Digi-Key Corp. is expanding operations globally and plans in the near future to establish its first office in China in furtherance of an internationalization program that will see the electronics components distributor putting “boots on the ground” in key European, Middle East and Asian locations, according to company executives.
The company in the last year quietly set up a branch office in Israel, using the country as a test ground for its foreign debut, Mark Larson, president, Digi-Key, said in an interview. The resounding success the company had in Israel led to further expansion in Europe and the company has now set up offices in Germany, Italy, Poland, Sweden as well as in the United Kingdom. China is next, according to both Larson and Chris Beeson, vice president of global sales and business development at the Thief River Falls, Minn.-based company.
“Digi-Key has consistently listened to our customers and when some of our international customers that have been engaging with us virtually began asking us to align more with them in the production area we decided to open an office first in Israel and then in Europe,” Larson said. “We haven’t formally opened an office yet in Asia but China is next. The engineering side of the business is increasing exponentially in China and we weren’t reaching some of these folks because we couldn’t bill in Renminbi.”
This year Digi-Key expects to generate about $50 million in sales from China, which puts it far behind bigger rivals Arrow Electronics Inc. and Avnet Inc. that have been in the market for quite a while and both of which generate billions in revenue annually from Asia. Larson said the company believes it is establishing a presence in China at the right time when the country is making a bigger presence in design engineering.
“I think our timing is fine and as the market in China evolves it will align with us,” Larson said. “It doesn’t bother me that we are coming in now rather than two or five years ago.”
Digi-Key isn’t planning either to ditch its unique business model that focuses on design engineering support, Larson and Beeson noted. Rather, the new initiative is in furtherance of its evolving “hybrid” business model that has seen Digi-Key branch into providing support services for customers requiring not only design engineering, but also some production support in areas it describes as “high-mix, low-volume” OEM products.
“The business model remains the same but we’re becoming just a little less virtual,” said Beeson. “For 40 years we’ve led with the engineering support and we will continue to put resources behind this. In addition, though, we will get involved in some production level support for a handful of our customers.”
Currently, production customers account for approximately 51 percent of Digi-Key’s revenue in North America and most of the services it offers them centered primarily on high-mix, low-volume products. The market segments concerned include industrial, medical and military amongst others, according to Larson.
Like some of its peers, Digi-Key is experiencing increasing requests for the combination of design engineering and production support from suppliers and customers. In response, the company has been fine-tuning its operating model by increasing investments in online infrastructure as well as examining opportunities for even tighter collaboration with suppliers and OEMs via the establishment of international sales facilities. The focus on production-level support does not extend to high-volume products and the company is unlikely to enter the mass consumer market, according to executives.
Rather, the “hybrid” business model would allow it to continue serving design engineers while supporting OEMs and suppliers through the manufacturing process but only for high-mix, low-volume equipment. Even as the company straddles the dual worlds of design and “high-mix and low-volume” production what’s unlikely to change is its strategy of shipping components from one single location in Thief River Falls, according to Larson.
“Along the years I’ve become more convinced that shipping from a single point is a differentiator – a positive differentiator – for Digi-Key,” he added. “Our customers know we are predictable and understand they’ll get their products within a 52-hour period. They can focus on design work in the meantime and we will continue to approach the market with that differentiation.”