Texas Instruments Inc. has further pared its distribution channel, notifying global distributor World Peace Group (WPG) and Asia-Pacific distributor WT Micro that it was terminating those relationships, effective December 2020.
TI told global distributor Avnet Inc. last week that it was ending their franchise agreement. The latest announcements are consistent with the evolution of TI’s channel strategy.
“Over the past several years, we have been evolving our distribution network to better align with our strategy to establish closer, more direct relationships with our customers,” TI’s spokeswoman told EPSNews. “As we build these direct relationships, we won’t have as much business flowing through the distribution channel and will require fewer distributors.”
TI’s approach to distribution has changed radically in recent years. TI never practiced “shelf-sharing” prohibitions which essentially discouraged distributors from selling TI competitors. It engaged with most national – then global — distributors and was generous with its demand-creation programs.
Under such arrangements, suppliers reward distributors for assisting customers with product designs. TI discontinued demand creation incentives in 2017. The move rendered distributors solely as fulfillment partners – managing inventory, delivering products and providing other supply chain services.
Distributors have been leaning on demand-creation services as component margins have declined. Demand creation rewards typically come in two forms. If a distributor secures a socket in an OEM design, suppliers provide a higher profit margin on volume sales if the design reaches production. Other programs pay distributors a set amount for their design assistance.
Avnet, WT Micro and WPG will have a year to transition their customers to products from other chip suppliers. However, some of that business may also shift to other resellers. Arrow Electronics Inc. is the industry’s largest distributor.
“While Avnet and Texas Instruments (TI) have had a long-standing relationship, TI made changes to its distribution strategy and is moving toward selling directly to its customer base,” said an Avnet spokesman. “As a result, Avnet and TI will be ending their distribution relationship by December 31, 2020. We respect TI’s decision and we will continue to work together through this transition.”
Avnet, which carries hundreds of chip lines, will continue to pursue opportunities to support its current and future customers, reduce operating costs, and further strengthen its current and future supplier partnerships, according to its 8-K.
The distribution channel overall is weathering a tough 2019. Following a year rife with component shortages and allocation, distributors have seen demand decrease in the first three quarters of the year. The industry’s two largest global distributors reported sliding sales: Avnet’s fiscal Q4 sales of $4.7 billion declined 7.5 percent from a year ago and 0.4 percent from the prior quarter. For its fiscal year ending June 2019, Avnet’s sales increased from $19 billion to $19.5 billion. Arrow reported second-quarter 2019 sales of $7.34 billion, a decrease of 1 percent from sales of $7.39 billion in the second quarter of 2018. Second-quarter sales, as adjusted, increased 2 percent year over year.
Profit margins on electronics components have been eroding for years, which has created tension between suppliers and distributors. To retain a larger portion of their profits, suppliers are cutting back on demand creation programs and paring their distribution rosters. At the same time, distributors are adding engineers to assist customers with designs.
Catalogs, or low-volume distributors, focus on high-margin engineering orders for product designs. Avnet has tapped into this market via its acquisition of Premier Farnell in 2016.
Texas Instruments has historically carried a broad distribution roster. In the Americas, TI currently lists Arrow, Avnet, Digi-Key, Mouser and Rochester Electronics as its resellers; in Asia, TI sells through the same distributors plus World Peace Industrial Group (WPG) and WT Group. In EMEA, Eastronics, Compel, MT Systems and Telsys join TI’s core global distribution roster.
TI has a robust engineering and sales presence around the world and is well-equipped to manage direct relationships with customers, industry sources say. It has also maintained a broad product portfolio while many of its competitors have spun off into smaller, specialty companies.