Back to school: soon-to-step-down interim Arrow CEO Kaufman talks distribution - News - Interview

Electronic News, Sept 2, 2002 by Ed Sperling

Steve Kaufman, interim CEO of Arrow Electronics Inc., spent time last week talking with Electronic News about the distribution industry, fee-based services and the overall economy. Kaufman, a long-time industry veteran who helped build Arrow into a distribution powerhouse, will return to a teaching position at Harvard Business School this fall. What follows are excerpts of the interview.

Electronic News: Is consolidation over in the distribution market?

Kaufman: In North America, there is a limited amount of opportunity for continued consolidation by Arrow or Avnet. There are always specific opportunities that might drive a deal, but in general the big merger stuff is over, other than a move by a group of second-tier companies to mount an attack. Pioneer is the next biggest, and they don't have the cash to do acquisitions. Future is private, so they can't raise the cash. But you could see one of them throwing in their cards with Nu Horizons and Jaco and Bell Micro. But short of that, big acquisitions are not likely.

Electronic News: How about overseas?

Kaufman: Europe is five to six years behind America in consolidation. In Asia/Pacific, meaning Hong Kong, Taiwan and China, that market has many of the same characteristics as the U.S. market did 30 years ago. There are a lot of small distributors, but no one has achieved as significant a position as they have in North America and Europe, which are dominated by Arrow, Avnet and some regionals.

Electronic News: There's been talk for years about real-time market pricing of electronics components, similar to what happens in futures markets. What's the role of distribution in all of this?

Kaufman: I don't think it can happen. The market is more complex than people think, and I have grave doubts that frictionless commerce will ever happen. So I don't think it can happen. First, you need franchise distributors to make this work. Second, if you take an order, you have to have inventory. Either that or you get parts from the gray market, and that has its own class of problems. It may happen for commodity components like DRAM and CPUs, but the bulk of electronics is connectors and passives. Not many companies want to buy those on a spot basis. The model doesn't make sense in this business. That's why the dot-coms in this area failed, including ones that Arrow invested in.

Electronic News: Arrow was one of the earliest proponents of fee-based services. Is that working?

Kaufman: We are having success with it. I would not pretend we are sweeping the board clean. But there are customers we talk to about this who are initially negative, and they ask us to explain it to them again. Things like an in-plant store, for example. We tell them we will sell them products at what they think is a fair market price and then charge for an in-plant store, which is nothing more than an on-site parts warehouse. We will offer the best warehouse even if we can't sell you parts, and we'll offer you parts even if we can run your warehouse.

Electronic News: Arrow also clearly has expertise in global supply chain management. Any plans to sell that expertise as a consulting service?

Kaufman: At this point, we don't see ourselves as consultants. Today, we are not interested in the consulting business. Our principal business is parts. When we can offer advice on setting up a supply chain, we will do that. But we are not charging by the hour or by the day. However, we are willing to sell information. We have a database with interesting data that we can mine in different ways.

Electronic News: Who's your typical customer?

Kaufman: Design engineers. If you're a design engineer and you pick a component, it's good if the components are early in their life cycle and there are three different manufacturers and 15 other customers. But you get slapped if there's only one manufacturer and the product is soon to be obsolete. We can tell them the difference between component A and component B. If they give us a list of 500 parts on a motherboard, we can flag those parts red, yellow or green. In a half hour, you can have a printout with red, yellow and green flags, and we can put that together because we have the largest database and we know what's being used.

Electronic News: How about sales-out information for manufacturers?

Kaufman: Every supplier already knows where every part is going.

Electronic News: From your vantage point, when will we start seeing positive proof of a recovery?

Kaufman: By February of next year we will clearly be in the recovery stage of this down cycle. I divide these cycles into four segments. First you're bumping along the bottom. We've been there for three to five months. Then you have two to three quarters of gradual recovery, with growth rates of 5 percent. That's followed by hot growth, which is 35 [percent] to 40 percent and lasts for four to six quarters. Then, to everyone's amazement, it collapses again.

Electronic News: Yes, but wasn't this downturn much steeper than in the past?

Kaufman: This is the first time in a long time that the industry collapse occurred with a macroeconomic collapse. And the frosting on the cake was the telecommunications downturn.