industry that has learned to live on fewer calories. Everyone in the whole supply chain is carrying less inventory because lead times have remained quite stable and in most cases quite low. No one is stocking up a line. That’s one of the issues that is restraining growth, quite frankly. No one is panicking about missing product because of lead times.

Electronic News: Any closing thoughts?
Feldberg: It will be interesting to see how the quarter evolves. We’ve got four weeks of October under our belt and we feel ok. It’s going to continue to be a modest environment where we think we can continue to meet our financial objectives and we’re going to continue to be an acquirer. We’re feeling pretty positive.

For more on Avnet and its operating groups, see:

Avnet M&A strategy credited for sales gains

Expanding in a single-digit growth industry