The general mood among electronics distributors as they entered 2018 was one of “cautious optimism.” The outlook grew darker in the first few months as the long shadow of a possible all-out trade war between the U.S. and China seemed increasingly likely. But as the year unfolded, the shadow lifted—and so did the caution.
After the dust settled, 2018 turned out to be a very good year for electronics distributors. The results are captured in the SourceToday Top 50 Distributor ranking. Overall, the 50 companies on the list posted combined 2018 revenue of $158.8 billion, a $14.4-billion or 10.7% improvement over 2017. The gains accrued disproportionately to the Top 10 distributors on the list, which accounted for $151 billion, or 96% of total revenue.
The Big Three
Top-ranked Arrow Electronics dominated the ranking adding $2.9 billion to its top line, which allowed it to pull away from its second- and third-place rivals: Avnet and WPG Holdings. Avnet and WPG duked it out for podium positions. In 2017, WPG took second place, and Avnet took third. In 2018, Avnet beat out its Taiwanese rival with stronger global revenue growth of 9.4% compared to WPG’s 3.2%.
In a year-end report, Arrow CEO Michael Long attributed the company’s performance in 2018 to its alignment with markets that have a strong and growing demand for electronic content, which included transportation, industrial, and aerospace and defense. “We executed well in 2018 and continue to see good returns on our organic investments,” he said.
Avnet CEO Bill Amelio echoed the sentiment in comments he made in a fourth-quarter calendar 2018 announcement. “Even with the current uncertainties in Asia, Avnet posted strong gains in revenue and profitability compared to a year ago,” he said.
WPG, which claims to be the largest distributor of semiconductor components in Asia, reported record revenue and net income in 2018 driven by steady component demand in the automotive, communications, computing and smart cities and homes sectors. In the fourth quarter, the company launched more than 40 new application solutions targeting new applications in the Internet of Things (IoT), artificial intelligence (AI), and other areas.
The fastest annual growth award for 2018 goes to Mouser Electronics, which posted 41.8% revenue growth and jumped from ninth to eighth place in the ranking. Mouser, RFWM, Sager Electronics, and Symmetry Electronics are subsidiaries of TTI, a Berkshire Hathaway company.
“Last year was a record year for Mouser thanks to strong demand worldwide,” said Mark Burr-Lonnon, senior vice president, EMEA, Asia, and Global Service at Mouser.
While many distributors experienced shortages of parts due to the strong demand, Burr-Lonnon attributed Mouser’s success to its breadth of inventory, which enabled it to meet delivery needs of engineers and buyers for the most sought-after products. “The shortage dilemma didn’t impact us as it may have other distributors,” he said. “In fact, we benefited.”
Fifth-ranked Digi-Key wasn’t far behind Mouser with a very respectable growth rate of 35.6%. “We have the luxury of a robust 2018, with growth above the norm,” Chris Beeson, executive vice president, Global Supplier and New Business Development at Digi-Key told SourceToday. “Some of that growth is due to macroeconomics, but we also hope it is related to things we are doing right.”
Combined, the top 10 distributors on the SourceToday list grew revenue by 9.1% in 2018, or $12.7 billion. The remaining 40 companies posted a higher combined growth rate of 31%, or $1.7 billion. Regardless of the pace of growth, the buoyant market raised virtually all boats.
In a survey of the Top 50 distributors, many identified forecasting as a top challenge for 2019. “A changing market environment generally drives wild swings in customer demand as their backlog gets right-sized,” noted one top-10 distributor.
First quarter data for 2019 reinforced the “changing market environment” theme, as global manufacturing growth slowed, and semiconductor shipments and electronic equipment sales trended downward, according to the Custer Consulting Group. The global purchasing manager index (PMI) bottomed out in 2016 and reached a high point in early 2018. In early 2019, the index was hovering around zero growth.
Of course, market conditions vary by country and region. Walt Custer at the Custer Consulting Group summed it up succinctly: “The U.S. is expanding, Asia is recovering, and Europe is in trouble.”
The U.S. is leading most countries in manufacturing expansion, and Asia is showing modest improvements. In March, China’s PMI moved back into positive territory, and Taiwan, South Korea, and Japan all reported PMI improvements, bringing them closer to positive manufacturing growth. The outlier is Europe. In March, the European PMI fell from 49.3 to 47.5, the lowest of any region (see figure).
“Results this year to date have been mixed regarding market demand,” said Phil Gallagher, global president electronic components at Avnet. “Our North America and EMEA regions are continuing to perform well. However, we’re watching demand in Asia Pacific closely and starting to see some initial signs of stabilization,” he said.
Reading the tea leaves, many distributors are resigned to the possibility that 2019 won’t be as strong as 2018, partly because of an inventory overhang that is expected to continue through the end of the second quarter. “By mid-year, the inventory problems will mitigate, and we’ll see a return to a more normal Q3 that will boost business,” said Bill Bradford, president and CEO of the ECIA.
As they did in 2018, many distributors are taking a prudent “cautiously optimistic” stance as they try to parse the mixed signals and forecast the remainder of 2019. Mouser is one of them. The company is projecting revenue growth of 11% for 2019, which is more modest than its stellar performance in 2018.
“We expect to see challenges relating to product delivery lead times, margin erosion, and market stability,” said Mouser’s Burr-Lonnon. “But overall, we are certainly optimistic about the future.”
Mouser’s priorities for 2019 include global expansion, new product introductions, the addition of new suppliers, and expanding inventory. The company is investing in infrastructure expansion to accommodate future business growth and adding office locations around the world, including in Brazil, the Philippines, Vietnam, and Poland. “It’s an exciting time for us,” said Burr-Lonnon.
And there are good reasons to be excited. Anticipation of the rollout of equipment that will power 5G networks and mobile edge computing is one big reason. 5G installations are ramping up around the world in 2019, and are expected to accelerate in 2020 and beyond.
These communications technologies will enable a new generation of electronics applications and hardware that require ultra-low latency, fast processing, and massive bandwidth. This includes augmented and virtual reality headsets for gaming and business; industrial automation; IoT and advanced robotics; innovations for smart cities and smart buildings; and infrastructure for autonomous transportation. All are bright spots on the horizon for component manufacturers and distributors globally.
What’s more, existing end markets that are consuming an increasing volume of electronic components and subsystems are diversified and remain relatively strong. “Specific markets like transportation and industrial are fairly steady and still doing well for us, plus we’re seeing really nice growth—high double-digits—in defense and aerospace,” said Avnet’s Gallagher.
Future Risk Factors
Of course, caution is required, given the many “what-if” risk factors that could cause unpleasant shocks to distributors and their supply chains. Perhaps as the top of the list are threats of flare-ups in trade disputes. In the survey of the Top 50 distributors, a number of respondents identified tariffs and trade disputes are their biggest challenges.
Last year, the U.S. imposed duties on $250 billion of Chinese imports to protest China’s theft of U.S. intellectual property. China retaliated by placing duties on $110 billion of U.S. goods. Many distributors are monitoring the present negotiations between China and the U.S. closely. As of May 1, the U.S. was claiming a deal was close. However, on May 5 President Trump tweeted that he was ready to impose additional tariffs on China.
To skirt the tariffs previously imposed and reduce the economic impact, some manufacturers and suppliers on both sides of the dispute relocated operations outside the U.S. and China or put plans in place to do so if relations deteriorated. For instance, in Dec. 2018, it was reported that Foxconn, the Taiwanese contract manufacturer that produces Apple products in China, was considering assembling high-end iPhones in India. Other companies are reportedly moving out of China to Vietnam, Thailand, and other locations in Southeast Asia.
At the same time, the southern border of the U.S. remains a political hotspot. Closure of any part of the border would disrupt the flow of materials and goods between the U.S. and Mexico, impacting manufacturing and assembly on both sides. While President Trump has said he will delay any move to close the border for a year, the threat still looms.
There are a few other systemic risk factors that have the potential to disrupt business in 2019. A recent report from the risk management firm Resilence360 analyzed 10 supply-chain risk factors. Here are three:
Security. This covers a variety of issues including, cyberattacks and the security of goods in transit, personnel, and manufacturing plants. For electronic components, security includes screening for counterfeit parts. All are big challenges.
In 2018, Resilience360 recorded a total of 65 cyberattacks that directly impacted supply chain assets, with November experiencing the highest number of incidents at 20. Regarding traceability of component, blockchain is perhaps the leading contender, but it has not yet reached a critical mass of adoption.
Shortages of critical raw material. Supply of some critical materials is vulnerable to demand spikes or production bottlenecks. For instance, in Europe, there is an impending shortage of certain polyamide materials used in the production of engineered plastic components.
In addition, the rising demand for lithium-ion battery relies on a steady supply of cobalt. Two-thirds of the world’s supply of cobalt, however, is mined in the Democratic Republic of Congo. Instability in the region could result in a supply shortage in the near future, Resilience360 warned.
The consequences of climate change. As the atmosphere and oceans absorb more carbon dioxide, the frequency, and severity of extreme weather events increases, including both droughts and floods. In 2017, the Asia-Pacific region suffered eight major tropical storms, which caused significant supply-chain disruptions in Japan, China, South Korea, Taiwan, and the Philippines, according to Resilence360. And in 2018, a month-long summer drought in Europe brought water levels on the Rhine and adjacent rivers to record low levels, halting shipping traffic.