Analog Devices Inc. (ADI) is not commenting on changes in its distribution network now that the acquisition of Maxim Integrated Products has been finalized. But Phil Gallagher, CEO of distributor Avnet Inc., is addressing the merger for the first time since Maxim dropped two of its global broadline distributors, Avnet and one unconfirmed company.
“The recent successful acquisition of Maxim Integrated has expanded Analog Devices’ product and solution portfolio significantly,” said ADI in a statement. “While we are not commenting on specifics, any changes in our distribution strategy will continue to put our customers at the forefront of everything we do as an organization, making their interactions with our company as seamless as possible.”
Maxim’s distribution lineup follows the playbook established by Analog Devices after its acquisition of Linear Technology. In 2017, ADI consolidated its global fulfillment business under Arrow Electronics Inc., which also provides design services for the analog supplier. ADI/Maxim is retaining all of its low-volume distributors, including the Farnell catalogs, which are a unit of Avnet.
Arrow Electronics historically has not commented on suppliers’ distribution realignments.
Although Maxim accounted for roughly $500 million of Avnet’s sales (about 3 percent of Avnet’s total $19.5 billion FY 2021 revenue), Gallagher is confident that business can be transitioned to other Avnet product lines. Maxim’s disengagement will be carried out over several months and Avnet will not be revising its quarterly forecasts, he said.
“We don't see it affecting our earnings through the balance of the fiscal year,” Gallagher told analysts on Avnet’s FY 2022 Q1 earnings call. Avnet reported first quarter sales of $5.6 billion, up 18.2 percent year over year. “We have plans in place. We've got great supplier partners that have parts of that technology, and we're mapping that over, and that's going to be the goal for the team. We see the opportunity to replace the [Maxim] business.”
Avnet and several of its global volume competitors have been here before. Texas Instruments Inc. discontinued its distribution incentive, or demand-creation, program in 2017 and in 2019 dropped six distributors in a significant blow to the channel. TI had historically used distribution widely and had no prohibitions regarding competing lines on distributors’ shelves.
Demand creation or “design-win” incentives are paid by suppliers to distributors that secure a spot in an OEM product design, often in the form of higher margins or a period of sales exclusivity. Since design-win programs are tied to volume sales, losing a supplier’s line is costly for distributors.
Supplier consolidation has always impacted the distribution channel. TI opted to directly service its customers with the exception of global fulfillment orders handled by Arrow. Following M&A, supplier product portfolios are often merged and sold by fewer distributors. Avnet had a long history with Maxim which had not distributed through Arrow. “This time, the ball didn’t bounce our way,” said Gallagher, but pointed out Avnet has also benefited from chip mergers.
“Cypress was acquired by Infineon. We've got that. Microchip acquired Microsemi. We've got that back. Renesas acquired IDT and Dialog, and that's in the Avnet house,” he said. “Our job is to adjust to that. We can't predict. All we can do is go drive and execute to the value proposition we're bringing to the marketplace.”
Component manufacturers rarely adjust their roster of catalog -- or low-volume -- distributors that serve the design and engineering community. Orders are smaller, require a high mix of components and are priced higher than volume transactions. Avnet’s engineering customers can still buy Maxim through Farnell.
“Thirty percent of Avnet’s overall business is still tied to demand creation even with line losses,” said Gallagher. “I’d say semiconductor companies are still dependent on the channel and nobody is looking away. There will always be line card adjustments.”
Catalog sales also command higher prices and profit margins, are easily handled via e-commerce and are usually shipped immediately. Volume orders are subject to component lead times which can now stretch as far as 25+ weeks.
Avnet has been investing in Farnell and its overall e-commerce operations by adding inventory, improving visibility across the Avnet businesses and providing more self-service tools.
Farnell reported record revenue of $455 million in Q1 2022 and operating margins of 10.9 percent. Fifty-three percent of Farnell’s revenue and 69 percent of total transactions were attributed to e-commerce sales. Avnet plans to add 250,000 SKUs to the Farnell businesses through its fiscal year.
Supplier adjustments have been a constant in the distribution industry and Gallagher doesn’t expect that will abate. Advanced Micro Devices' pending acquisition of Xilinx is not expected to impact the channel. Xilinx and Avnet have had a de facto exclusive relationship for decades and Avnet is a longtime distributor for AMD. Xilinx rival Altera, now owned by Intel, was historically aligned with Arrow. The two FPGA leaders have avoided sharing shelf in the channel although that hasn't been an issue with Intel.
“With supplier consolidation, sometimes you win, sometimes you lose, and sometimes they're neutral. But it's not new. I've been around for four decades. And when I started at General Electric, Intersil, Fairchild, National and Motorola were the top lines. They’re all gone,” said Gallagher.
"There's no question there's going to be something else happening out there,” he added. "Avnet is in its 100th year of business. To be around 100 years, you just got to adapt and move on, and that's what we're doing with this one.”