STMicroelectronics N.V. is envisioning a day when up to 35 percent of its sales would be derived through components distributors, a move that potentially could add several billions annually to the total available market (TAM) for big and medium-size channel partners.
The Geneva, Switzerland-based semiconductor manufacturer has in the past sold its products mainly through direct relationships with OEMs and intends to maintain a strong internal sales force. However, it is also rapidly deepening relationships with distributors, adding new partners and investing in more online channels as part of a larger plan to improve revenue growth. ST also believes distributors would enable the company reach thousands of customers that its direct sales force may not currently be addressing, according to Bob Krysiak, president, Americas region.
“The vision of Carlo Bozotti [ST’s president and CEO] is for 30 to 35 percent of our business to go through the distribution channel” Krysiak said in an interview with Electronics Purchasing Strategies. “In some geographic areas it’s higher than that already, for example in Asia, but for different reasons. In North America, Europe, and Korea we hope to get to that 30 to 35 percent eventually. This is influencing our product strategy and the way we organize the company.”
Although ST has always sold some products through distributors, the company’s revenue growth strategy was anchored on its direct sales relationship with the biggest electronic OEMs and via strategic partnerships with some of the industry’s leading equipment manufacturers. That strategy helped propel ST to the top ranking of the world’s biggest chip vendors in the past, lifting sales to $10.35 billion in 2010.
The company’s revenue has since slid sharply, though, due to tough conditions in the wireless equipment market and poor performance at Nokia Corp., one of its biggest customers. ST’s revenue in 2012 fell to $8.49 billion, down 13 percent, from $9.74 billion in 2011. Sales for 2013 are forecast to be in the range of $8.2 billion, as reported by Yahoo Finance.
In response, the company has in recent quarters tried to reduce expenses and improve sales growth by expanding the customer base. Distributors are playing a significant role in that strategy, Bozotti said during a presentation July 23 to discuss the company’s 2013 second quarter results. The sales initiative include strengthening “our geographical coverage, greatly expanding our small to midsize customer base, as well as expanding our sales through distribution,” Bozotti said. “In the second quarter, distribution represented 26 percent of sales, up about 4 points from last year, and some further improvement from the prior 2 quarters. Our midterm goal is to move closer to 30 percent.”
About five years ago the percentage of ST’s sales generated through distribution was approximately 17 percent. The company has been forced to re-examine its focus on large OEM accounts because of the dangers inherent in being heavily dependent upon big customers. Nokia’s slide in the wireless equipment market, for example, hurt ST severely and contributed to the company’s decision to shutter its joint venture with Ericsson. (See: End of the Road for ST-Ericsson.)
In order to reduce the dependence upon large customer accounts, however, ST would either have to push more sales to medium size companies by increasing its sales workforce – thereby negating the focus on expense reduction -- or go through distributors who have the manpower to reach tens of thousands of customers.
Calling Big, Medium, Small and Online Distributors
The advantage of using more distributors and expanding ST’s channel presence, Krysiak said, is that the company would also get new data about smaller customers and deepen its relationship with them. “Distributors do a great job of shipping globally, very quickly and pushing our products to tens of thousands of customers quickly,” Krysiak added. “And of course we will know about them and be able to follow up with them very quickly to know when they want to enter into production.”
ST’s distribution strategy doesn’t center on just the top-tier distributors, however. The company already sells through the leading players, including Arrow, Avnet and Future but it is now exploring deeper relationship with small and medium-size distributors in addition to specialized companies. One other key element of its channel strategy is to use online distributors that ship globally and service small purchases from engineers working on prototypes, according to Krysiak.
“Our online effort is being pushed also through catalog distributors that have morphed into online distributors -- Digi-key, Mouser, Premier Farnell, to name just a few,” Krysiak said. “They do a great job of shipping globally, very quickly and pushing our products to tens of thousands of customers. That allows us to do fantastic NPI to hobbyists and even customers with big accounts.”
Krysiak acknowledged that ST hadn’t always treated the channel as a critical part of its sales strategy. By focusing on the large OEM accounts, ST might have given distributors the erroneous impression that they were not central to its revenue growth plans, Krysiak noted, adding the new ST wants to erase that impression completely by paying equal attention to direct sales partners as well as distributors.
“I see us growing in share of the market in the channel and I see the channel partners not saying that we would support them [only] after the OEM business,” Krysiak added. “It’s more like ‘We are supporting you; you are a direct channel partner, we want to focus on you and we want to develop with you.’ We need to expand the number of customers we touch using distributors, online and traditional sales marketing efforts. They already see that change in ST.”