The East vs. West struggle for economic dominance and relevance is turning the global electronics components distribution market on its head. A mere nine years after it was incorporated, WPG Holdings Ltd. is threatening to upstage Arrow Electronics Inc. as the No. 2 global electronics components distributor in what is shaping up as the most definite confirmation of Asia’s role as the pre-eminent center for the production of high-tech goods.
The stakes are huge for the entire industry and, once the dusts have settled, new winners and losers will emerge with the ongoing redistribution of sales and influence accelerating from West to East. Thirsty for the profits and sales counterparts in the West have long enjoyed, enterprises based in China and other parts of the so-called “Far-East” region are butting heads with more-established rivals in the design, distribution, procurement, production and sales of high-tech equipment. Success in all these areas might be years away but already many Eastern companies are nipping away at the West’s leadership in almost every operating areas of the electronics industry.
It’s in electronics components distribution that Far-East companies have racked up the more obvious successes, forcing Western components distributors to redefine their operations, exit some businesses and shore up defenses in other sectors. Across the industry, Western distributors are intensifying and deploying defensive and offensive measures that include entering new and more stable markets (aeronautics, lighting, medical, industrial and energy, for instance) and refocusing resources on specialized activities – such as engineering design chain, logistics and supply chain management support services – that seem to promise longer-term growth as well as better profit margins.
Efforts like these have helped companies like Arrow, Avnet, Digi-Key, Future Electronics, Mouser, Premier-Farnell and TTI hold on dearly to profit margins and even boost sales but they haven’t stopped the giddy advancement of companies like WPG Holdings, which is now on the cusp of becoming the No. 2 player in the components distribution market.
Propelled by the massive transfer over the last several decades of manufacturing activities worth hundreds of billions of dollars to lower cost production facilities in China, Indonesia, Malaysia, the Philippines and, increasingly today, Vietnam, local distributors in south East Asia have grown exponentially in recent years. In a mere decade companies like WPG Holdings (TPE:3702) and hundreds of smaller distributors have emerged across Asia and won over Western OEMs. They leveraged their knowledge of the communities, contacts and national policies to win huge businesses at not just the multinational OEMs but also at voracious local equipment manufacturers in diverse segments of the high-tech economy, including enterprise infrastructure, industrial, data and networking equipment and consumer electronics.
WPG Holdings’ growth has been nothing short of stunning. Founded in 2005, the Taipei, Taiwan-based company grew fast by focusing solely on Asia – especially companies in China – where it benefitted from the country’s equally explosive expansion. China in 2012 reported $1.64 trillion in high-tech industry revenue, surging from $242.2 billion ten years earlier, according to the country’s National Bureau of Statistics.
The number of people employed in the country’s high-tech industry surged to 12.7 million during the same period from 4.2 million in 2002 while patent applications climbed to 97,200 from 5,590. Foreign governments and enterprises contributed heavily to this expansion but the greatest benefits from high-tech’s investment in China have accrued to companies like WPG Holdings and other service providers like contract manufacturing services provider Foxconn Technology Co. Ltd. (TPE:2354), which alone employs about 1.2 million people in the country.
China – and WPG Holdings – Rising
WPG Holdings has been trying to expand internationally in recent years and has a growing presence in North America but the largest chunk of its sales continues to come from Asia and this will most likely remain unchanged for the near future. Surging China sales propelled the company to the top 3 position in the last several years and although some companies are relocating production facilities to Vietnam, Brazil, Eastern Europe and even the United States, WPG Holdings remains a potent player in its local environment where companies like Arrow and Avnet are similarly jostling for market share.
In 2013, Arrow again edged out WPG Holdings in the components distribution market but this year, its title as the No. 2 global components distributor after Avnet Inc. is up for grabs, according to current projections. In fact, it’s almost definite the American company will slip to the No. 3 global position behind WPG in 2014.
Arrow reported total revenue of $21.4 billion for 2013, including sales of approximately $13.7 billion in its electronics components division. WPG, meanwhile posted sales of NT$406.3 billion (about $13.6 billion at current exchange rate), up 12.5 percent, from NT$361 billion in 2012. For 2014, analysts on average are estimating Arrow will report companywide revenue of $22.4 billion, up 5 percent from 2013. The components business, which has lagged the smaller business division in sales growth, has shown some improvements since the beginning of this year, posting sales of $3.4 billion for the first quarter, up 4 percent, from $3.2 billion in the year-ago comparable quarter.
WPG, like most of its other Asia-based competitors, grew at the expense of the bigger rivals and took on all customers for what looks like paltry profit margins. Western distributors have been shunning such low-margin business in recent years. Arrow, for example, purposely pulled back from bidding on mass volume supply contracts that would further shave down its operating margins and has instead focused on growing its components business sales with design engineering and other value-added services, according to Michael Long, president, CEO and chairman.
“In general, the team has gotten really focused on who our customers are and we are less concerned with the bluebirds that may come in that are lower-margin activities,” Long said during the company’s conference call last month to discuss first quarter results. “The team's overall year-over-year right now increase in registration was up about 8 percent, which is a nice increase year-on-year. That signals that there's more to come. Those are higher-margin products. And they've made some pretty good progress on that over the course of the year. And customer base expansion has still been under way, especially in China, and that's certainly helped that market also increase its margin.”
That shift, while productive in that it halts the erosion of gross profit margins, has other attendant costs. It has slowed Arrow’s sales growth and will continue to pull this back until other initiatives designed to drive up expansion kick in. For the current quarter, for example, Arrow executives are forecasting relatively flat performance for the current quarter, which means sales growth will continue in the single-digit for the second quarter.
“As we look to the second quarter, we would expect market conditions for our global components business to remain consistent with the first quarter. We believe that total sales will be between $5.45 billion and $5.85 billion, with global components sales between $3.45 billion and $3.65 billion and global enterprise computing solutions sales between $2 billion and $2.2 billion,” said Paul J. Reilly, CFO of Arrow in a press statement.
Arrow and its Western counterparts must get their growth strategy right. They want a piece of the China pie but prefer the richest portion, a dilemma that could only be solved through value-added services. While they’ve long enjoyed the first mover advantage and honed sophisticated offerings that the industry continues to value Far-East competitors like WPG Holdings won’t be satisfied with serving as mere middlemen between component suppliers and OEMs. Already, these companies are racing to add supply chain management and other value added services and will likely get better at these over the next few years.
Western distributors today emphasize the range of services they offer either to design engineers or as specialized distributors who not only understand the challenges facing their customers but are swift to offer solutions that would protect market shares and expand sales. Multiple sites have been launched by these companies to offer engineering design solutions, information and data beyond what component suppliers traditionally provide while supply chain management services are now provided as complementary offerings to smoothen product flow.
Mouser Electronics Inc., for instance, recently began providing anti-counterfeiting information on its website to help customers avoid the problem. “This site is dedicated to communicating with our customers our commitment and other relevant topics concerning Authorized Distribution,” said Pete Shopp, senior VP of Business Operations at Mouser in a statement. “Mouser strongly supports all efforts to help the industry identify and avoid counterfeit parts.”
Digi-Key Corp., too, is knee-deep in providing technical support information to design engineers with the goal of driving engagement with them and influencing their purchasing actions. The distributor has a team of 150 technical experts who daily update several of the company’s specialized sites for design engineers – eewiki.net is a prime example. Randall Restle, head of the design engineering support group at Digi-Key, said his team’s goals include “answering questions engineers haven’t even thought about today but which they may have tomorrow.” The Digi-Key team provides this resource gratis to design engineers in addition to answering direct questions on a 24/7 basis, according to Restle.
“We pre-empt the questions engineers might have,” Restle said in an interview. “Digi-key’s technical experts answered over half a million queries in 2013 and are engaged in 1,250 technical web chats and phone calls per day. There’s information that’s hot and needed right now and there’s another that’s needed but doesn’t require a live-chat because we’ve already made it available to the engineers online. All they have to do is conduct a brief search.”
This differentiation in services between Western distributors and their Eastern rivals has become not just necessary but critical, according to industry observers. Many Far-East based competitors are still involved primarily in the provision of basic distribution services to OEMs and lack the design chain and supply chain sophistication of their Western rivals. Eventually, these companies, too, will begin to expand such dedicated and highly-specialized services but, for now, the needs they meet are still very basic.
Cracking into the design engineering support services remains a formidable challenge for south East Asian distributors. In recognition of this, Western distributors are playing up their design engineering value added services and leveraging modern logistics services to reduce any disadvantages long distance from Asia might be imposing on them. Digi-Key executives, for example, conducted a detailed review of the operating system of shipping products from the United States to all customers globally and decided to retain this strategy and beef up the company’s e-commerce capabilities to support customers. The approach seems to be working, according to company executives.
“The initial challenge for us internationally came from companies that want inventory on the manufacturing site but we figured out a way to get products to customers as fast as and even faster in cases than shippers in the same country,” said Dave Doherty, executive VP, operations, at Digi-Key during a recent interview at the company’s Thief River Falls, Minn. office. “The global boundaries are fewer than they’ve ever been and we’ve found we can be as local as the next company even though we are shipping from Thief River Falls. The sophistication of the supply chain has advanced enough that it doesn’t matter where the product is being shipped.”
In the second part of this report we will examine how China and Chinese and other Asian companies are impacting the interconnects, passives and electromechanical (IP&E) components market.