Analog Devices Inc.’s realignment of its channel strategy has implications beyond the companies directly involved -- ADI and acquisition Linear Technology; and distributors Arrow Electronics Inc. and Avnet Inc. ADI’s move could prompt other semiconductor companies to reconsider their distribution options.
A distributor’s supplier roster works a bit like a sports team. If the five-time Super Bowl champions, the New England Patriots, traded any of its three quarterbacks (heaven forbid), the other 31 NFL teams would immediately review their rosters to see how they could benefit from or offset the Patriots’ decision. ADI’s decision to align exclusively and globally with Arrow and drop Avnet could prompt two of ADI’s rivals, Texas Instruments Inc. and Maxim Integrated, to make a countermove.
Suppliers don’t just use distributors to warehouse and resell their components. Distribution is also a supplier’s window into the global OEM/EMS customer base. Both Arrow and Avnet currently share, with ADI, the distribution customers that are buying ADI components. Now that Avnet is losing the ADI line its best move is transitioning its ADI business to another vendor. The vendors most likely to benefit? Texas Instruments and Maxim. TI is carried by both distributors; Maxim is distributed through Avnet.
Exclusivity is a great deal for distribution. Any volume order that ADI/Linear doesn't handle directly will flow through Arrow. Avnet could make a compelling pitch to its remaining analog suppliers: it now has a two-pronged strategy -- Premier Farnell's catalog business and Avnet’s global supply chain services. Catalog distributors focus on small orders for engineers and designers; and catalog sales can lead to volume engagements. (Although Arrow fulfills small engineering orders, it does not have a distinct catalog business.)
This kind of maneuvering harkens back to the days when suppliers wouldn't be sold alongside their direct competitors within one distribution organization. This reluctance to "share shelf" with a rival dictated the supply chain's M&A activity through the late 1990s. If two distributors merged, one supplier would drop off the line card. If two suppliers merged, they'd usually drop one or more distributor(s). Some of the more famous examples of shelf-sharing were AMP and Molex; ADI and Maxim; Xilinx and Altera; U.S. semiconductor suppliers (specifically Motorola and National Semiconductor) and Japanese chip makers; Japanese chip makers and Korean semiconductor suppliers.
Suppliers did this to gain maximum attention from their distributors. Under the ADI/Arrow agreement, Arrow is going to step up its design and engineering support for the ADI/Linear Tech product lines. These companies support demand-creation programs that reward distributors -- usually through higher resales margins -- for getting their devices designed in to an OEM end-product. Texas Instruments late last year discontinued its demand creation program with distributors, so ADI/Linear will garner a lot of attention from Arrow. Still, Avnet has an additional ace up its sleeve: Maxim. Avnet could encourage its existing ADI customers to transition to Maxim.
ADI and Maxim did share shelf at Avnet for a number of years. Due to massive consolidation within the distribution industry (driven largely by Avnet and Arrow) competing suppliers eventually had to make a choice: share shelf with rivals or lose the exposure provided by the industry’s two largest distributors. ADI and Maxim both ended up with Avnet through M&A, and now Altera, through its affiliation with Intel, shares shelf with Xilinx at Avnet.
The big question is, will TI pare down its channel? Industry sources say that's unlikely. TI has long been "agnostic" regarding competing lines: TI was sold alongside Japanese competitors when that practice was unpopular. Arrow is now the biggest electronics distributor in the world and its TI sales are said to be considerable.
Moreover, TI is no longer looking to its distributors for demand creation, and sources say its transition risk is low. Customers that use analog technology in their designs don't swap products that easily: analog is a tricky specialty. Converting customers from one supplier to another is easier said than done.
Time for the unprecedented
However, nothing is unprecedented anymore. Shelf-sharing has largely gone away; and TI's retreat from demand-creation was at one time unthinkable.
Now, a new competitive battle is brewing. Resale margins on components have been declining for decades. Twenty years ago a design-win could net a distributor as much as 25 margin points. Nowadays it's closer to 20 depending on the supplier. Fulfillment margins are said to be in the 5-to-10-point range. Distributors and suppliers are essentially competing with one another over extra margin points.
"Distributors are still investing in demand-creation by building up databases of engineers, creating design communities and providing extensive technical product information to designers," Bolaji Ojo writes in Avnet Evolves and so Must the Electronics Supply Chain. "In the meantime, some suppliers have announced direct, go-to-market sales strategies, cutting or threatening to cut distribution out of the demand-creation business."
If more suppliers follow TI's lead, demand-creation programs could be extinct. They are already pretty tenuous: only a handful of suppliers offer robust design-win compensation plans and not all design-wins (less than half, in fact) lead to volume sales opportunities. Distributors would be competing over the low-margin fulfillment business -- and likely undercutting each other's prices. That benefits no one.
"Distribution is in peril of losing its prime position in an industry filled with too many disintermediate players trying to snatch or whittle down its already paltry margins," Ojo writes. "Suppliers are restless and no longer quite as reliable a group of partners as they once were. Worse, OEMs have become extremely self-centered; the supply chain, or supply network as some prefer to call it, is tenuous. We have entered a world of everyman for himself."
Distribution should consider some unprecedented moves of its own. Passing the costs of demand-creation on to customers -- rather than relying on suppliers for compensation -- is unheard-of. It would require tighter bonds between suppliers and distributors and a lot of unpleasant conversations with customers. But it could also stabilize profit margins, expand demand creation programs, and reduce roster realignment. In short, it could mean suppliers and distributors are finally playing on the same team.