Design work for nothing: distributors lose their product-buy overseas

Electronic News, Nov 11, 2002 by Rob Spiegel

Distributors expanding into the Asian market are finding it difficult to get paid for their component and system design work.

When the bill-of-materials (BOM) gets shipped to an Asian contract manufacturer, the manufacturer often shops the bill-of-materials out to its own suppliers. But distributors typically contribute the design work at no charge, contingent on selling the component. If the component sale walks off to China, the distributor ends up empty-handed.

Many distributors claim that tracking their designs to make sure they get compensated has become a growing challenge. "It's a huge problem," said Bruce Goldberg, president and CEO of Miami-based All American Semiconductor Inc. "I don't know that we're getting the buy."

In getting credit for design work, distributors often find themselves at the mercy of their suppliers. "We have to rely on the supplier to let us know if [the contract manufacturer] bought from someone else," Goldberg said. "Sometimes they know and sometimes they don't."

Part of the problem is that the distributor doesn't necessarily have the franchise in the country where the manufacturing gets done. "When the demand is local, say in Boston, Detroit or Dallas, the compensation is in the piece/part rate," said Phil Gallagher, senior VP of global business development at Avnet's Electronics Marketing in Phoenix. "If it goes to Asia, we may or may not have the franchise. More often we do."

Yet even having the franchise doesn't mean the compensation for design is assured. "We're not guaranteed to get the sale, and it may be at a different margin," Gallagher said.

Not all distributors agree there's a problem with drifting design wins. Executives at both Nu Horizons Electronics Corp. of Melville, N.Y., and Memec plc of San Diego noted they have systems in place that tie design to part sales globally. With 75 percent of its business tied to demand-creation, Nu Horizons is plenty motivated to make sure it gets paid for design. Avnet has a smaller percentage tied to demand generation at 20 percent to 30 percent, though the gross dollars are likely greater.

"It really comes down to tracking the business," said Arthur Nadata, president and CEO of Nu Horizons, noting that the company has decided not to rely on its suppliers for its data. "We have a design tracker that truly tracks from the inception of design to the contract manufacturer in Asia. If we have an automatic split [an agreement to share revenue for design work], we can report all of it."

Nu Horizons shares its design tracker with key suppliers, for a fee. "We offer it to suppliers as a [third-party logistics] fee for service," said Nadata, who acknowledged that the motivation to create the information system was concern over compensation. "You have to be paranoid."

Phil Sansone, president and CEO of Memec's Unique Americas unit, agreed the challenge of getting paid for design work is growing with globalization. Memec derives a good portion of its business from design creation, so Sansone views the problem as simply part of doing business.

"It's a reality. We're seeing the trend, but for us, it's part of the business process where we track the [bill of materials] to Asia," Sansone said. "And we're doing well in booking the business there."

He noted that part of the solution is to be on the ground in Asia. "If you have a name and you've been doing business over there for a number of years, it helps you to overcome those obstacles," Sansone said. "For companies just entering, it's a whole new game."

Distributors that are not getting fully compensated for designs are looking to their suppliers to help solve the problem of compensation. "I don't know what the end-solution will be, but we will have to get paid," said Avnet's Gallagher. "If suppliers want us to, we can identify the cost--it's a fixed overhead."

Goldberg also would like to see suppliers participate in solving the problem. He suggests suppliers share information about what parts the contract manufacturers are buying, or not buying, in Asia so distributors can get compensated for the design investment.