Component distributors are the closest thing the electronics industry has to Superman. That’s backed up by too many facts to be considered flattery. They do all the traditional things their group nomenclature – distributors – connotes but also much more. In fact, the largest distributors perform so many varied services for their customers (OEMs, EMS providers, design engineers and other distributors) and component suppliers that they may even merit a different classification as Brian Ellison, president of America II Electronics, told me during a recent interview.
Ellison should know. Before he joined America II, he worked for more than 10 years at one of the two largest distributors in North America. Since he began leading America II, the industry veteran has led efforts to dramatically expand his company’s offerings as well as its presence globally. Although America II’s annual sales is a fraction of Arrow Electronics’ and Avnet’s, the Florida-based component distributor has taken steps in recent years to strengthen and expand its presence in North America, South America, Europe, Asia-Pacific and Japan. You’ll be hearing more about America II in future as the company intensifies the expansion of both offerings and global presence.
Let me return, for now, to what distributors do and how they have helped to push sales growth at component vendors and broaden the use of electronics throughout the global economy. The topic came to mind when I saw a Forbes analysis of Dialog Semiconductor’s just-announced $4.6 billion purchase of Atmel Inc. The Forbes article suggests Dialog was more interested in the direct sales channels Atmel has used to penetrate a segment of the electronics purchasing community. Nothing could be farther from the truth. If Dialog snapped up Atmel primarily for this purpose the transaction will blow up spectacularly in its face. I plan to address what Dialog saw as the main benefits it can reap from buying Atmel in a separate blog. For now, here’s a link to EPS’ coverage of the acquisition. (See: Dialog Buys Atmel to Cut Dependence on Apple).
In the meantime let’s use Arrow Electronics as a prime example of why distributors remain the main vehicle many components manufacturers use to drive sales and market penetration. Arrow in its 2014 annual filing with the U.S. Securities and Exchange Commission, (SEC), described itself as a distributor and an enterprise computing solutions provider. The distribution division accounted for 63 percent of its 2014 sales. What are the activities of that division? They include the following description as outlined by Arrow in its filing (the bold emphasis is mine):
“The company acts as a marketing, stocking, technical support, supply chain manager, and financial intermediary on behalf of electronic components manufacturers and provides geographically dispersed selling, order processing, and delivery capabilities to guide products to market on behalf of these manufacturers. At the same time, Arrow offers to a broad range of customers the convenience of accessing, from a single source, multiple technologies and products from numerous suppliers and rapid or scheduled deliveries. The company assists these customers with its ability to market new products and equipment powered by electronic components through design engineering, programming and assembly services, integration support and supply chain management. Additionally, it simplifies returns and inventory management for customers and provides electronic asset disposition services to ensure the maximum reuse of electronics.”
Arrow has office presence in some 56 countries from where it serves “over 85 countries,” according to the SEC filing. No other group of companies in the electronics industry can claim to provide as many services or touch as many other groups in the market. The other players in the industry include OEMs, component manufacturers (semiconductor, passive, electro-mechanical and interconnect vendors), foundries, independent design houses, logistics services providers and software (design chain and supply chain application) developers.
In terms of business-to-business customers, few other groups within the industry can also match the number of customers that distributors touch on a daily basis. Arrow’s customers, for example, number more than 100,000 and include large OEMs and contract manufacturers as well as medium-size and small enterprises in all corners of the globe. They also include established companies, start-ups and even enterprises or companies that are in the embryo stage – essentially those that live only in the hearts and minds of engineers working in basements and garages, unknown and unsung yet.
It can be tempting to sweepingly say only huge distributors of Arrow’s size (2014 sales: $22.77 billion) can be so ubiquitous in the market. That’s not the case. U.K.-based Electrocomponents Plc is much smaller (fiscal 2015 sales: £1.3 billion or $1.96 billion) but it sells products to engineers and other customers in more than 80 countries and ships “a new parcel … every two seconds,” according to its annual report for the fiscal year ended March 31, 2015. Electrocomponents said it “holds over £250 million of products in stock and add around 60,000 new products to our range every year.”
Like its bigger competitors, Electrocomponents is a franchised distributor representing manufacturers supplying products to the entire economy. It represents around 2,500 suppliers and supports these companies with the tools they need to broaden their reach globally. Without distributors, the global electronics and high-tech market would be dramatically smaller.
Why? Because distributors, even when they simply serve as middlemen in the transactions between component buyers and component manufacturers, remain the critical link in most procurement functions. They help create awareness for new products, facilitate design-wins, connect buyers and sellers and, more importantly, foster an environment that enables the makers of components and the manufacturers of finished equipment thrive by getting their products to market fast and at the optimum price.
Most of what you read above is known to many in the electronics industry but it is worth reiterating nonetheless. I decided to write about this as noted above after reading the Forbes article that claims one of the primary reasons Dialog Semiconductor agreed to pay almost $5 billion for Atmel was because “Atmel will not only provide a larger portfolio of products to sell, but it has a sales channel to a lot of disparate partners including a large number of new entrants to the chip community in the form of the maker community.”
The transaction will not be as beneficial to Dialog’s shareholders if its main objective was to gain access to Atmel’s direct sales channel in the so-called maker community. Those “sales channels” haven’t helped Atmel overcome the huge challenge of stalled revenue growth the company faces. Atmel’s 2015 revenue is projected to shrink nearly 14 percent, to $1.22 billion, from the $1.41 billion it reported in 2014.
If Dialog hopes to broaden its revenue base – one of the company’s stated goal for buying Atmel – it will have to look well beyond direct sales and partner more broadly with distributors. They distribute products to a wider customer base and well beyond the purchasers that component suppliers can themselves reach. More importantly, though, they can look deep into a company’s offering and identify hidden component jewels developed years back but languishing in storage, unnoticed, unloved but needed by OEMs.
America II’s Ellison told me about such an offering at a U.S.-based component vendor. His company poked around in the supplier’s offerings and found it had display products for sale. America II got the displays to market, earning kudos for its efforts from both the supplier and its customers.
I was surprised myself. The components supplier has its headquarters only 30 minutes from my office. I had visited its office many times and had been reporting about the supplier for nearly 20 years. I always described it as a major supplier of passives components and discrete semiconductors. I didn’t know it also makes displays! That’s the power of distribution.