Despite growing volatility in the global trade environment, electronics distribution is on a roll that shows few signs of slowing in 2019. But distributors say they aren’t resting on their success. In the midst of a booming market, expect deep investments in inventory and distribution operations, digital infrastructure, and talent acquisition.
“A super cycle,” is how Karim Yasmine, Corporate Vice President, Strategic Supplier Development, at Future Electronics, describes the past two years of revenue growth in the electronics distribution industry.
It’s an unprecedented run that’s expected to extend through this year, fueled by strength in almost every vertical—from automotive and industrial applications to security and mil/aero.
“Many of the core verticals just continue to drive growth,” says Yasmine. “For example, if you look at just the basic industrial business, it has experienced strong growth in the last couple of years. If you look at what we would call the traditional automotive business, it too has been on a steady rise because of the increasing amount of electronics content in cars.”
All Segments Showing Growth
“What’s interesting is that everybody's talking about this cycle we are in and what's going to drive it. Every segment is going to drive growth. Every segment is showing growth. You look at Mil/Aero as well. There are some pretty significant government-sponsored programs that will drive some growth as well. Even IoT, which is a bit of a generic term, at this point because it has become a bit of a horizontal. We're just starting to hit the curve on IoT, and we know that we’re prepared to meet our customers’ needs.”
Karim Yasmine
Corporate Vice President, Strategic Supplier Development
Future Electronics
As to what's coming next, Yasmine points to numerous new automotive applications such as ADAS, Hybrids and EVs, infotainment, and battery management systems—some which didn’t even exist a decade ago--that he expects will drive tremendous business.
Other new technologies and issues are expected to contribute to that growth, including the adoption of 5G technologies, the Internet of Things—with implementations now reaching a critical mass--and cybersecurity. “Right now, the market is being pulled by so many different segments and applications that I feel very positive about what the outlook for next year will be,” concludes Yasmine.
Don Akery, President, TTI Americas, concurs. “Business continues to be strong for us. Bookings and billings continue to improve, quarter over quarter.” As a case in point, he notes that the third quarter of 2018 was the company’s strongest ever.
Layered on top of the strength in the mainstream distribution business, there also is growing demand for distribution services, including design and inventory support, as well as the expansion of non-traditional customers and markets driving new revenue opportunities.
Kevin Hess, Senior VP of Marketing at Mouser Electronics, sees the Internet of Things as one factor that’s driving a wholly new customer base. “Nowadays, if you’re manufacturing something, you likely want it to be connected. And if your product didn’t incorporate electronics before, it now will need to if it’s going to be connected in any way,” he explains. “This trend is creating a group of innovators—people making modules and boards and building connectivity into their products-- that have never been part of our industry before.”
Maker Movement Expanding Customer Base
“The innovator movement or maker movement really started more than a few years ago and everybody wanted to reach them. We were all trying to understand how to help these innovators create the next big thing. It’s really opened up a market opportunity that is beyond our traditional customer base. I don't know if it's big dollars, but it’s a lot of customers, and the hope is that a few customers turn into bigger dollars down the road. We feel things like our no-minimum model, along with our vast product selection, are a plus for this group.”
Kevin Hess
Senior Vice President of Marketing
Mouser Electronics
Investing in Bricks-and-Mortar and Digital Infrastructure
To take advantage of a boom market and better serve both existing and new customers, top executives at many of the key distributors say investments in their businesses will continue apace in 2019.
Some of that investment will be in good old bricks-and-mortar, primarily to support an expansion of inventory capabilities and distribution operations, and also to accommodate the increase in business more efficiently.
“We announced last year that we're going to expand our new distribution facility by another 168,000 square feet over the next six to nine months,” says TTI’s Akery. The company, which moved into a new 800,000-square-foot facility in Fort Worth, TX in 2018, announced at EDS last year that it was committed to taking inventory levels up significantly in order to ensure it would be able meet the needs of its customers.
“We're sitting on inventory that is 40%, 50% more than it was 18 months ago,” says Akery. “Even in a market where there's a lot of product that is hard to come by. That's a sign that our guys, our product teams, got ahead of it. “
And all that extra inventory needs to be housed somewhere.
“Similarly, in 2018, Sager Electronics opened a new value-add and distribution center in Carrollton, Texas, tripling its distribution footprint. Early this year, it will start replenishing its power, thermal and value-add related inventory at the new facility. “A year— maybe less— from now we'll have the majority of our bigger, bulkier items in this location, which is what we set up the facility to handle,” says Faris Aruri, Senior VP of Marketing. He notes that the central location of the facility is an advantage for the company.
Huge, New Wave of Connected Technology
“Where are we in the cycle now? I think we're at the beginning of a new wave in connected technology. How many products do you see now with Internet connectivity? Smart thermostats, smart cameras, smart lighting—these are all becoming commonplace features in our homes today. I think we haven’t even scratched the surface yet. We're at the beginning of the introduction of a lot of new, innovative products. And we’re ready to meet the needs of the companies creating those products.”
Faris Aruri
Senior VP of Marketing
Sager Electronics
Six months ago, Premier Farnell, broke ground on a new facility in Leeds, UK. “It will be a fully-functioning, smart warehouse, with automation, mobile robots, shuttle systems, mobile data connections, pick-to-light systems, and more,” says Farnell’s President, Christopher Breslin. “It is going to deliver two times the existing throughput with much greater efficiency.”
Digi-Key Electronics also has started construction on a new 2.2 million-square-ft facility at its Thief River Falls, MN headquarters. “This project was many years in the planning stages,” says Chris Beeson, Executive Vice President, Global Supplier & New Business Development at Digi-Key. “It was designed to drive natural productivity gains in our distribution operations, but at the same time we wanted to do more than just make our existing processes more efficient. So, during the design phase we also explored questions such as, ‘What don’t we do today that we could be doing?’ We then looked to incorporate features into the facility design that would allow us to expand our business and take advantage of new revenue opportunities.”
Focus on Staying Ahead of the Game
“We have the luxury of a robust 2018, with growth 40% above the norm. Some of that growth is due to macroeconomic reasons, but we also hope it is related to things we are doing right. So, we ask ourselves questions like ‘Why do customers find out website appealing? Why are people reading more of our technical notes? Why are people engaging us for not just more transactions but altering the type of transactions with us?’ It’s an ongoing process for us as we think about what we need to do in order to stay ahead of the game. We know the importance of new trying things, knowing that some things will pan out, others will not.”
Chris Beeson
Executive Vice President, Global Supplier & New Business Development
Digi-Key Electronics
For most distributors, it’s also about becoming more efficient inside their existing bricks-and-mortar facilities in order to handle the increase in orders.
“The demand for warehouse workers is skyrocketing. And honestly, there are just not enough people out there to fill the jobs,” says Dan Stewart, VP of Marketing and Ecommerce at Allied Electronics. “The only way anybody is going to be able to operate effectively moving forward in the future is to add automation to make their warehouse workers more efficient and productive.”
Mouser’s Hess agrees that it isn’t economically feasible to continue to hire more and people as the number of customers and shipments grow, so one of the major things the distributor is doing is adding more automation within the warehouse.
To that end, Mouser is investing in smart equipment that can communicate to everything else in the warehouse over wireless communications, which will streamline both warehousing and shipping operations. “Bottom line,” says Hess. “We’re evaluating everything—even the best location for a product to be placed in the warehouse based on its flow—to maximize efficiencies.”
Distributors also say there will also be ongoing investments in digital infrastructure, ranging from new capabilities that drive a better customer experience to creating transparency around new tariffs and pricing.
“Improving the customer experience online is a journey that we—as well as other distributors--have been on for some time, and we’ll continue to make aggressive investments here,” says Allied Electronics’ Stewart. “We view it as our job is to make sure that our customers can interact with our site in the way that they want to.”
One example he points to is the recent addition of 360-spin images of products, allowing a customer to view a particular product from any angle, something digitally savvy customers will appreciate. Another is the addition of an exploded view of a product, which provides customers with a more detailed look at the specific features or individual sub-components of a product.
“It’s changing the way that our customers are engaging with our website,” Stewart explains. “In the past, a customer would have to pick up the phone and call tech support with basic product questions. Now, we are making sure that we provide as much information digitally as possible, so now in many cases they don’t need to make that call.”
Allied Electronics is also using the data on how customers engage with the website to make better decisions. “We can bring these analytics into conversations with our suppliers around topics like inventory and marketing so that we can come out with a very clear action plan grounded in the actual analytics,” says Stewart.
A Future Guided by Data Analytics
“I wish I had a crystal ball to look into the future. Any time when things are going well you have cautious optimism. You’re optimistic about the future, but you’re always cautious because you never know when it's going to turn, because, eventually, it’s going to turn What we do know is that the role of data in our decision making is only going to become more critical. Some 90% of our customers engage with us digitally and when they place an order with us there is a rich set of information on what they want and need. We’re leveraging that information to make decisions, develop our strategies and engage with suppliers.”
Dan Stewart
Vice President of Marketing & eCommerce
Allied Electronics & Automation
Mouser Electronics is focusing on the creation of more educational content for customers and making that content easier to find. “Our non-traditional customers in particular are going to start with a search engine, so we need to make sure our content is discoverable,” says Hess. “Then, once they find what they are looking for on Mouser, they need to be able to navigate our website in a highly intuitive way. It’s no longer good enough to simply publish a part number and the amount available. A customer may not be familiar with the part they are looking for, so we need to educate people on what they are buying and ideally provide all the content on the same page.”
One new feature--designed to address a timely need==that Premier Farnell is working on is providing transparency to its customers around the cost of tariffs. “Rather than simply embedding the cost of the tariff in the total price, we show it as a separate line item for the customer,” says Premier Farnell’s Breslin. While it takes retooling of the GIS (geographic information system) and other systems reporting, Breslin says that the investment will pay off because of the benefits to the customer.
Big Time Plans to Invest in People, Too
Nearly all distributors we spoke too plan to make additional investments in people, particularly in customer-facing roles.
For example, as Sager Electronics becomes increasingly involved in product lines such as power supplies and thermal solutions, it continues to make a substantial investment in engineers and sales to focus on those areas. “We are one of the only companies that's employing electrical and mechanical engineers specifically focused on power and thermal applications. Our engineers are involved from the initial recommendation of certain products and solutions for a customer’s power and thermal requirements to working on a complete design and offering a customized solution, especially for smaller companies that need design support,” says Sager’s Aruri. “Our goal is to be a trusted advisor in power and thermal.”
Future Electronics, too, is making deep investments in headcount to provide technical support to its emerging customer base. “The technical requirements of the products that some of our customers are designing are getting more complex—these days almost everyone wants to connect their product--which means wireless complexities. These designs often require high-touch support,” says Future’s Yasmine. “So, we’ve made investments in the physical headcount of our FAE organization. We’ve also beefed up our Future Connectivity Solutions organization, and in Europe we’ve opened additional design centers of excellence.”
TTI Americas has also been increasing its headcount, with the biggest increase in the number of customer-facing roles in the organization. By the end of the first quarter this year, it expects to have added a total of 233 field sales people in North America since the beginning of 2018. “It’s something that we think is unique, based on what we’ve seen from our publicly held competitors,” says Akery.
And that’s just the tip of the iceberg. There is much, much more that electronic distributors will be investing in because they know even in a boom market that to make money you have to spend money.
Some Challenges Ahead
That’s not to say that it is all smooth sailing ahead. There’s no question that new tariffs and trade treaties and uncertainty around the growing volatility in the global trade environment will have an impact on the distribution business and a ripple effect along the entire supply chain.
Nearly all distributors say that tariffs are a conversation and now becoming a business practice that has created new considerations for the industry. Some go further to say tariffs have no upside and are nothing but a distraction for industry at every level from manufacturers, distributors, and customers to sales reps.
“It is not one of my favorite topics, but it’s one that we can’t ignore,” says Premier Farnell’s Breslin. “There’s the basic work we need to do, which is to understand the size of the impact and the percent of products that have content from China.
Auto, Aero, and IOT Markets Strong
“There are a few, very strong markets that are driving demand today. The military, aerospace, and automotive markets are strong, simply because there’s so much electronics content in those applications. But the amount just continues to increase. The IoT has also hit a critical mass, but one of the big differences on the IoT side is the type of customers that we are getting. They are makers and innovators, which is different from our traditional customer base. They benefit from community interaction, and that’s where we can really support them with our online community, element14.”
Christopher Breslin
President,
Premier Farnell
“Our supplier is going to continue to manufacture product in China. Sometimes we have options to do it in other cost-effective geographies. So, we’ll do that,” Breslin continue. “But beyond that, internally there are a lot of things we have to do just to make sure that we can pass these things along to customers in a way that is not taking advantage of the situation. We also have competitive realities that some of our competitors will pass everything along. Some might absorb some of it and pass along and then have a cost advantage in the market.”
TTI America’s Akery says that his company chose to be transparent and fair. “We’re not looking at the tariffs to make any money. We're just administering it. We've invested a lot of money. We've got an advantage in that our warehouse - and it's been this way even before the new one - is a free-trade zone. It's considered a foreign trade zone. That gives us a competitive advantage on anything we import ourselves and export out of the country,” he says.
Responding to Tariffs with Transparency, Fairness
“I'd say the China tariff piece of it has thrown a curveball at all of us, and it’s taken a lot in order to be able to administer them. But our strategy is to be transparent and fair. We decided that for four months we would absorb the tariffs, and we would start charging on November 1, 2018. One of the reasons we were able to do that was because of our inventory that we had on-the-shelf before the tariffs were put in place. Clearly, we had paid no tariffs on it. We were committed to being transparent with our customers, telling them, ‘We're not going to charge you. We're not going to make a profit on this.’”
Don Akery
President,
TTI Americas
Digi-Key Electronics’ Beeson says that it will be challenging to measure the net cost or impact of a lot of the trade and tariff-related activities. But, he also notes that there have been some unexpected benefits. “We’ve had to look at processes like free trade zones, which overall will be a net benefit. We also are putting a lot of energy into the topic of global trade. Global logistics and trade represent our value to the customer and to our suppliers, especially when you consider we bring these products into the US and export over 50% back out.”
Bottom line, distributors agree that it’s something they will need to keep a close eye on. “At the end of the day, now that we are as a company fully set up to provide support on a global basis, it's business as usual,” says Future Electronics Yasmine. “So, we’ll keep pushing on new designs and supporting our customers on their on-time delivery. Moving forward, we’re prepared to deal with whatever else comes along.”
