Designing Distributors

Electronic News, Nov 30, 1998 by Heidi Elliott

NEW YORK--Move over Cadence, Avnet Inc. is moving into design services.

At its investor meeting here last week, Avnet executives told analysts the Avnet Design Services (ADS) group could be its next Integrated Materials Services--the supply chain management division which has experienced a compound annual growth rate of 40 percent since its inception a few years ago. IMS now represents $1 billion of Avnet's nearly $6 billion in revenue. And analysts say it could be the next big thing for Avnet and for electronics distribution as an industry.

What IMS brings Avnet in new procurement business, ADS could do by providing engineering and design support for customers facing the challenge of integrating increasingly more complex component technology in shorter time to market cycles, many believe.

"We're looking to invent new marketing segments--design for microcontrollers, programmable logic, and supplier IP that is usable across different markets," CEO Roy Vallee told a group of more than 30 analysts gathered at the Omni Berkshire hotel to hear the company's plans for the future.

"Avnet Design is in its infancy now, but it's the next IMS," said Brian Hilton, co-president of Avnet Electronics Marketing. "There's a trend toward third-party IP. We see an opportunity to take the vendor's IP and add software." "I think it's exactly where distribution should be," said Gary Smith, chief analyst for EDA worldwide at Dataquest.

Three Operational Groups

At Avnet Design Services, the unit is broken out into three operational groups: demand-creation, design services and professional services (the creation and licensing of IP.) ADS was formed in September as a formal unit in the company, and is headquartered in Arizona. The company has three design center locations--New Zealand, India and Arizona and right now it's a small part of the company's overall business, perhaps about $30 million.

However, there's much potential. Dataquest estimates the worldwide IP market to grow at a compound annual rate of 32 percent.

Dataquest calculates the market this year to reach $1 billion, and grow to nearly $1.5 billion next year. Smith said distributors like Avnet and semiconductor specialist Wyle have a great opportunity to grab a chunk of the outsourcing market for design services. In fact, Smith compared Wyle's design capabilities to those of LSI Logic, saying they were in the same league.

The trend is similar to the overall outsourcing movement--companies are determining that they can jettison their own design operations, and save money while putting their concentration on core competencies. Target companies for distribution design services, which Smith defines as "lower mainstream," cannot afford tool seats of $150,000, and large EDA companies focus on only the largest customers. EDA industry giants don't go after the lower mainstream group, so it's a prime market for distribution, argued Smith. He said "$150,000 is a big investment for (the lower mainstream,) so outsourcing is a good idea. And that's the distributor's land. The TAM, the potential, is really with the distributor."

Great Potential Cited

Though distributors have been doing design work for years, Avnet and analysts contend the potential for pushing into that market space is great. And, said Avnet's Hilton, the path toward this trend has been in the making for years. "It's a migration path," Hilton said. "In the late 1980s, companies outsourced manufacturing. In the '90s, it was procurement. Now there's a move to outsource engineering and design services. We really expect to grow this business over the next three to five years."

Distribution analyst Clarke Walser, principal with Walser & Associates in Arlington Heights, Ill. said distributors will have to offer more services to stay competitive in the industry. "Most major distributors have been trying to create a group of businesses that direct the right combination of goods and services to the different customer segments," he said. "There's no question in my mind but that services of all kinds are going to (loom) larger in distribution. To get a better gross margin, you better bring something else than components to the table."u