A turf war between electronics components distributors and contract manufacturers shouldn’t surprise anyone. The two groups operate razor-thin margin businesses and while they offer critical services neither is truly at the top of the electronics industry food chain. To further complicate matters, OEMs can (and sometimes do) reap major benefits from pitching distributors against electronics manufacturing services (EMS) providers – another fancy name that arguably better describes what contract producers to the industry do.
Recently, some of the largest distributors and EMS providers have again been locked in another tussle, albeit an old one that periodically emerges like the ocean tide, going in and going out depending on market conditions. Suppliers are seeing more contract manufacturers offering to serve as their direct-to-customer partners. In other words, the EMS companies want the same relationship distribution enterprises have with component suppliers.
Contract manufacturers generally seem to believe they can play any role in the supply chain; they initially and gradually took over regular product assembly and manufacturing, some logistics, PCB and enclosure production, repairs and warranty fulfillment and procurement before diving in recent years into the design engineering pool, the one area of product development that had been closed to them due to OEM reluctance.
If EMS providers can do all the above, what stops them from serving as distributors, directly negotiating for components with suppliers and selling these to OEMs (and themselves) and pocketing the difference to boost margins? Before answering that question, let’s take a look at the industry’s more recent history. Veterans of the electronics market know EMS providers haven’t been shy at positioning themselves between OEMs and component distributors. They did at the beginning of this century and helped to catapult the industry to its deepest and most traumatic historical downturn in 2001.
Double-ordering of parts resulted in record accumulation of components throughout the industry and the fallout included massive write-downs (Cisco Systems alone wrote off $3 billion of excess inventory at its contractors), the deep fracturing of supplier relationships (Vishay Intertechnology sued at least one customer to compel compliance with the terms of a procurement contract) and even eventual dissolution of some businesses. Companies like Nortel Networks were caught up in the vortex of the industry downturn, leading to pressures on its contract manufacturers (Celestica, for example) and suppliers, some of which went out of business.
This isn’t just an historical review with no implications for today. It remains a problem for the electronics industry and participants in the supply chain need to pay close attention to the resurgence of EMS provider interest in component distribution functions. In recent months, anecdotal evidence have been piling up showing some contract manufacturers are dabbling again in distribution activities.
“I don’t think you can count anyone out of anything and contractors wanting to act as distributors is one of those things that come up every five to 10 years,” said Steve Vecchiarelli, head of supply chain services at Digi-Key Corp. in a recent interview. “They want to be able to buy directly from suppliers and they’ve been able to do it in the past. It comes and goes away. I don’t think contract manufacturers should be serving as distributors, though.”
In addition to broadening offerings and reshaping themselves into vertical supply chain services providers, top contract manufacturers are also jostling with distributors at component manufacturers. These deals aren’t publicly announced, according to industry executives, but they are worrying for distribution.
I’m not saying contractors shouldn’t engage in or actively serve as distributors. That’s their prerogative. However, OEMs and component suppliers need to ask themselves whether their contract manufacturers are also well equipped with the internal resources and the financial muscles to act in this capacity.
During the 2001 downturn referenced above, distributors were left to clear up the inventory overage mess created by OEMs and EMS providers. They did a good job and helped the industry roar back. We may have to call upon them again. Soon.
Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.