Distributors Poised For More Growth In 2011

For proof of the growing importance of electronics in our daily lives, look no further than the performance of the North American electronics distribution sector in 2010. The industry rebounded from a tough 2009, and many companies are now hoping the sales gains and increasing economic headwinds of the last year will keep the momentum going in 2011.

“The big take-away is that 2010 was really a remarkable year for the electronic component industry,” says Michael Knight, vice president of corporate product management for electronic components distributor TTI Inc. “We went into the recession later than most other industries and we came out of it earlier and faster than most other industries. And by all accounts 2011 looks to be an up year—and an up year on top of what we just had is pretty remarkable.”

Some of the industry’s largest companies posted high double-digit gains through most of the year. For example, Avnet’s fiscal 2010 sales (ended July 2010) grew by 47% compared to fiscal 2009, and its fiscal first-quarter 2011 sales (ended October 2010) were up 42%.

At Arrow Electronics, third-quarter sales (ended October 2010) grew by 27% compared to the same period in 2009, with sales for the first nine months of the year up 29%. The level of industry activity was a surprise to many distributors who began the year with visions of a slow climb back to acceptable levels of growth.

“As we were coming out of 2009, which was a horrible year, we had a meeting here in the beginning of January about how we were going to turn it around,” says Perry Fox, president, CEO, and owner of Tonar Industries, a small, regional distributor based in New Jersey. “We never imagined that it would turn around as quickly as it did. 2010 was a terrific year, in many ways, across the board.”

And although many electronics distributors are predicting a soft landing in 2011 as the comparisons get tougher, many still anticipate double-digit growth at healthy margins. As of October, lead times had begun to retract—making parts that were next to impossible to obtain now more readily available—and certain target markets looked poised for growth as the demand for electronic technology in everything from solar energy equipment to medical devices continued to grow.

“We think 2011 will be kind of a soft landing as the comparisons get tougher and the growth rates come down,” says Scott McLendon, vice president of product management and marketing for distributor Allied Electronics. “But I think the underlying economy will provide enough wind in our sails to have a good 2011.”

Medical, Alternative Energy Get Set For Growth
Growing demand for electronics across a wide range of industries is helping drive the current trend. From medical devices to solar- and wind-powered energy products to embedded computing technologies and growth in broadband infrastructure, opportunities abound for distributors selling a wide range of electronic components.

Although Tonar Industries sells to a variety of customers, Fox points to growth in broadband and the medical industry as key areas he’ll watch in 2011. The broadband growth goes hand in hand with his company’s telecommunications business, and he says medical devices have been a focus for many years.

“Broadband appears ready for growth and medical is definitely a strong area in this country,” Fox explains. “Embedded computing is another area. This is an incredible opportunity for all of us in the electronics industry.”

Fox points to a proliferation of embedded computing technology, used in everything from mobile phones to appliances to toys and games.

McLendon emphasizes growth in the medical area, pointing to the vast amount of medical devices, monitoring equipment, and diagnostic tools used in hospital intensive care units as just one example.

“All those sorts of things are driven by electronics and electrical technology,” he explains. “That [area] is still exploding.”

Allied also specializes in selling to industrial markets, supplying OEM components as well as maintenance, repair, and operations (MRO) supplies to makers of a wide variety of capital equipment. McLendon says infrastructure growth nationwide will drive this portion of Allied’s business in 2011 as the need for capital equipment in markets such as transportation, energy, water, wastewater, and communications grows.

“There are certain ‘megatrends’ out there that you can’t ignore,” he explains. “For instance, you have a growing population in an advanced country like the United States, so you have to have infrastructure to support that growth.”

McLendon also points to the country’s insatiable need for power and the subsequent growth among customers who supply products and machinery to power-generation companies as key opportunities for Allied.

Along those lines, makers of alternative energy products—especially solar- and wind-powered items—represent a big growth opportunity for distributors such as Powell Electronics, a company with nine offices across the country and roughly 230 employees.

“We’ll see [solar and wind] really take hold and grow,” says Powell’s director of marketing John Barrington. “Commercial aviation and any of the electronics associated [with that] is another area. [That market] had a significant downturn with the economy, but it’s already come back big time and it’s going to continue to grow.”

Steve Stamatis, senior sales director for Area 51, an electronics distributor with eight U.S. and three international locations, says solar power in particular will help drive growth for his company this year.

“Solar seems to be, right now, getting to a point where it’s growing rapidly,” Stamatis says. “And we have a lot of products that are suited to that application.”

Knight agrees with the outlook on solar, wind, and other alternative energy markets.

“Alternative energy is alive and well in North America, and we’re starting to see some of that stuff feel like production business,” he says. “Smart Grid [technology] is another area. It is packed with the latest-generation electronic component technology. The numbers there are projected to be staggering.”

In addition, some distributors say the ability to help customers become more “green” is another huge driver of growth these days. For companies such as Allied, which sells to makers of capital equipment, helping customers find more energy-efficient solutions to running their plants can open the door to new business opportunities.

“Becoming more [energy] efficient is very important” to manufacturers, McLendon explains. “[They] want to know how to save energy in their facilities. We can help [by supplying] new products that are more energy efficient, by solving application problems that give the end user a more energy-efficient facility, and by becoming more environmentally sustainable ourselves.

“The ‘green’ issue is still very applicable, and I don’t think it’s going to go away any time soon,” he adds. “Such a huge portion of the electricity in this country is used by industry, so saving money there is becoming more and more important.”

Other Opportunities
Service in general represents another key opportunity for distributors, as customers seek to outsource procurement and product assembly tasks, as well as take advantage of the flexibility and product availability distributors provide. Fox points to “project management” services as an important growth opportunity for his company in the years ahead.

“People are doing more with less, so the more value we provide, the more it benefits the customer,” he explains. “[Customers] are taking some of their typical day-in, day-out functions and having a distributor like us do it for them—everything from procurement to working with contract manufacturers [to build a product] and then delivering a final product back to them. [Customers] are also outsourcing things like pc-board assembly, connector assembly, and what not. So from that standpoint, we’re bullish on 2011, though it may not be [for growth] in the traditional way.”

Stamatis says he’s seeing a renewed value placed on distribution these days as well, especially when it comes to small, local distributors. He says customers today want more choices and flexibility in issues such as payment terms, local inventory, and general decision making—areas in which he says small distributors maintain a distinct advantage.

“The big guys have all the resources in the world, but they’re still not as flexible as we can be,” Stamatis explains. “There’s only myself and the owner to discuss decisions with, so that makes things move faster. Customers are starting to realize that there are alternatives out there.”

But large distributors argue that they have an advantage in this new distribution-centric era as well. Knight points to a conversion toward distribution among OEM buyers that have traditionally sourced product directly from manufacturers.

“A lot of major users historically have done business on a direct basis, but they got into early trouble with availability of product [in this last cycle],” Knight explains. “So [these customers] became much more receptive to the supply-chain services a modern distributor brings to the market these days.”

Concerns Still Linger
Despite the positive outlook, concerns remain as the general economy continues its slow climb out of the recession. Employment is a key issue. Staffing remains lean, and many distributors don’t see that changing any time soon. Fox anticipates some hiring in distribution in 2011—he hired a few people himself in 2010—but says he sees a cautious approach, unlike previous growth cycles when there was much over-hiring in the industry.

“Technology has allowed us to do so much more with less. I don’t know if that’s fortunate or unfortunate, but I think it’s probably going to stay rather lean,” he explains.

“With my own employees, they are very, very, very committed and dedicated, but I do believe they feel incredibly overworked. We’re doing some work in Asia now, so I know they’re getting calls and e-mails all night long. So they’re working longer hours,” he said. “Their mood is tired, but I hope fulfilled.”

Other distributors agree that hiring is being done carefully, with an eye toward supporting steady growth ahead.

“We’re probably a little different than the typical distributor,” says Barrington. “We had no layoffs during the downturn. We drew a line in the sand and kept everybody on. We just asked everyone to work harder, faster, and smarter. We are hiring now and are looking for qualified people to support the continued growth we’re planning on.”

Far outweighing the concern over employment is the looming issue of counterfeit products. By most accounts, the problem is getting worse, as counterfeit items of all kinds are finding their way into the supply chain.

“It’s a problem. It is absolutely a problem,” says Fox. “Especially when you can’t get parts [and] and you start going to alternative sources of supply.”

Knight agrees, noting that “this thing just continues to develop a life of its own.” Both he and Fox point to efforts by government agencies as well as the National Electronics Distributors Association (NEDA) to promote awareness of the issue. NEDA, for example, recently launched an awareness campaign aimed to promote the value of sourcing electronic components through supplier-authorized distributors.

“This is the overarching issue that is affecting the electronic components industry,” Knight adds. “It’s on everybody’s mind.”

Last month, the University of Maryland hosted the 3rd Annual Symposium on Avoiding, Detecting, and Preventing Counterfeit Electronic Parts. The three-day meeting featured a NEDA-member panel discussion on the value of the authorized distribution channel in light of the growing global concern over counterfeit products.

Although these and other general business concerns—such as rising healthcare costs and continued tight credit markets—will weigh heavy on distributors’ minds throughout the year, most remain upbeat about the future.

“I don’t think [business] will continue at the same rate, but I do think it’s going to remain strong,” says Fox. “There’s always uncertainty, but for now sales remain strong.

TAGS: Distributors
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