Damron Looks Five Years Out

Electronic News, April 23, 2001 by Rob Spiegel

What will electronics distribution look like in five years? This is the third in a series of interviews with industry leaders and experts in electronics components distribution. We've asked our participants how they perceive the industry's future. Our third prognosticator is Robert Damron, managing director of Tucker Anthony Sutro Capital Markets in Milwaukee.

EN: Will the distribution business become more diversified in its products and services? More consolidated?

RD: As parts of the electronics industry slow, others will likely accelerate. The large distributors will therefore look to new and different products and services to help drive the growth of the business going forward. However, if a distributor does not believe it is receiving maximum value for certain segments of its business, it may choose to spin out one or more segments into separate companies.

EN: How will the industry's product mix change? Will there be more there be more products related to wireless? More products related to Internet devices?

RD: Although PCs and related equipment drove the growth of the industry in the '90s, it is not expected to be the driver of the growth this decade. Going forward, electronic component growth will likely be driven by wireless and Internet devices.

EN: Distribution players: Will the industry continue to consolidate down to two major players?

RD: Arrow (Electronics Inc.) and Avnet (Inc.) are the clear leaders in electronics distribution, and we believe they will continue to take market share over the next five years. However, the industry will also likely support a few smaller, niche players providing a high level of customer support in specific technologies.

EN: What is the future role of automation? What forms of Internet-based automation tools will contribute to distribution development? Design collaboration? CRM? Supply chain?

RD: Most third-party Internet marketplaces are either dead or soon will be. However, Internet as a tool for distribution will continue to grow and result in more efficiencies for everyone in the channel. Additionally, most outsourcing trends are alive and well. OEMs and CEMs will continue to outsource design and inventory management services to the distribution channel.

EN: Globalization: Will a smaller percentage of sales come from North America? What geographical area will lead industry growth?

RD: Over the next five years, it is likely North America will become a smaller percent of the worldwide electronics distribution market as other regions of the world experience accelerating growth. We would expect the fastest growth to come from the Asia/Pacific region.

EN: Picture the distribution industry five years down the road. Will productivity be enhanced? Will the product and service mix evolve?

RD: Every year, distribution in aggregate lowers its operating expenses as a percent of sales. We believe this trend will continue over the next five years as the large distributors get larger and enjoy more economies of scale and benefit from improvements in technology. Furthermore, we expect fee-for-service agreements to become more prevalent in the years to come.

EN: Will the next five years prove that disintermediation was just a myth?

RD: Distribution is alive and well. In many cases, distribution is the most efficient sales channel in the industry. There may be other players in the industry that can offer one or two of the services distribution provides. However, distributors are the only players in the channel that can provide one-stop shopping, next-day delivery, inventory management, kitting, programming and credit all under one roof at a competitive price.

EN: What do you think will be the biggest surprise in electronic distribution over the next five years?

RD: After many years of declining margins and return on invested capital, we believe the industry will see a reversal in this trend and begin showing better financial results over the next few years. With fewer weak players competing on price, the two dominate players will likely show more pricing discipline and charge more appropriately for the products and services that they provide.