Electronics distributors for years have been fighting the battle of differentiation. At various times, the channel’s arsenal has included global expansion, e-commerce and supply chain solutions. The battlefront has now moved to the design and engineering realm, and the stakes are getting higher.
Avnet Inc. has just unveiled its Design Center of Excellence in San Jose. The center is one of 10 Avnet facilities that provide design, onboarding and prototyping services to customers around the globe.
“Avnet offers full end-to-end capabilities to support customers at any stage of the product lifecycle including design, engineering, manufacturing, distribution and after-market services,” said Scott MacDonald, vice president of global integrated solutions at Avnet. “The new design center strengthens our manufacturing scope and scale to bring customers’ products to life.”
For decades, electronics OEMs have been outsourcing their non-core functions to their partners. Electronics manufacturing services (EMS) providers have taken over board building. Semiconductor fabs now produce ICs. Distributors manage much of the supply chain’s inventory. Now, both distributors and EMS companies are providing cradle-to-grave support services to their OEM customers.
“Customers want to drive expense out of their business model,” MacDonald explained. “We provide the opportunity for customers to design, develop and ‘prove’ their products before they move into volume manufacturing.” One key element in Avnet’s strategy is its software expertise. The San Jose center works with OEMs and independent software vendors (ISVs) in support of their integrated and data center solutions. “Customers no longer see hardware as their core strategy," MacDonald said. "Our customers believe their differentiation comes mainly through software. Our value is to help customers integrate hardware and software and quickly move their product into our global manufacturing environment.”
Avnet’s San Jose center features a capabilities showcase, a new product introduction and engineering lab, product warehousing and a state-of-the-art programming center; other centers provide manufacturing services. Distributors have typically avoided the latter option so they don’t compete with their EMS customers. But the market is changing, MacDonald said, and Avnet has to align its services with customer demand.
“While there is a level of ‘co-opetition’ between Avnet and EMS providers, our core manufacturing strategy is really in design and IP,” MacDonald said. Most of Avnet’s integrated solutions use off-the-shelf boards while its manufacturing operations support products designed by Avnet and its customers.
To be fair, EMS companies have also staked a claim in design, engineering and after-market services for OEMs. Profit margins on manufacturing-only services are razor thin. EMS providers have been moving up the design chain to bolster their earnings.
Distributors have found themselves much in the same boat. Margins on order-fulfillment services have been eroding for years; design-related activities command a higher profit. Distributors believe they have a leg up on the EMS competition. “EMS providers don’t have supplier relationships,” MacDonald said. “They don’t have visibility into new technology releases, pricing, or inventory as an asset. From the supplier perspective that is a significant differentiator for us.”
“We don’t run into EMS providers all that much as we have a different customer base and business model,” he added.
For distributors, supporting their suppliers is equally as important as serving OEMs. Vendors rely on distributors to promote their products anywhere in the world. Avnet built its San Jose design center with an eye toward duplicating the model worldwide. "We saw an opportunity to open the first of these centers in Silicon Valley and we will look at how we can scale this model," MacDonald said. Since Avnet already as a global footprint, more customers can design and develop their products locally. Vendors -- including companies such as Intel, Dell, Kontron, Microsoft, and Supermicro -- are providing positive feedback, he added.
“Avnet’s continued emphasis and investment in design support will positively impact data center, IoT and other advancing technologies,” said Intel’s Dhiraj Mallick, vice president of the Data Center Group and general manager of the Innovation, Pathfinding and Architecture Group. “Intel is proud to have our technology driving many customer and platform demos in the showcase featuring our Intel Xeon Scalable Processors, Intel Omni-Path HPC Fabric and Intel Optane technology.”
The challenge for distributors remains proving their value to both suppliers and customers. In the components world, semiconductor maker Texas Instruments has scaled back a program that rewards distributors for design work. Nevertheless, distributors continue to add services that lighten OEMs' load and extend far beyond inventory management.
"The way the market looks at hardware is changing," MacDonald said. "Hardware is still being consumed, but it is being consumed differently. Today customers offer more value through software. So they may lean even more on distributors to manage the hardware for them."
"Every customer is different," MacDonald concluded. "We have to make sure we have the right service model aligned with how our customers expect to be served. That might mean building a 'white box' reflecting their brand and packaging; repairing and services their products; managing them through the end of their lifecycle and everything in between. Our job really is to take customers where they want to go."