Electronics Distribution No Longer a Two-Horse Race

At the end of the year, Avnet Inc., the longtime global revenue leader in combined components and systems sales, is going to look very different from the company that recently celebrated more than 60 years in the electronics distribution business.

$26.2 billion Avnet and its nearest competitor Arrow Electronics Inc., with sales of $23.28 billion in 2015, have operated very similar business models for more than three decades. Both distributors have split their businesses between electronics components and IT systems sales. Although both product groups sell to very different customers, their commonalities have been enough to keep both distributors in those markets.

Avnet’s sale of its $9.6 billion Technology Solutions (TS) business is going to change all that. After the sale, the majority of Avnet’s business will be in electronics components with total revenue of roughly $17 billion.

In recent years both Avnet and Arrow have tried to leverage their components and systems businesses as a kind of one-stop shop for electronics OEMs. As components have become more dependent on software for their functionality, distributors have started to provide programming and other services that have spanned both devices and systems. For example, Avnet’s embedded systems business once resided within Technology Solutions but more recently fell under the auspices of Electronics Marketing (EM). Avnet’s IoT efforts have also spanned both business groups as security and software have become key elements of a robust Internet of Things.

In late 2105, Pascal Fernandez, vice president of Avnet Velocity, EMEA, described Avnet’s plans for “The Supply Chain of Things” to EPSNews. Its effort spanned both Avnet EM and TS:

“Services are going to make the difference in the IoT market — some companies are even considering giving the hardware away for free and that will give them an entry point [into the market],” said Pascal Fernandez, vice president of Avnet Velocity, EMEA, a business unit of Avnet Inc. “Competitiveness no longer depends on the cost of the hardware but also the enabling of the hardware which is really exciting. The reason we think we are at the center of the IoT is we are connecting the dots of the technology on one side and hardware on the other, from sensors to servers.” “

Avnet, a global electronics distribution company, spans the hardware, software and service businesses. In hardware, Avnet’s primary businesses are electronic components and enterprise computing equipment. Over the years, both suppliers to and customers of electronics distributors have demanded more of their channel partners. Avnet has expanded into services that support both these constituents. The distributor now provides product design and integration services; hardware and software configuration; logistics and reverse logistics and more recently what Avnet calls “the Supply Chain of Things.”

“We have the technologies and the products such as sensors; we have solutions in servers and the cloud; we can connect the components to the products and get the products to connect through software and the enterprise platform and also to cloud services,” said Fernandez. He describes the IoT as an ecosystem in which distributors are best suited to orchestrate the supply chain. “We have the technologies and the products such as sensors; we have solutions in servers and the cloud; we can connect the components to the products and get the products to connect through software and the enterprise platform and also to cloud services,” said Fernandez. He describes the IoT as an ecosystem in which distributors are best suited to orchestrate the supply chain.

Avnet and Arrow have also spent considerable money on reclamation and recycling services for computers and systems. The concept, executives have said, is to provide end-of-life services for customers that want to upgrade to new equipment and securely dispose of old and obsolete equipment.

In 2013, EPSNews wrote:

In the electronics supply chain, the industry’s two largest authorized distributors, Arrow Electronics Inc. and Avnet Inc., have made major investments in reverse logistics. Avnet recently folded its Avnet Integrated Services unit into its Technology Solutions global business.

In addition to focusing on taking back, repairing and recycling used equipment, the Avnet Services unit is providing a complete life cycle management service. On the front end, Avnet Services helps customers select and configure IT products and equipment; supports equipment through its useful life; and then can take it back and redeploy it into a secondary market. Used equipment is also used to secure spare parts, and anything that can’t be reclaimed is recycled or disposed of. Avnet owns the companies that provide these services.

Of course, things change. Avnet Technology Solutions has been struggling in recent years. Avnet TS has had more exposure to low-margin portions of the IT and systems business than competitor Arrow. Avnet has a high exposure in PCs, for example. IBM contributes roughly 30 percent of Avnet’s computer sales, while Arrow’s exposure is between 10 percent and 15 percent. Avnet TS also has significant exposure in Asia, which accounts for roughly 13 percent of its computing sales.

The distribution industry is also undergoing a “digital revolution” where customers are demanding more online products and services. Avnet has been lagging in those efforts and hopes to catch up through its acquisition of Premier Farnell. In 2011, Premier Farnell formed the element14 engineering community and has since invested in a variety of design tools and related capabilities. By engaging with engineers, distributors get involved with product designs early in the process and capture of larger share of customers' spend as products move from concept to production.

If Avnet is successful in its bid to acquire Premier Farnell plc -- and indications are it will -- it should also increase its margins in component sales. Premier Farnell, parent to North America’s Newark element14, operates mainly as a catalog distributor specializing in high-mix low-volume sales. Engineers, the primary buyers from electronics catalogs, are less price sensitive than customers the in high-volume fulfillment segment.

However, there are still a number of questions that remain even after Avnet’s conference call with analysts earlier today.

Avnet embedded:

Avnet is going to retain its embedded business, according to executives. Avnet embedded was made a global business earlier this year under the leadership of Avnet veteran Ed Smith. Smith abruptly left Avnet late last month. During today’s call executives said the embedded business was part of Technology Solutions but would now become part of EM.

Avnet recycling and reclamation services:

There was also no discussion of Avnet’s reclamation and recycling businesses that serves both EM and TS.

Avnet's focus is clearly more about financial stability than differentiating itself from Arrow. According to the Wall Street Journal, Avnet said it expects a gain of between $3.75 and $4.75 a share from the deal. Avnet shares rose 8 percent to $42.31 in midday trading on Monday. The comparisons between Arrow and Avnet are likely to fade as Avnet exits the systems business, but overall, the race remains interesting.