There are numerous challenges ahead for interconnects, passives and electromechanical (IPE) components manufacturers, component distributors and equipment makers. Commoditization – the rapid erosion of pricing and profit margins – isn’t a problem for just suppliers. It poses a challenge for distributors and, in the longer run, OEMs too; what they gain in lower pricing for commodity components is promptly in higher prices for proprietary parts.
Suppliers of IP&E components are locked in a never-ending race to introduce innovative products and improve upon existing offerings. This means R&D budgets for this price-challenged industry segment will continue to increase as a percentage of sales with the unenviable prospects that the suppliers may not be able to fully recoup those investments before corrosive price declines chew into their profits.
Consolidation is also accelerating in the sector and the $7.2 billion offer for Molex Inc. by Koch Industries is only the latest multi-billion transaction in the market. Last year, Switzerland-based ABB offered $3.9 billion for Thomas & Betts partly to leverage the connector manufacturer’s extensive network of distributors. Earlier this year, ABB also agreed to purchase Power One Inc. for $1 billion. Deals like these raise the possibility other leading IP&E players could become takeover targets. Will companies like TDK Corp., Amphenol, Vishay Intertechnology Inc., Taiyo Yuden Co. Ltd., Murata, Kyocera Corp. (and subsidiary AVX Corp.) be involved soon in M&A activities either as acquisition targets or consolidators?
A slightly different dynamics is taking place within the components distribution segment. Profits and margins from the distribution of IP&E components aren’t high but the sheer size of the market makes it impossible for even the biggest distributors to ignore the market. In fact, companies like Arrow and Avnet that market themselves as full-service providers able to supply any and all components required by OEMs are demonstrating they won’t yield any grounds to specialist IP&E distributors.
“IP&E has significant importance to Avnet because we started out in connectors so IP&E is a part of our legacy,” said Chuck Delph, senior vice president of sales, Avnet Electronics Marketing, Americas, in an interview. “It is critical to our long-term future in the Americas region as. Our customers are asking us for total solution. They’re not looking for an individual technology representation or a single supply representation. They’re looking for us to bring in the total solution.”
For all the enthusiasm, electronic component distributors are toiling like elephants in the IP&E market but getting snack bite profit returns. This hasn’t stopped them from scrambling to build and protect share in the market. The war raging now is between the top distributors who believe they are well positioned to service the sector and the handful of rivals who over the years have managed to become known as the Kings of Connectors, Electromechanical, Interconnects and Passives.
Once secretly waged, that war over IP&E is finally spilling out into the open. Companies like Arrow and Avnet are butting heads with specialists rival distributors like TTI with numerous allegations flying about how competitors may be using the dreaded tool of lower pricing (and, of course, lower margins) to win market share. The financial numbers available from the U.S. Securities and Exchange Commission fillings of publicly-traded distributors confirm the biggest industry players are beefing up their services in the sector and boosting sales as a result.
Big and Getting Bigger
Let’s start with mega-distributor Avnet Inc. The Phoenix-based company operates two business divisions, Electronics Marketing (EM) and Technology Solutions (TS). Avnet EM reported sales of $15.1 billion in the fiscal year ended June 29, 2013, representing 59.3 percent of the company’s $25.5 billion revenue, and up from $14.9 billion in the fiscal year ended June 30, 2012. The company’s sales of “passives, electromechanical and other” rose in fiscal 2013 to $1.7 billion, up from $1.6 billion in the prior year and a massive increase of $645 million from fiscal 2011. Even in the connectors segment where Avnet EM lost grounds in 2012, sales improved in fiscal 2013, to $687.6 million from $667.5 million in fiscal 2012 after a sharp decline from $1 billion in fiscal 2011.
Despite its strong presence in the sector and the fact that it is often credited with coining the term IP&E, Avnet isn’t considered an IP&E “specialist”. It’s not a title it wants, though, according to Delph who says the company is “excited” about the opportunities existing in the IP&E sector but stressed it is a full service distributor that prides itself on covering a wide range of products. In other words, Avnet sells everything OEMs and contract manufacturers need.
“We do not have IP&E as a separate business unit within Avnet; it operates within our total components business,” Delph said. “This means we put our semiconductor and IP&E business together under the same leadership team and the same resources because the customers are expecting us to provide total solution. What they’re looking for is a one-stop ability to get things accomplished both from a technology as well as a supply chain perspective. They want us to help them consolidate their database and you need to have the full product offering to be able to do that.”
That assessment may mask Avnet’s growing emphasis on the IP&E market, though. If the company is not a specialist in the sector it is certainly one of the leading suppliers and one that is beefing up services and taking steps to demonstrate its deep IP&E offerings to suppliers and customers. Some of the actions the company has taken over the last three years are paying off. If there’s any consolidation or mopping up to be carried out in future in the IP&E segment, Avnet will be one of the aggressive acquirers looking to add “specialist” distributors to its already beefy offerings.
Arrow Electronics is another major player in the IP&E distribution market. The company’s Securities and Exchange Commission filings indicate products described as “passive, electro-mechanical and interconnects” account for about 20 percent – or $2.7 billion -- of its $13.4 billion components distribution unit. That would put Arrow and Avnet in the ranks of the largest IP&E distributors in North America. Future Electronics Inc. is another big distributor of IP&E components although the company’s position is unknown because it doesn’t disclose sales figures.
IP&E Specialists Won’t Cave
IP&E specialist distributors know companies like Arrow, Avnet and Future want to squeeze them out but they aren’t about to fold. Companies like the DAC Group (Heilind), PEI-Genesis, Sager and TTI have so aggressively carved out positions in the IP&E market that they have become almost synonymous with the sector. IP&E suppliers love them because of their laser focus on the segment and willingness to service small to medium-OEMs that aren’t big enough to get individualized attention from bigger distributors.
The specialists’ hard-earned reputation is drawing the kind of attention they would rather avoid from the big broadline distributors that are weary of being cast as side players in a market they so clearly dominate. Margins for specialists will continue to come under pressure in future although the leading players have become quite resilient and can withstand the onslaught.
Even as these companies confront their individual challenges, they must also deal with industrywide problems. Distributors, IP&E suppliers and OEMs today face the reality of a slowly building consolidation fever in a segment once considered the backwaters of the electronics industry. As suppliers buy smaller competitors and investors take big players private, the implications for everyone remains murky.
The competitive environment is changing and it isn’t clear yet what impact vendor consolidation will have on distributors, broadline and specialists alike. EPS will examine this question and others related to events in this critical business segment in future articles.
This is the second article in a series on developments in the interconnect, passives and electromechanical market. The first article published on Sept. 15, 2013 examined the implications of the $7.2 billion acquisition of Molex Inc. by Koch Industries. (See: IP&E War Heats Up Electronics Supply Chain, Part 1.) In future articles, EPS will look at some of the technological innovations roiling the IP&E sector, examine the market share of the key players and evaluate the likelihood that some of them will be acquired by rivals or taken private by investors.