Obsolescence Insurance, a New High-Margin Business for EMS Companies
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So far, Intel Corp.’s acquisition of Altera Corp. has not affected either supplier’s relationship with global distributor Arrow Electronics Inc. Although neither company was mentioned by name, Arrow CEO Mike Long told analysts on a quarterly conference call this week that consolidation in the semiconductor market -- which also includes NXP/Freescale and Avago/Broadcom -- has not adversely affected the distributor and there has been no fallout on Arrow’s linecard.
Arrow is not the most likely company to feel an impact from Intel/Altera—it has had a long relationship with both suppliers. However, within the broader distribution channel the acquisition could set off a chain reaction that impacts buyers and the status quo. For decades, Altera and its nearest competitor Xilinx Inc. could not be procured through a single distributor. Avnet Inc. has had a long relationship with Xilinx; Altera and Arrow are firmly established partners. Altera and Xilinx, because of the competitive nature of their product lines, will not be sold side-by-side at one distributor.
Intel’s acquisition of Altera could change that. Intel has sold its products through both Arrow and Avnet for decades. Even if Intel were to absorb Altera’s product lines under the Intel brand, Altera and Xilinx could technically be sold side-by-side at Avnet. Competitively, that might be a disadvantage for the FPGA makers. For buyers, it could mean a broader choice in FPGAs or the ability to consolidate purchases under a single distributor.
Would that then leave Arrow and Xilinx at a disadvantage? Is consolidation a big priority for buyers? My sense is that buyers do not want all their eggs in one basket. Dealing with multiple distributors just makes sense. It lowers the risk of being without product; it provides an opportunity for price comparison and leverage, and it’s just good business sense. While there may be some shift in BOM items if Avnet sells both Altera and Xilinx, buyers will still do business with both distributors.
So where does this leave the Altera-Xilinx distribution roster?
Intel could force Avnet to choose between Intel/Altera and Xilinx. In the past, chip makers’ refusal to be sold side by side meant a distributor would be dropped from the post-merger roster. That practice has largely gone by the wayside, and few chipmakers have the wherewithal to dictate to a $20-plus billion partner. Intel is one of those chipmakers. However, Intel has historically distanced itself from past practices in which Japanese and U.S. companies couldn’t be sold by the same distributor and maybe has just moved beyond such methods.
Xilinx could also ask Avnet to choose. But disentangling from Avnet—or Avnet dropping Xilinx—would be a difficult and painful process. Avnet has actively supported Xilinx’s products by sponsoring an annual X-fest which brings engineers and Xilinx products together and has featured Xilinx products in numerous reference designs and kits. Both companies have invested significantly in one another.
Xilinx could also seek out a distributor that does not have a conflict with Altera. WPG, an Asia-based distributor and Future Electronics Inc. of Canada are the largest global broadline distributors, by revenue, after Avnet and Arrow. Neither one carry Intel in the Americas. Both would likely welcome Xilinx to their linecard.
It’s also possible the last example of refusing to share shelf will just fade away. Intel is important to Avnet and Arrow, but they are also the two largest electronics distributors in the world. So far the relationships have been a win-win-win. Could Altera dislodge Xilinx from Avnet’s linecard? Given the level of partnership and support Avnet and Xilinx have historically had it would be an uphill battle for Altera, but maybe the best technology will determine the winner.
Consolidation is inevitable, it seems, and conflicts will arise no matter who is aligned with whom. But it is still a big factor in the distribution channel, and one analysts asked Arrow’s Long about several times. Long said for Arrow, consolidation has created new opportunities to sell a broader line of products. And, he added, the distributor is bringing value to suppliers.
“We’ve been able to navigate through the consolidation because our suppliers value our engineering capabilities,” Long said. Arrow has invested in its engineering resources and Long said Q2 was a very active period for Arrow in terms of design wins. “We have seen robust design activity in Q2 and approved designs were up in the double-digits year over year,” he said. “That’s up from single digits in Q1.”
Maybe the industry is ready for a competitive landscape based on value or the best technology rather than who else is on a distributor's shelf.
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