If design activity is a measure of innovation in the electronics industry – and in most cases it is – U.S. companies are inventing more products this year than last. Arrow Electronics Inc., which carries hundreds of component brands to hundreds of thousands of OEM customers, saw its design-wins increase by double digits globally in Q2 2015 compared with the prior year. Activity isn’t as robust as it was during pre-recession cycles, said Paul Reilly, CFO of Arrow, but it is on the upswing.
Arrow, like other distributors, has a pretty good handle on design activity. Arrow in particular has invested in swelling its engineering ranks in both its components and computer systems businesses, Reilly told investors and analysts at the Citi Global Technology Conference this week. Distributors have a significant stake in design-wins: if a distributor gets a supplier’s component designed in to an OEM end-product the distributor stands to benefit once the product reaches production. In some cases those parts can only be sourced through the distributor; in other cases the distributor gets a preferred profit margin on component volume sales. Reilly noted that in addition to semiconductors Arrow carries a wide variety of interconnect electromechanical and passive (IP&E) electronic components. Some suppliers in all of these markets compensate distributors for design-wins.
The designs aren’t the types of things that will get man to Mars, Reilly said, but they are products that will help consumers better interact with one another and the environment around them. Reilly said he met with three separate California companies recently doing work in lighting. IoT is another growth area in which consumers will be able to interact with their homes, for example. “It’s cool, interesting stuff,” he said.
Design-wins take 6 months to a year to reach fruition, Reilly explained, so he’s encouraged with the components market through 2016. Most of the U.S. innovations are coming from small to mid-sized companies that have been able to access capital in the post-recession marketplace. Most are job providers in the U.S. “There are cyclical design cycles and I wouldn’t say it’s as robust now as it was pre-recession,” Reilly said, “but we do see more invention work happening.”
Arrow is also more upbeat about the next few quarters in spite of the jittery stock market and suppliers’ lackluster expectations. “For us, as we are hearing about our suppliers’ guidance, we question why we are different,” Reilly said. “So we ask ‘What is the end-market for the semiconductor industry?” Based on data from the SIA and other organizations, the communications, PC and consumer markets account for about 80 percent of semiconductor sales. “Only about 25 percent of what we are selling goes into those markets,” Reilly said. “The big difference is customer mix as a starting point.” Arrow is also evenly dispersed among the three major geographical markets and is not concentrated around any single supplier or end market.
Analysts pointed out mixed signals continue to come out of China and as a result the stock market is showing a lot of volatility. “[China] is hard to call right now,” Reilly conceded. “It’s hard to tell whether the activity is based on rumor, innuendo or whether this is a pause or a tipping point. I wouldn’t say it’s a tipping point. Maybe there is a lot going on that we can’t see but at the moment I don’t see us at a tipping point.”