Value-added keys growth in difficult year

Electronic News, Dec 2, 1996 by Bernard Levine

The growing dependence of parts manufacturers and customers on the distribution channel really paid off for distributors in 1996, enabling the franchised industrials to post at least some modest sales gains despite a tough business environment.

Distributors have long touted their value-added thrust, and it played a major role in helping them coax a bit of growth from a difficult year that otherwise could possibly have seen their total sales numbers go negative.

Another key factor promoting some distributor sales growth this year has been the increasing percentage of business being turned over to distribution by such major parts makers as Motorola, who want to maintain on an OEM-basis primarily a reduced number of their larger accounts.

Once the Christmas rush is over and everything is added up, franchised industrials should post just over 3 percent growth this year, according to EN market research, which falls in the middle of the general distribution industry consensus of 0 to 5 percent. With the total worldwide semiconductor market (OEM and distribution) expected to decline as much as 10 percent this year, distributors might have suffered a similar fate if not for kitting, EDI, autoreplenishment and other value-added services which continued to mushroom through 1996.

Even though the distributor growth percentage didn't turn negative in 1996, it certainly flattened from the booming increases of the past few years. This year has been quite a comedown from the 25 percent plus growth the distributors had become accustomed to, but most forecasters expect modest double-digit growth to resume in 1997, with EN market research predicting an overall hike around 12.5 percent next year for distributors of active and passive components.

"In an era of downsizing and outsourcing, customers and suppliers are increasingly turning to us," Avnet chairman Leon Machiz told his firm's annual meeting the week before last. "Electronic distribution is on course to become the material supplier to the supply chain. Value-added services are the fastest growing part of the business. It defines the future of distribution."

Added Avnet vice chairman/president Roy Vallee in an interview afterwards: "We are coming out of our industry correction, and '97 will be an up year," with possibly low to middle double digit growth.

While the industry was disappointed that the boom of previous years didn't continue in 1996, most distribution executives are counting on a new year to bring better things. At Nu Horizons, marketing VP Ben Schwartz noted, "1996 wasn't the banner year we expected. Business leveled off; there was a tremendous pricing issue. Pricing was down dramatically on static RAMs and DRAMs and affected other commodities." Nevertheless, he said, "Nu Horizons will show significant growth this year. I expect we will be up very nicely and profitable."

A number of distributors have observed an uptick in recent weeks. "Business is starting to rebound," said Richard Hyman, Milgray executive VP/COO. "The industry will be up 10 percent next year; '96 will be flat to up 5 percent."

The major trends, Nu Horizons' Mr. Schwartz added "are obvious. EDI (electronic data interchange) will be a very strong tool for both distributors servicing customers and the distributor communicating with the supplier and the supplier servicing the distributor. There will be continued demand on distributors to add technical resources."

At TTI, Craig Conrad, VP of corporate sales, noted "We are continuing to expand our value-added program and clearly, our auto-replenishment programs have been responsible for much of the growth we have had over the last few years."

The key impact of value-added programs on this year's distribution growth was noted by many. Wyle's president/CEO, Ralph Ozorkiewicz, pointed out that the overall world semiconductor industry is expected to be down 9 to 10 percent this year, but "we could expect with our programs to outperform the market. Distribution should do better."

Other factors have also helped distributors, Mr. Ozorkiewicz added: "The U.S. market has held up better than some of the global markets. There is a propensity in North America for suppliers and customers to utilize services of distribution for an increasing percentage of their business. There is the relentless pervasiveness of customer outsourcing, with more and more value-added by distributors." He also noted Wyle expects to gain market share and outperform the industry. Helping should be the value-added joint venture, Accord, established this year with Marshall Industries.

Reptron is also counting on contract manufacturing and other value-added efforts to help it outperform the competition, according to Paul Plante, CFO. "We have a strong company culture when it comes to value-added. Customers are not looking for simply suppliers of piece parts. They want to deal with fewer people who can provide a wider spectrum of goods and services: EDI, auto replenishment, in-plant stores and total product assembly. Our sales have grown faster than our peers, and it is a direct result of our strategy of value-added. We are doing better than our competitors, We can differentiate ourselves from the competition. Even in a down market we are growing because of value-added."