The North American (NA) distribution industry has posted a five percent increase in revenues after experiencing two years of flat growth. Although distributors faced several challenges, including price pressure, currency fluctuation, and margin erosion, a stronger global economy and higher demand from several market segments, including industrial and medical, buoyed the entire industry in 2014.
Sales for the top 50 North American-based franchised distributors grew five percent in 2014, reaching $31.7 billion. This follows a sales decline of one percent in 2013 and a two percent drop in 2012. This surpasses the $31.2 billion in NA revenues posted in 2011.
Despite the good growth, distributors faced several challenges over the past year, including currency exchange rates, margin erosion, industry consolidation, and more compliance demands and requirements from customers that increased their costs.
The number one challenge in 2014 was currency fluctuation, said Lindsley Ruth, chief executive of Electrocomponents plc, parent company of Allied Electronics. “In particular in the European marketplace – buying U.S. dollars and selling in Euros – profitability was significantly impacted.”
The challenge hasn’t waned in 2015. “The currency exchange rate is probably the biggest challenge right now, and, of course, the global economy continues to be a big issue,” said Steve Newland, senior vice president, Americas Sales & Service and Global Sales Operations, Mouser Electronics, Mansfield, Tex. “The European economy is not doing so great. China has reported some of the slowest growth they’ve had in six years so the global economies are not hitting on all cylinders right now.”
Another big issue for distributors has been consolidation. “Industry consolidation in the semiconductor industry is presenting challenges as well as opening up opportunities,” said Ruth. “The opportunity is broad in terms of being able to provide more focus for a consolidated supplier base, and some of the challenges is just working through some of the integration steps and assisting the supply base as they go through that process of integration.”
One of the latest announcements in the semiconductor industry is the merger between NXP Semiconductors and Freescale Semiconductor. The acquisition of Freescale by NXP is expected to transform the companies into the industry’s eighth largest chipmaker, according to IHS, growing its combined presence in key industrial sectors.
Other major semiconductor deals over the past year include Qualcomm’s acquisition of CSR PLC, Infineon Technologies’ purchase of International Rectifier Corp., and On Semi’s acquisition of Aptina Imaging Corp.
The interconnect, passive and electromechanical (IP&E) market also wasn’t immune to acquisition fever. TE Connectivity, Vishay, Molex, Bel Fuse, Bourns and Cornell Dubilier all acquired companies to expand their product portfolios and/or market reach.
“Consolidation causes concerns for the OEM buyers as they work through the unknowns. But our role in distribution is to make that as seamless as possible and to make it ultimately invisible to the end customer,” said Ruth.
Newland agreed. “We continue to support and make sure every part number is searchable, findable and orderable as it existed previous to the acquisition. Sometimes that requires some effort. It doesn’t do us or the supplier any good if an acquisition is made and we stop selling product because of it.”
But Newland admits there are some challenges for distributors. It makes business more complicated because there are brand, price and operational issues, he said. “It creates operational complexity and many times cost initially for the distributor. It’s like setting up a new supplier again.”
Margin erosion also continues to be one of the biggest challenges of electronics distributors and one that has a significant impact on their bottom lines. Customer demand for discounts based upon falling commodity prices is a big challenge, said Russel Dorwart, president & COO of PEI-Genesis, Philadelphia, Pa. “These falling prices are never reflected in the distributors’ costs from the manufacturers. Virtually all manufacturers are addicted to annual distribution price increases regardless of the broader economic conditions."
Distributors also reported compliance as a growing challenge in the industry. Raised compliance demands from customers and the costs related to these demands is a challenge, particularly in the connector industry, said Dorwart.
“The connector industry is trailing many industries in terms of quality, on-time delivery, and automated interactions with their distributors,” he added. “Despite this, customers are expecting this industry to operate on par with the automotive industry. There is a lot of work needed by both manufacturers and distributors to bring the current realities of the connector industry in line with customer’s expectations.”
Despite the challenges, many of the top distributors cite 2014 as a good year for distribution. “There wasn’t a whole lot of challenges,” said Ruth. “2014 was one of the better years in the last 15 years, and 2015 has the potential to be another solid year of electronics growth specifically in the Americas.”
“It’s been a remarkable year. One for the history books for us. We continued to have very strong growth in Europe and Asia,” said Newland. “What was a little surprising is that we had tremendous growth in the Americas - a turnaround like we haven’t seen in three to four years. We grew over 20 percent in the Americas last year and that helped stimulate a lot of corporate growth.”
Looking ahead, distributors expect growth to continue into 2015. A recent ECIA survey corroborates the trend. The survey respondents – distributors, manufacturers, and manufacturer representatives - expect growth across all market segments in the second quarter of 2015 with the strongest growth coming from automotive, industrial, medical, and consumer segments. Thirty-eight percent of distributor respondents expect the market to grow between one to three percent and 23 percent believe the market will grow between three to five percent.
“We’re still in strong double-digit growth. We’re growing at a fast rate, but at a slightly lower rate than last year,” said Newland.
However, Europe is problematic, added Newland. “Europe is becoming a little bit of a drag because of the strong dollar. When you look at challenges for the distribution industry for this year, any multi-national or global company based in the U.S. is going to struggle because of the exchange rate. We have to sell so much more just to stay even with where we were last year.”
“It does impact profitability and as the Euro decreases in value that also impacts purchasing decisions in Europe in terms of where they are going to source product,” Newland continued. “Our products get a little bit more expensive on a U.S. basis because the Euro is worth less than it was before. It hurts all U.S.-based companies from a revenue and profit standpoint and it can also impact purchasing decisions. Since we ship globally from the U.S., it definitely affects us.”
As for the supply side, distributors report stable lead times, no shortages, and not a lot of surplus. But buyers shouldn’t be “lulled to sleep by the consistency of the market we’ve been in,” said Ruth.
“Inventory levels in the channel overall is relatively low; visibility from customers is also relatively low, and lead times are short, which sets up for the perfect storm,” said Ruth.
“Buyers have to continually manage the visibility they provide to their distribution partners and make sure that the inventory is in place. While it may not matter today while lead times are short, it can change on a moment’s notice,” said Ruth. “They [buyers] should make sure when times are good and parts are relatively available that they have the right supply chain in place to be able to manage through the potential shutdowns that could come in the future.”
Industrial Market Fuels Growth
Overall, the top NA electronics distributors experienced a healthy sales gain in 2014. Thirty-nine distributors posted a sales increase last year with 13 recording double-digit increases. In 2013, only 27 distributors reported sales gains with nine posting double-digit increases. Only eight distributors posted negative sales in 2014, down from 16 distributors in 2013 and 21 in 2012.
The top 50 North American distributors also grew their global revenues, reaching $66.2 billion in 2014, increasing seven percent from $61.9 billion in 2013. The top distributors still derive the majority of their global sales from North America at 49 percent, although down slightly from 52 percent in 2013. They also derive 28 percent of their sales from EMEA (Europe, Middle East, and Africa), and 23 percent of their sales from Asia. Revenues derived from sales in South America still tally less than one percent.
In terms of customer base, 54 percent of the top distributors' business comes from OEMs, and 34 percent of their sales is from electronics manufacturing service (EMS) providers and original design manufacturers (ODMs). The remaining 12 percent is derived from "other" customers including MRO, government institutions, educational, individuals, design services, and other distributors and resellers.
Caveat: The customer percentages are based on responses from 36 of the top 50 distributors. The revenue market share of the top ten distributors is 93 percent, and seven of the top ten distributors did not respond to this question.
Based on 34 responses, we found that the top distributors garner most of their sales from industrial customers (29%), followed by military/aerospace (22%), automotive (10%), telecommunications (7%), medical (6%), computers (6%), energy (5%) and mobile communications (1%). The top distributors also derive 14 percent of their business from "other" markets. Seven of the top ten distributors did not respond to the question.
Many of these distributors expect to see demand in 2015 coming from high end, high reliability markets including industrial, military/aerospace, automotive and medical.
The overall industry, particularly semiconductors, is getting a big jolt in demand from industrial applications. The industrial semiconductor market grew about 16.8 percent in 2014, compared to 2013, which was attributed to “continuing strength in China and a resurgent U.S. economy,” the two largest markets for industrial semiconductors, according to IHS.
Another major contributor, said IHS, was increased capital spending. The market research firm expects growth in the industrial semiconductor market to grow at a 9.7 percent compound annual growth rate (CAGR) over the next several years, reaching $55.2 billion in 2018.
Smaller medical systems also are expected to drive demand for ICs, sensors, and other devices over the next few years, according to the latest research from IC Insights. Global medical semiconductor sales is expected to reach $8.2 billion in 2018, growing at a CAGR of 12.3 percent between 2013 and 2018.
More Resources, More Inventory
The industrial, medical and transportation sectors are key market segments that many electronic components manufacturers and distributors agree will remain strong in 2015.
Almost all of the subdivisions of the OEM segments – medical, industrial, instrumentation and process control - had strong double-digit growth last year, said Newland. “We’re not a big player in automotive but we still saw strong double-digit growth in transportation. But the real strength was in the industrial subdivisions, which were all high double-digit growth.”
While Newland noted that “a lot of good market-driven growth” came from the Internet of Things (IoT), wearables, smart devices, and home automation, Mouser’s growth came from “good strong underlying industrial demand in our core market and customer set.”
He also attributes a lot of Mouser’s growth to investments in inventory. Part of this success formula is being able to stock the right parts and speed up the launch of new innovative products.
“We continue to add SKUs at a very high rate and have increased our on-hand inventory substantially. We also had great growth and continued success with our new products focus, which has always been part of our strategy,” said Newland.
“We also continued to get better and make strides from a customer service standpoint. More inventory, better service, and good strong traction from our key segments had a lot to do with our growth,” he added.
As new product introduction (NPI) partners, distributors are key to ensuring that the product information gets out to designers and buyers, and the parts are available at launch. Mouser, for example, continues to make huge investments in its online “microsites” – technology and application-focused websites for designers and buyers. In addition, the Mouser Newest Products site provides technical information that can viewed by category, manufacturer or by week.
In 2014, Mouser launched several new applications sites, including motor control, security, and communications, and several technology-focused sites including high voltage, open source hardware, and wearables. Offering more than 30 resource sites, the distributor also enhanced several other resources throughout the year. These sites offer new product introduction information, reference designs, application notes, data sheets, white papers, and other solution-based content.
In addition, Mouser unveiled in an Engineering Development Tools Center, an anti-counterfeiting site, and its MultiSIM BLUE component evaluation tool for designers and buyers. The distributor also launched an Innovation Together program with celebrity engineer Grant Imahara of Mythbusters fame. The program provides video spotlights, design challenges, and other ways for engineers to share design ideas with Imahara and each another.
The distributor continues the trend into 2015 with the launch of a new robotics applications site.
Other top distributors also have made significant investments in Web-based resources over the years, including Arrow Electronics, Avnet, and Digi-Key. Arrow offers a Web-based life cycle services platform that includes enhanced components search and interactive design tools. Avnet provides several design zone microsites around technologies and markets, and Digi-Key offers several "TechZones" that focus on several application areas including lighting, energy harvesting, microcontrollers, power, sensors, and wireless.
A Technical Sell
But the top 10 distributors don’t have a lock on growth. One smaller distributor that has managed to grow significantly over the past few years is Phoenics Electronics, which posted the highest growth rate among the top 50 distributors by focusing on specific market segments and product lines. Phoenics Electronics is a $58-million semiconductor specialist that focuses on the technical sell.
The growth is due to market segment focus, the manufacturers that the company is supporting, and the employees, said Peter Rooks, president, Phoenics Electronics, Acton, Mass. “It’s all about the people. If we didn’t have great people working here we wouldn’t be able to make what’s been available into reality.”
In terms of market focus, what has driven growth is data centers, said Rooks. These data centers drive huge requirements, including for the networks that support the data centers and the storage companies that supply them products to support the infrastructure, he added.
The two things that these data centers need are security and memory, said Rooks, and we have two main suppliers - Cavium Networks and Micron – that are focused on this industry. “Cavium is the world leader in security and network processors and Micron is one of the top memory suppliers in the world.”
“This is one of the main markets that drove growth incredibly in 2014,” said Rooks. “Our goal is to hit $100 million in the next couple of years. We’ve added some other lines that are very strategic for us like Vitesse, GE and Conexant, as well as a software company MontaVista. These companies are very synergistic with what we do and they also will enable us to break into other markets like consumer, industrial, and video/broadcast.”
To better support the expansion, Rooks also doubled the size of the company last year, hiring ten new employees.
Phoenics' goal is to sell a minimal number of lines that are synergistic so there are no overlapping technologies. Hardware field application engineers (FAEs) typically focus on one or two manufacturer lines while software FAEs have responsibility for one.
“Being very focused allows us to understand the technology and the products so when people ask us questions we can answer them without having to go to the supplier,” said Rooks. “It’s important that we as a team understand the products so well to enable our customers to get to production quicker.”
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