Asia’s electronic components distribution market is ripe for consolidation and Avnet Inc., the world’s top player in the sector, says it is putting the finishing touches to a strategic plan to grow strongly in the region via acquisitions and by leveraging existing investments to support customers and suppliers in refining their supply chain management offerings.
With less than one year at the helm of Avnet Electronics Marketing, the distributor’s components operation, group Global President Gerry Fay says his division has begun building on initiatives rolled out over the last decade in Asia, including the establishment of a robust management team, partnerships with key suppliers, partnerships with OEMs and contract manufacturers and a formidable presence in the major countries of the region. Furthermore, the company is turning its radar on acquisition targets and expects to devote more resources to beefing up supply chain assets and services in response to growing demand for these offerings from Asian companies.
“The growth opportunities in Asia excites us,” Fay said in an interview. “In the West, we continue to run very profitable businesses and in Asia, we’ll make investments in both our core operations and adjacencies that we believe will drive differentiating growth and profit margins.”
Demand hasn’t quite strengthened across the electronics and high tech market as many industry players would like. While pockets of growth are spread across the industry, distributors like Avnet know a broad-based expansion won’t emerge until demand improves strongly enough to push out lead times and strengthen average selling prices (ASP). So far, the industry outlook remains slightly positive but manufacturing indices across the world haven’t perked up enough to point to the likelihood of surging demand in the months ahead.
“Lead time is still very short and without lead time expansion we don’t get very much in ASP expansion,” Fay said. “All the indicators seem positive but outside of some product areas like discretes we haven’t seen much in terms of lead time expansion and that is really the barometer for me as to whether we’ll see growth in the short-term.”
And yet Avnet is planning for and executing a major push in Asia, which company executives from CEO Rick Hamada on down believe would drive growth across the electronics industry in future. At Avnet EM, Fay himself is pushing through growth strategies begun under his predecessor but which he has taken to another level, drawing on lessons learned from his previous position as head of operations and global supply chain at the parent company.
Fay said Avnet EM is accelerating the implementation of its double-pronged strategy of offering customers supply chain efficiencies honed in North America and Western Europe coupled with strategic acquisitions of smaller rivals in Asia. Distributors in the region will eventually go through the same consolidation that swept through North America and Europe over the course of the last 10 to 15 years and Avnet is certain to be one of the consolidators, he said.
“Asia is where the growth is and we are going to be in the market where growth exists,” Fay said. “We already have a large presence in Asia, we have an excellent management team in Asia that drives growth and meets our profit objectives. As long as we can continue to meet our profit goals in that region we will continue to invest there.”
Industry observers agree the Asian electronic components distribution sector remains highly fragmented with hundreds of small to medium size players in markets such as China, Japan and South Korea jostling for customer attention with bigger players like Arrow Electronics Inc., Avnet, Future Electronics and World Peace Group (WPG). Taipei, Taiwan-based WPG has surged from relative obscurity in the last 15 years to become the region’s biggest distributor and possibly the world’s No. 2, according to some estimates, providing additional incentives for its bigger North American rivals to bulk up in the region.
While Avnet EM has a global footprint and is leveraging Avnet corporate assets worldwide, its customer-facing business is still tailored to meet and satisfy regional demands. Customer requirements in each region vary widely from other markets, forcing suppliers to rely on companies like Avnet to satisfy those differing needs, which can often result in equally wide profit margin disparities.
Avnet is one of a handful of dominant players that pushed through and survived the winnowing of distributors in the higher margin Western European and North American markets and it has since focused on preserving profits and sustaining growth through differentiated value-added services to help customers gain a competitive edge.
In the West, for example, Avnet EM regularly rolls out services that support design engineers in all industry segments, including display and embedded applications, with the aim of securing fatter margin programs at customers. More recently, the company has added special programs to help customers promote their Internet of Things offerings, a product area Fay said is “promising but hasn’t yet begun driving growth.”
This strategy is often complemented with value-added supply chain management offerings to help customers be more flexible and reach end-buyers with the right products at the optimum price. That design chain and supply chain combo works well in Western economies where companies understand the importance of optimizing total cost of ownership (TCO) metrics. For this, customers are typically willing to pay a premium for the services that Avnet and its closest competitors provide, observers said.
Acquisitions have driven a large portion of Avnet’s growth, pushing revenue to $25.5 billion in the fiscal year ended June, 2013 from $9.1 billion in fiscal 2003. The company has acquired more than 90 companies since 1990, mostly in North America and Europe but with a smattering of deals in Asia, including the purchase of China’s RTI Holdings Ltd. in April 2013. It has acquired businesses in Japan, Taiwan, Singapore and Australia but is believed to be gearing up for a major push in Asia. (Click here for Avnet’s acquisition history.)
The purchase of MSC Investoren GmbH last year falls neatly into the category of strategic deals Avnet likes to make to expand market share and mop up the competition. With the transaction, Avnet secured additional value-added offerings it is now rolling out in the EMEA region, according to CEO Rick Hamada in a presentation to analysts last month.
“Avnet EM is positioning for future growth,” Hamada said. “While MSC’s component distribution business is being integrated into EM EMEA’s existing structure, we will also have a new business unit branded MSC Technologies that will leverage MSC’s broad offering of embedded and display solutions across our combined customer base. With deep technical expertise supported by specialized development and manufacturing resources, we are confident this addition will expand our markets, accelerating our growth in a region where customers are looking for advanced solutions and capabilities.”
Fay hinted the same strategy will work quite well in Asia for Avnet. Although the Asian market has been dominated by manufacturing-related activities rather than design chain and supply chain solutions, the situation is beginning to change. Not only are outsourced design firms emerging in Asia but the local OEMs and electronics manufacturing services (EMS) providers are also seeing the advantages they can gain from supply chain efficiencies. They will rely on companies like Avnet to help them secure this type of competitive edge. As a result, Avnet EM is looking at transferring some of the knowledge gain in North America to its Asian operation, Fay said.
“We need to leverage the supply chain capabilities we have in Europe and the Americas in Asia as customers there become more sophisticated from a supply chain perspective,” he said. “Avnet will leverage our scale and scope where others don’t have it and in markets like Asia, we need to use our financial strength for customers and suppliers.”
First, though, big distributors like Avnet will need to do some cleaning up in Asia. So far, suppliers and OEM/EMS customers have accepted the fragmented nature of the Asia distribution market as one of the realities of the region but it’s not optimal for growth, profitability and efficiency either for component vendors or distributors.
That’s why the Asian distribution market will eventually go through a period of trimming that will result in a sharp reduction in the number of viable players. It happened in Europe and North America and Asia will not be any different, Fay said.
“It’s inevitable,” Fay said. “The Asia market will consolidate into fewer players. That’s definite.”