Over the past few months the complexion of the electronics distribution industry has radically changed. Qualcomm’s acquisition of NXP has marked the largest supplier merger to date; and distributor Avnet Inc. sold off its systems business and acquired catalog competitor Premier Farnell. Although those two events don’t directly impact leading IP&E distributor TTI, Inc., this type of consolidation has implications for the greater electronics supply chain.
“We look at this activity all the time, keeping in mind we have made a commitment to the specialty distribution model,” said Phil Gallagher, president, sales and marketing for TTI Americas, corporate officer and senior vice president for TTI, Inc. “We believe that is our value proposition and that there are many ways we can continue to succeed in the market as a specialist.”
Many specialty distributors were swallowed up during the industry’s massive consolidation wave of the 1990s. TTI, and subsidiaries Mouser and Sager avoided that fate. Mouser has maintained a laser-like focus on the engineering market and Sager, like TTI, carries IP&E devices but has staked a leadership claim in power components and solutions.
“If you think about the TTI family of companies,” Gallagher added, “I see the relevance of these businesses as greater combined than separately. The key for us is managing those companies with a business model that works the best for our customers and suppliers…visually it might look like the linking of the Olympic rings, there is overlapping opportunity, but each ring is also complete alone.”
TTI, Mouser and Sager all are part of Berkshire Hathaway, an investment group known for its hands-off management of acquisitions. The three distributors share some common backroom resources but have distinctly different products and customers. Gallagher, who worked at Avnet for 30+ years, has immersed himself in supplier and customer visits for the past eight months for a crash-course in specialization.
“I won’t compare broadline to specialty outright, but I will say that specialization brings a depth of product knowledge that allows TTI to differentiate itself,” he said. “When you live and breathe something every day, it is natural that you will become experts – specialists, if you will. In meeting after meeting I’m amazed when a customer asks about a product or a part number our people know about it in depth. I’m really not taking a shot at broadline distributors; it’s just that when you focus like this, you truly are different in the marketplace – that expertise is important to suppliers who appreciate distributors who focus to this degree on their products."
The demand-creation dilemma
Many suppliers provide an incentive for distributors to secure a spot – or “create demand” – for their components in an OEM product design. Distributors receive a few extra margin points on volume sales when the product reaches production. However, leading semiconductor supplier Texas Instruments Inc. recently eliminated its demand-creation program and brought its design-in efforts back in-house—a move that represents lost business opportunities for distributors.
Historically TI has been a trailblazer in distribution practices and the possibility that other suppliers will follow their lead concerns many in the supply chain. “We’ll see how it plays out,” Gallagher said. “It’s a big move by TI. That said, we’ve seen this before – TI and other suppliers have emphasized demand creation or order fulfillment at one time or another. For a distributor, I think it’s all about your ability to adapt in a shifting environment, the industry is transitioning all the time.”
One of the challenges for distribution is an investment in engineers. Engineers don’t directly drive sales, so distributors spread engineering costs across a variety of suppliers and customers. Gallagher points out that there are always suppliers willing to work with their distributors on demand creation. “As a distributor, you don’t just sit back when things change—you’ve developed [design] resources and you can double down with your other suppliers and still go after those sockets,” he said. “TI’s distributors will figure out what to do.” Gallagher added that he doesn’t expect there will be a wholesale shift away from demand creation programs; distribution, he said, is still the best model for many suppliers to efficiently maximize their reach into a broad customer base.
TTI does not have a classic FAE program; it has dedicated specialists recognized as subject matter experts aligned to their particular area of expertise, whether it be in the technology arena with sensors, circuit protection, discretes, power and connectors; or within vertical segments such as industrial and TTI’s Transportation Business Unit, (TBU), Gallager said.
Ultimately, the goal of demand-creation programs is to generate volume sales. Although distributors have become one of the last sources in the supply chain for high volumes of inventory, publicly traded distributors often face pressure from Wall Street if their stock levels are perceived to be too high. This is another area where TTI sets itself apart. Although Berkshire Hathaway is publicly traded, TTI and its subsidiaries aren’t driven by quarterly results.
“We still see the business benefit of always having available to sell inventory,” Gallagher said. “We think inventory matters. We can look at the market over a period of time and not have a knee-jerk reaction to Wall Street. TTI looks at long-term value and long-term reward, which allows us to make strategic investments in inventory. That helps us maintain our – and our suppliers’ -- fair returns. We bring more value to our supplier and customers.
M&A has been a constant in the supply chain and Gallagher doesn’t see that changing. Supplier consolidation has pros and cons for the channel: a merged supplier offers a wider variety of products and two supplier relationships are whittled down to one. In distribution, the big are getting bigger but that doesn’t equal differentiation. “You can’t control the market,” Gallagher said. “What really matters is how you compete. You can try to steal market share away from a competitor, or you can provide customers with a compelling reason to buy through distribution. The most important thing is how you adapt.”
Although TTI is not necessarily known as an acquirer, the company quietly has made quite a few acquisitions. Over the past 20 years, TTI has acquired 15 companies, in all regions of the world. Most notable in the Americas, TTI acquired Mouser in 2000 and Sager in 2012. “We have a model we use for any company coming into the TTI family that vets the company strategically, culturally and financially,” Gallagher said. “If we find something that fits our established criteria, we certainly will take a look. “