There were no doom and gloom reports for 2016 at the Electronics Distribution Show (EDS) in May. Most electronic component distributors and manufacturers were “cautiously optimistic” about 2016, expecting low- to high-single-digit percentage growth. Many expect to see a repeat of 2015 but have much higher growth expectations for 2017.
In 2015, the electronic components distribution industry in North America faced a year highlighted by price pressure, eroding margins, currency fluctuations, and stagnant growth. This translated into a buyer’s market - average selling prices (ASPs) were down; inventory levels were stable, and lead times for most electronic components were short – that has continued into the first half of 2016.
During TTI’s EDS presentation, Michael Knight, senior vice president, TTI Americas, said the distribution industry’s growth in 2016 will likely match the GDP of about 2.5 percent in the U.S. and 3 percent globally.
However, TTI expects a better year in 2017. The global distributor has seen four consecutive months of improvement but it will be late summer/early September before the market hits the lowest point and then will strengthen in Q4 and onward, Knight said.
The growth rates that the industry once enjoyed are over, he added. The focus has shifted more from revenue growth to productivity gains – cost cutting and cost management to grow the bottom line.
In addition, there is a continued squeeze on ASPs, which shows no sign of slowing down this year, said Knight. In 2015 compared to 2014, ASPs for capacitors were down 11 percent and six percent lower for resistors. In addition, ASPs for both electromechanical devices and connectors were down two percent.
The capacitor market was hit with margin pressure and strong ASP erosion as well as took a hit in the oil and gas industry, said Mike Morton, president TTI global sales and marketing, during the EDS presentation.
However, Morton also noted that the resistor market continues to grow in Europe and Asia, and he sees high growth potential for both discrete and sensor product segments. TTI also expects to increase its market share for circuit protection devices.
In a follow-up discussion, Knight noted several other challenges for distribution in 2016, including “continued slow market growth for the entire supply chain in all regions that leaves distributors dependent on share gains to achieve any meaningful top line progress, coupled with continued resale and margin erosion that can leave distributors dependent on cost cutting to make any progress on the bottom line.”
“In addition, the customers for electronic components continue to become more global in terms of their approach to supply chain and pricing development. While distributors like TTI can and do provide global supply chain solutions, we are constrained with regional pricing from our suppliers, which adds a lot of complexity to the quoting process due to the need to identify the region each part will be consumed in so that the correct costs can be collected,” he continued. “Our suppliers have solid reasons for this, starting with the way their company cost centers and income statements are structured, but the end customers are less and less sympathetic. This has been a hot topic in the industry for years and one that suppliers and their distributors are going to have to figure out or else risk losing business to alternative supply chains that don't have the same constraints.”
Faced with these challenges, the North American distribution industry only managed to grow 1.3 percent in 2015, reaching $32.1 billion in 2015, according to EPS News’ annual Top 50 Distributors report. This is after recording five percent growth in North America in 2014, after two consecutive years of flat growth.
2015 was a tough year for many North American distributors. In 2015, only five of the top 10 distributors reported growth, all in the single digits, and only three of the top 50 distributors posted double-digit percentage growth in 2015. Overall, 29 distributors reported increased sales in 2015, compared to 39 distributors in 2014.
Distributors also faced a tough year globally, growing less than one percent. Again, many distributors pointed to currency fluctuations, slow growth in China and macroeconomic conditions.
Despite the challenges, distributors continued to invest in new sales offices and warehouses, hire more people, and increase inventory to better support their customers. The trend is expected to continue throughout 2016, according to many EDS attendees.
TTI is one of the leading distributors that continue to invest even during weak markets.
“TTI is fortunate to be part of a company in Berkshire Hathaway that is well known for taking the long view. This has always been our operating mode and even in the face of a difficult environment, especially in the Americas, we are investing heavily in our business,” Knight said.
“We are concentrating on not only preserving our strengths through maintaining our team and our inventory levels, but also on laying the ground work for growth in a stronger market in the future,” Knight continued. “We have significant distribution center infrastructure expansion projects going in all regions as well as a business system modernization program underway, both of which will provide space in which to grow for at least the next ten years.”
Mouser Electronics also continues to invest in its business. During his EDS presentation, Glenn Smith, Mouser’s CEO and president, said inventory increased 20 percent last year to $396 million with nearly 700,000 part numbers on the shelf.
“It’s all about inventory,” said Smith. “If it’s not on the shelf, it’s not going to go into the design.”
To grow sales in 2017, Mouser plans to focus on adding more customers and subscribers. The global distributor also has activities in place to grow its web traffic, increase the number of parts shipped, and further increase inventory. Other focus areas include adding more content, delivering more service and quality, and additional automation.
One thing that never changes is distribution’s focus on new product introductions (NPIs). According to the Top 50 distributors report, 37 distributors expect NPIs to drive growth in 2016, up from 27 distributors last year. Along with the trend, we’ve seen many leading distributors build up their marketing and content around NPIs, applications and solutions to help drive the buying process.
Distributors also expect value-added services to help drive growth. In fact, many have increased their value-added capabilities and added new product lines to support the services. Specialization is a big part of this growth, particularly for small to mid-sized distributors.
One such distributor that I met with at EDS is Integra Electronics. The small specialty distributor of passives and electromechanical devices is partnering with several contract manufacturers to deliver complete solutions to its customers, who are primarily small to mid-sized companies that have limited resources.
Acquisitions also are expected to fuel growth for several distributors. However, we didn’t see much consolidation in the North American distribution industry in 2015.
One distributor that is experiencing robust growth primarily due to acquisitions is Sager Electronics. Sager’s acquisitions will make them a “power house” in power, said Morton, during the EDS presentation.
Knight said TTI is investing in segments that it views as particularly “bountiful” like transportation and power. “In part this is through acquisitions, most notably the moves our Sager subsidiary is making to accelerate their position as a leader in power supply distribution and value-add services, and in part some key industry hires we have made to help drive our global business in the transportation market segment.”
TTI also is developing new service offerings to add to its portfolio of supply chain solutions, some of which are designed for its supplier partners.
In 2017, distributors, in general, see growth opportunities coming from several sectors including industrial, lighting, and transportation. This is in line with the focus markets for many IP&E component manufacturers in 2016 – industrial, medical, lighting, and automotive.
Distributors and component manufacturers also expect significant growth potential from emerging markets, particularly the Internet of Things (IoT). Seventeen out of the top 50 distributors expect IoT applications to drive growth and eleven said smart grid/smart meters will be a big growth driver.
Click here for key findings of EPS News’ top 50 distributors’ survey. The report ranks the leading distributors by revenue in North America, along with their sales growth rates, sales breakdown by component category, and percentage of sales from value-added services. All of the top 10 distributors maintained their Top 50 rankings in 2015.