In the 1990s, supply base reduction was the battle cry for many purchasing departments at large vertically integrated electronics original equipment manufacturers (OEMs). The issue remains an important one, but is taking a back seat to industry consolidation, in many cases.
Looking back at supply base reduction, OEMs often had thousands of suppliers, and it was common to have a dozen or more suppliers for a single part. Large companies often had decentralized purchasing operations, with individual manufacturing sites buying production parts for their own production lines. Often, each site had different suppliers for parts that were used by multiple sites.
Companies were obviously losing out on leveraging opportunities. As a result, in some cases companies turned to lead-site purchasing. Buyers at one manufacturing location would combine the requirements of a part used by multiple sites and negotiate price and other terms with the supplier.
In other cases, OEMs decided to centralize purchasing to manage supplier selection, negotiation, and management on a company-wide basis. Commodity components requirements were combined to achieve better prices and improved overall terms. Centralized purchasing organizations also often reduced their number of suppliers and forged strategic relationships with a handful of key suppliers in an effort to guarantee low cost, continuity of supply, continuous quality improvement, and access to suppliers' latest and greatest technology.
Times have changed, and supply base consolidation is becoming a more pressing concern for buyers of electronic components.
Over the last year or so, semiconductor companies and other component manufacturers seem to be consolidating at a faster rate, with more brand-name companies merging or acquiring other suppliers.
“There’s no question there has been a lot more merger activity in the last six months, and maybe over the last year-and-a-half, than there has been in a very long time,” said Brian Matas, vice president of market research for IC Insights. He noted many of the suppliers involved are top 10 or top 15 chip companies. Many are trying “to bolster revenue or expand their presence,” Matas said and, in some cases, stockholders are “clamoring for companies to do something to generate better returns. Mergers are one answer to that.”
The most recent big consolidation announcement was made June 1 when Intel said it would acquire Altera for $16.7 billion. That followed the announcement in late May that Avago Technologies would acquire Broadcom, a major manufacturer of semiconductors used by mobile phone OEMs. Just last year Avago purchased LSI Logic.
Other recent semiconductor industry acquisitions include NXP’s purchase of Freescale, Lattice Semiconductor’s purchase of Silicon Image, and Cypress Semiconductor’s purchase of Spansion. It’s not just semiconductor companies that are merging. Passives components and connector companies are also consolidating. Earlier this year, Cornell Dubilier announced it would acquire Illinois Capacitor. Resistor manufacturer Bournes acquired Komatsulite MFG earlier in the year, and Connector manufacturer TE Connectivity acquired Xiamen SIBAS Connectors Co. Molex has acquired a number of companies this year, including SDP Telecom, Pro Tek Medical, and Soligie.
Most industry analysts say that more electronics industry acquisitions will occur later this year and in 2016 as companies try to grow sales by acquiring other suppliers.
Analysts say that acquisitions are often good for companies’ financial health and for stockholders. However, for purchasing professionals, consolidation can mean fewer choices and less competition. One example is DRAM. In the early 1990s there were about 20 DRAM suppliers. However, over the years DRAM manufacturers consolidated or got out of the DRAM business, and now there are three major DRAM makers that control about 80% of the DRAM market.
In some cases, when a company that makes standard components acquires a supplier that manufactures similar parts, it discontinues the components made by the acquired supplier.
However, there can be an upside to consolidation for buyers. Often, a company that acquires another supplier becomes more financially sound and may be in a better position to make investments in new technology and capacity. Also in some cases, the products of an acquired company may be different than the acquiring company. As a result, the newly merged company may offer a wider selection of components.
Navigating these challenges and opportunities will become increasingly important for purchasing professionals over the next few years.
Jim Carbone is a freelance writer covering the electronics supply chain. A veteran journalist, Jim was a writer and editor for Electronics Purchasing and Purchasing magazines for 21 years.