News and New Products

Avnet's Harley Feldberg: Distribution evolution

By Suzanne Deffree, Managing Editor, News -- Electronic Business, 8/12/2008

Electronic Business recently spoke with Harley Feldberg, president of Avnet Electronics Marketing, about the company's June quarter, how Avnet buffered the economy, the lack of organic growth in the distribution market and the new M&A structure that has encouraged, what impact the Olympics will have on business in Asia, plus the changing inventory models that make up the modern day electronics supply chain. What follows are excerpts of the conversation.

Electronic Business: Avnet faced a lot of challenges in the last quarter and last fiscal year overall, but still showed solid performance, especially on the Electronics Marketing (EM) side, which saw revenue of $2.73 billion, up nearly 11% sequentially in its June fiscal Q4 on better-than-expected sales from all three of its regions. Let's talk about how Avnet EM buffered the economy.

Feldberg: The market continues to be a difficult one, but we are starting to really gain some significant traction in a focus we've really been pushing in the last couple of years, which is trying to move a bit up the value chain. That's not meant to suggest that we are not still a very significant, active fulfillment distributor, but I think what you would find, if you went out and interviewed most of the large suppliers that we represent, is that we really have taken a leadership position in demand creation [using distributor-supplied suites of engineering services to encourage product training and guidance].

Demand creation tends to afford you a higher gross margin and a better return. Now, it does require a higher investment because of technical resources and training, etcetera, but our belief has been for the last couple of years that focusing in that area will help insulate us from these kinds of difficult environments. I think part of what you saw in our results is a recognition that we are making progress in the initiatives that we internally call design chain.

Electronic Business: Can you give us any examples?

Feldberg: We've always been in the demand-creation business, but we really turned up our focus on that post the Memec acquisition. If you think about what's happening in the market, the reason why it seems to be gaining traction and value now is the volume OEMs that drive so much of the global TAM [total available market] – the Apples, the Ciscos, the Sonys, and the Nokias of the world – much of that volume and much of that design is handled by our suppliers direct. As that business has moderated, over the last year especially, there has been significantly increased interest on behalf of many of our suppliers to accelerate their efforts and energy into the next year and the mass market. That really leads them back to distribution. Our ability to represent them for their technologies to win design in that mass market is really a big, big part of our success.

Electronic Business: How was organic growth last quarter?

Feldberg: In the industry overall, and if you contrast us to our largest competitor, it was really tepid organic growth. A good portion of our growth, as well as the industry's, is being driven by M&A [merger and acquisition] and in some cases currency.

Electronic Business: How has, if in any way, your M&A strategy changed to balance that?

Feldberg: As opposed to focusing as we did in the past on M&A for consolidation purposes, our M&A has been far more strategic. We've made a couple of strategic acquisitions in Europe to expand our IP&E [interconnect, passive, and electromechanical products] presence there in that market. Those have worked out very well and we are seeing nice growth and gains in share because of that. These acquisitions aren't big enough to create the kinds of explosive growth that a Memec did when we look year on year, but they are very strategic and they are providing a couple of points of growth. They are helping to round out areas where we either have some weakness by region or we are looking to expand.

Another example would be we acquired a company back in the second half of last fiscal year called Azzurri, which was a small design-chain-focused distributor based out of the UK. We integrated that with our Avnet Memec unit in Europe, which is really a boutique niche specialist for high design product lines. … In Asia we bought a company called YEL, a passive specialist, because that's a market that is really ripe for IP&E consolidation. Today, the vast majority of IP&E business in Asia is very small companies, so we look to be part of consolidating that.

Electronic Business: Does Avnet have any plans for Japan or Vietnam near term?

Feldberg: Yup.

Electronic Business: Can you talk about them?

Feldberg: Nope.

Electronic Business: What are your general thoughts on those two markets, then?

Feldberg: Different, from our perspective. Vietnam looks like a growth opportunity somewhat similar to Eastern Europe in that we will most likely expand there organically. We have some people there, we'll add some more people there and expand our office. I don't see M&A as being the probable strategy there. It's a small, evolving market.

Japan is a very large, mature market, so M&A will be right out front of our strategic growth strategies. I am really reluctant to say much because I don't want to word it so it tips something off. I would only say we've been learning a lot. We've been there since the Memec acquisition. We are as committed and excited about the market as we've ever been. And we believe fiscal 2009 [started in July] will be a very good growth year for us in Japan.

Electronic Business: Do you see the Vietnam and Japanese markets as fulfillment, design chain, or a mix of both?

Feldberg: Today I would categorize Vietnam probably as another fulfillment market similar to a Thailand or a Malaysia. And I would definitely categorize Japan as a mature market with both fulfillment and demand creation.

Electronic Business: What other opportunities in technical markets do you see? Last Thursday Avnet announced a distribution deal with a company that focuses on HB LEDS.

"What I'm watching is Asia, because this is the time of year where Asia's activity levels really help dictate what kind of year it's going to be for all of us."

Feldberg: We continue to expand our LED offering. It's an evolving market segment where clearly the right strategy is to have multiple key partners because it is not clear who the winners and losers are going to be. It's not clear what technologies are going to win out over the others. We have a pretty broad offering, so what you saw today was just an additional offering over and above that. But it looks like a very exciting opportunity.

As it relates to us, it will be less explosive and more incremental. I don't see anything on the horizon that's going to take this market from X dollars to 10-times X, but we are doing a lot from the design perspective. One of the things that is interesting about that opportunity for us is in many ways it takes us into an account base not currently familiar with us. When I look at some of the activities that we have going on they are with companies that heretofore we were not really engaged with. People making signs, people making stadium lighting, and all kinds of things.

Electronic Business: What other opportunities are you watching as we move into the second half of calendar year 2008?

Feldberg: What I'm watching is Asia, because this is the time of year where Asia's activity levels really help dictate what kind of year it's going to be for all of us. There are a lot of exciting things going on there, [but] a lot of mixed messages, quite frankly. You hear from some people that the cell-phone business is really moderate and others see it growing. I was somewhat encouraged by Cisco's [earnings] announcement the other day because it sounded more positive than was expected relative to that market, which is an important market for us. We are hoping that whole Internet-infrastructure market will have a positive impact on growth.
But back to Asia: I'm curious as to what impact the Olympics is going to have on our business there. So far we don't see anything specifically concerning, but the Olympics don't happen every week so I'm not sure what signals to look for and we are watching that very closely. Clearly LCD TV has been a big winner, with much of it leading up to the Olympics. It will be interesting to see if that carries on after that and into the holiday season.

Electronic Business: How does inventory look going into the second half of the calendar year?

Feldberg: Good. We burned our inventory down slightly in June, which seemed appropriate based on the modern market environment. One of the analysts [on our quarterly call] was taking us down a path that I've heard before around inventory being an arm-wrestling process, kind of a game of musical chairs between the CMs [contract manufacturers], the OEMs [original equipment manufacturers], semiconductor manufacturers, and ourselves, and at the end of every quarter the music stops, and who's stuck with the inventory? I wanted them to understand that the progress that has been made in distribution in general and in the channel is really primarily driven by a positive relationship with our suppliers and not a negative relationship with our suppliers.

It's not that we are buying less inventory. That is not our [Avnet’s] cultural philosophy at all. But our cultural philosophy is inventory is one of the tools of our trade. We want to buy the right inventory at the right price, but what has helped over the last couple of years is we've gotten much more efficient with our suppliers relative to having a tighter linkage, Web-based tools between us. And so it's allowed us to operate much more efficiently. As a secular trend, you'll continue to see some degree of continued inventory- velocity improvement in the channel, simply because we are getting much better at managing the tools between us.