Where in the world is growth? - Distribution

Electronic News, August 19, 2002 by Corinne S. Bernstein

Just as mid-l9th-century pundits urged those seeking wealth to go West, electronics distributors' early 21st-century manifest destiny is to serve customers and build market share in the East.

This year's cloudy business climate hasn't derailed distributors' global focus, particularly on emerging markets in Eastern Europe and Asia. Distributors are reporting double-digit gains in these regions this year and expect even healthier growth when the global electronics industry recovers.

But a large part of the sales increases in Eastern Europe and China may be at the expense of growth elsewhere. Electronic manufacturing service providers and other manufacturers are shifting their operations from North America and Western Europe to capitalize on lower production costs, tax incentives and untapped potential in emerging countries.

"Everyone is seeing increased business in Asia, for example, but is that business that has been transferred or is that indigenous?" said Harriet Green, VP of global strategy and business development at Arrow Electronics Inc., Melville, N.Y. "We think indigenous business is preparing to pick up, but signs are not that dramatic. Globally, we think we're transitioning to an upturn. In the past, Asia transitioned first, followed by North America, then Europe."

Additional complications in calculating growth prospects in different regions are likely. Further shifts in the manufacturing base are inevitable.

"Customers can design products in America, pilot run them in Eastern Europe, and mass produce them in the Asia/Pacific," said David Ashworth, president and CEO of the U.K.-based Memec Group.

Distributors will target their global moves accordingly through a combination of acquisitions, partnerships and building new operations. Companies such as Arrow, Avnet and Memec already have facilities in almost every country. Others that were early to expand overseas include Future Electronics, Richardson and TTI. Still, there's room for more expansion.

"Any acquisitions from the large distributors will likely be in Asia, possibly in Eastern Europe," said Matthew Sheerin, VP at Thomas Weisel Partners LLC, New York. "I don't expect much consolidation in the United States--maybe some smaller deals."

The bottom-line is that distributors must be close to customers and suppliers. "When you're transitioning to an upturn, relationships with customers and suppliers are critical," Green said. "You want to make sure you have sales people to support customers and the ability to drive relationships with suppliers all over the world. Wherever our customers and suppliers want support, we have hard sites."

When National Instruments began production last October at its Debrecen, Hungary, facility-- the company's first overseas manufacturing site--its distributors, including Arrow, Avnet, Memec and TTI, were already established nearby. For the Austin-based company, having local access to the channel is crucial. National Instruments' production volumes vary from month-to-month and it needs local component suppliers to accommodate those shifts, said Jeff Eldridge, the company's commodity manager for electronic components.

Distributors' local presence is key for more efficient procurement, inventory management, and demand-creation and fulfillment, said Otto Kosgalwies, VP of sales and marketing for Europe at STMicroelectronics. "We're asking all our distributors to have a strong presence in all European countries--not just on paper," he said. "We expect our distributors to help us lay the groundwork for the mass market in Europe.

"We expect distributors to be there earlier than we are or at the same time," he added.

While component DTAM for North America declined 25 percent last year to $21.1 billion, it dropped only 14 percent to $13.3 billion for all of Europe, according to figures from U.K.-based Europartners Consultants. In Eastern Europe, however, component DTAM jumped 44 percent to $1.2 billion.

Avnet Inc.'s fiscal 2002 sales in Eastern Europe rose between 15 percent and 20 percent, according to Slobodan PuljareVic, the Phoenix-based distributor's senior VP for Eastern Europe. He expects that market to grow 25 percent in fiscal 2003, which began June 1. "This is minimal," Puljarevic said. "I would like to see more growth."

In Eastern Europe, EBV, which Avnet acquired two years ago, grew at twice the rate of the worldwide semiconductor market during the boom of the mid-1990s.

He estimates that sales from Eastern Europe account for 10 percent of Avnet's European sales, giving the company a25 percent to 30 percent share of that emerging market. "Eastern Europe and Asia remain equally attractive," said Andy Bryant, president of Avnet Electronics Marketing.

Avnet, which has acquired seven companies in Asia since 1995, employs 700 and has a $600 million run rate in the region, Raymond Tsang, president of Avnet's Asian operations said. He expects Avnet's headcount in Asia to reach 1,000 within two years. "Recently, we are more focused on growing the organic business, and further acquisition would be more strategic since we already have operations established all over Asia, except Japan," Tsang said.