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The Top 50 Electronics Distributors: Restarting Growth and Running with It

Last year, Digi-Key Electronics announced plans to add an additional million square feet to its main warehouse in Thief River Falls, Minnesota. Last month, the company started construction on the $300 million project. But Digi-Key’s president and chief operating officer, Dave Doherty, said that the timing could have been better in retrospect.

“The right time probably would have been three years ago,” Doherty told SourceToday. The company, which has been growing rapidly in recent years, would have been in an even better position to tap into the recent boom in electronics manufacturing. Now, Digi-Key plans to occupy more than half of the new space immediately after construction wraps up.

Following two years of slow growth, Digi-Key is far from the only electronics distributor trying to take advantage of the recent market rally. Some are building new warehouses to handle more orders, others are ploughing cash into global expansion and hiring, still others are focused on capturing more business online, and nearly everyone is basking in healthy growth.

Currently, electronics distributors share a feeling of cautious optimism, industry executives say. The Internet of Things is reinvigorating the hardware business, giving a booster shot to these companies, the middlemen in the electronics supply chain. Most distributors project double-digit percent growth over the next year and plan to add new products, services and business around the world.

That came through in SourceToday’s Top 50 Electronics Distributors list. Our analysis draws from financial results reported by each company and verified where possible, as well as estimates for several privately held companies that declined to comment. Each company explained their business priorities and major concerns, as well as projected revenues for the next year.

Pushing electronics distributors deeper into the black is the Internet of Things, which could include billions of devices—ranging from smart thermostats and factory sensors to connected cars and traffic lights—which will all store information in the cloud. Executives agree almost unanimously that these applications could serve as long-term fertilizer for the industry.

The automotive sector has created voracious demand, aggravating shortages of many components. Doherty said that the average car is now manufactured with 10,000 capacitors, whereas several years ago that number hovered around 3,000. Last year, the average lead times for power MOSFETs—discrete semiconductors routinely used in vehicles—stretched to 30 weeks.

Only 36 electronics distributors shared sales forecasts with SourceToday, but three-fourths project double-digit growth over the next year, while nine respondents say their businesses will grow more than 20 percent. That reflects what the Electronic Components Industry Association recently said about 2017 component sales in North America, which increased 10.4 percent after two years of stagnation.

The top 10 companies on the list reported $77.3 billion in revenue, representing 93.3 percent market share, down slightly from 95 percent in 2016. The change suggests that smaller distributors are growing faster than larger competitors as manufacturers cast a wider net to combat shortages in the supply chain. These shortages have worsened as suppliers shrink from boosting production and oversteering into demand.

“We have this convergence of high demand and psychological concerns, because of how tightly companies have managed their supply chains up until recently,” said Doherty, adding that it is having “a double whammy effect.” He warned that “it doesn’t take much to have a shortage of capacity turn into an overage of supply, so you have to be careful.”

View Top 50 Electronics Distributors List

Phoenix, Arizona-based Avnet fell into third place in the rankings behind Arrow Electronics and WPG Holdings after the first full year without its Technology Solutions business unit. The revenue for privately held Future Electronics, ranked fourth, is based on SourceToday’s estimate. Sixth-ranked TTI reported revenue separately from its subsidiaries.

Looming over every electronics distributor are widespread component shortages, which have been growing worse over the last two years. About 60 percent told SourceToday that the shortages were a major concern in 2018. Even though they could fatten up profit margins in the short term, the shortages are leading to a landgrab for inventory.

The shortages affect some parts more than others, according to the ECIA. The average lead times for interconnects, semiconductors, and passive components have all lengthened over the last year. Memory chips have been in short supply, causing prices to skyrocket. Other shortages have hurt the availability of microcontrollers.

But electronics distributors say that they have managed well under the mounting pressure. “Frankly, we’ve had orders on factories for 12, 15, 18, 20 weeks on all these products to make sure our customers are covered,” said Michael Long, Arrow’s chief executive officer, in a recent conference call with financial analysts.

“You don’t just flip a switch to get capacity because everybody is buying theirs from the foundries,” Long said. “If they don’t have it, then there’s none to be had.” He added the Englewood, Colorado-based company’s customers are running low on inventory, but none have fallen behind on orders because of parts shortages.

That may not be everyone’s experience. “Supply constraints, extended lead times, capacity constraints [and the like], particularly in the electronics components markets, continue to frustrate and drain needed resources, have delayed production schedules and, in some cases, caused missed or delayed sales opportunities,” said one manufacturing executive in a recent Institute of Supply Management report.

The parts in shortest supply include discrete semiconductors, which have lead times of 19 weeks, up from 13.5 weeks at the same time last year. The average lead times for power supplies and batteries have more than doubled from seven to 15 weeks. Resistors, capacitors and inductors are on allocation for an average of 16 weeks, according to ECIA estimates.

Other factors could foment these shortages. Around 30 percent of electronics distributors told Source Today that supplier consolidation was a major concern over the next year as it could push more parts out of production. Smaller distributors also worry that the consolidation of the supply chain makes customers more complacent with larger rivals.

Long shadows are also cast by the possibility of a trade war with China. The threat came into focus in March when the Trump administration proposed tariffs on $50 billion worth of Chinese goods. Even though products like televisions were spared by the proposed tariffs, the list did include parts in short supply globally like circuit boards, transistors, batteries, and diodes.

The tariffs, proposed by U.S. Trade Representative Robert Lighthizer, came as backlash against trade policies that allegedly pressure American firms to pay intellectual property – usually related to microchips – to play in the Chinese market. Economists fear that retaliation from China could steer global economic growth into the mud.

“In today’s digital world, nearly every industry utilizes electronic components and the supply chain for such components is globally interconnected and complex,” says the ECIA. “As a result, the imposition of tariffs will have global consequences for businesses and consumers alike, adding friction and costs to the supply chain that can hinder economic growth for all.”

The chaos plays into the hand of independent distributors, like Fusion Worldwide, which expects revenue to grow 37 percent to $720 million by the end of the year. Advanced MP Technology, an independent San Clemente, California-based firm, reported $189 million in revenue last year and projects 20 percent growth in 2018. NewPower Worldwide, based in Nashua, New Hampshire, anticipates revenue of more than $150 million in its third full year of business, up from $107.3 million.

“We really exist to fill gaps in the supply chain,” said Paul Romano, chief operating officer of Boston-based Fusion. “Any time risk is introduced into the supply chain, that ends up creating opportunities for us, because we are there to essentially minimize risk.” He expects parts shortages to continue until at least the third quarter of 2018, and likely longer.

Many smaller distributors are planning to reinvest in ecommerce to capture additional customers. Neither Diverse Electronics nor Cumberland Electronics pulled in more than $30 million last year, but both companies pointed to digital growth as their core focus in 2018. Nevertheless, both companies are still far behind the likes of Mouser Electronics and Allied Electronics and Automation.

Allied, the Fort Worth, Texas-based subsidiary of Electrocomponents, which also operates RS Components in Europe, has shifted almost all its marketing dollars online. And even though only 40 percent of the $550-million company’s sales are online, about 90 percent of customers interact with its website, which recently added 360-deg. views for certain products.

“We’ve captured customers from other distributors that have not made the same journey,” said Dan Stewart, Allied’s vice president of marketing and ecommerce, in an interview. “Lots of customers used to buying the old way have started buying the new way. And honestly, that’s because they want to, not because we push them to do it.”

The biggest challenge is holding enough inventory to meet expectations for online ordering. Over the last year, companies have been scraping the supply chain for so-called safety stock to smooth over shortages. At the same time, book-to-bill was 1.1 in the first quarter, indicating that order backlogs are being replenished as orders are filled, according to the ECIA.

The supply chain has been under so much pressure that more customers are putting in requests for the same part with several distributors and then cancelling one of the orders after getting it, analysts say. Double ordering, as it is called, is problematic because it can blow demand out of proportion, leading to longer lead times and depleting order backlogs.

Joseph Moore, an analyst with Morgan Stanley, recently released the results of a survey in which 46 percent of electronics distributors say they spotted double ordering in the first quarter, versus 24 percent in the previous quarter. Double ordering could saddle electronics distributors with excess inventory once demand dies down, hurting margins on the leftovers.

 View Top 50 Electronics Distributors List

“Whenever there are constraints, there is some level of double booking,” said Doherty, also the current chairman of the ECIA executive committee. But the manufacturers he has talked to say that double booking is not a widespread concern. “They believe that demand is much more significant than what they can fulfill right now,” he added.

Many of the largest electronics distributors have introduced new services to hedge against margin erosion. Last year, Avnet acquired Dragon Innovation, a software firm founded by several former engineering executives from iRobot. The company’s tools help customers with manufacturing, recording bills of materials, cutting production costs, and choosing factories.

Similarly, Arrow Electronics has expanded into IoT software and services to supplement its components business unit, which can react wildly to palpitations in the supply chain. In January, the company followed through on that strategy with the acquisition of eInfoChips, an engineering services firm and its more than 1,500 employees.

The company seems to be emulating smaller electronics distributors, which tend to operate locally rather than internationally—not only handling standard services like supply chain management, but also serving as an extension of a customer’s engineering team. But it is bringing scale into the equation: the $26.8 billion business serves 125,000 customers worldwide.

With the growing focus on entrepreneurs and electrical engineers, the largest distributors may steal some business from Mouser and Digi-Key, both of which target a wide range of low-volume customers, including what Doherty calls professional makers. That can be an advantage as smaller orders are more insulated against supply chain disruptions.

“Our model is more immune to market fluctuations because we focus on new product introductions and because our prime customers are electronic design engineers and procurement agents who buy small to medium quantities,” said Kevin Hess, vice president of marketing for Mouser, a $1.34-billion business with plans for global expansion in 2018.

Likewise, Digi-Key, which projects 10 percent growth over the next year, has focused on smaller-scale customers. Tools like the tiny Raspberry Pi computer and Arduino circuit board have helped broaden the $2.33-billion company’s customer base. But the biggest challenge is keeping shelves stocked to handle lots of smaller orders – and that takes careful management.

“I’m not going to consume 10,000 pieces with a customer at a discounted rate because then I’m out of stock for two months while I wait for my supply to replenish,” said Digi-Key’s Doherty. “If customers start to lose confidence that we have inventory, trying to bail out shortages is more to our long-term detriment than short-term gain.”

Two-fifths of electronics distributors said that they would consider mergers or acquisitions over the next year to expand and diversify inventory. That was the strategy behind TTI’s acquisition of Symmetry Electronics last year. The combination added “rocket fuel” to the Los Angeles, California-based Symmetry, said David Beck, its vice president of marketing.

Symmetry, which reported revenues of $44 million in 2018, expects to grow between 10 and 12 percent by the end of the year. Beck declined to comment how much TTI would invest in Symmetry, which plans to expand its warehouses, headcount and inventory in 2018. TTI, which is based in Fort Worth, Texas, also owns Mouser and Sager Electronics.

The issues that Symmetry faced on its own included raising capital to hold additional inventory for customers. Beck said that another problem was scaling “a sales and support team to support nationwide or global customers, and then capturing business that is purchased overseas by a local customer’s contract manufacturer partner.”

Smaller distributors share concerns with larger rivals about sudden shifts in demand. The electronics market is intertwined with the global economy, which could be upset by several factors. No one has a crystal ball, but trade wars and renegotiations of trade deals like the North American Free Trade Agreement and the Trans-Pacific Partnership could throw a wrench into further growth.

“This month, next month, six months, a year from now—no one really knows what is going to happen,” said Stewart, Allied’s vice president of marketing and ecommerce. “It’s all about being well-positioned to take advantage when things are going well, so when a downturn occurs you can continue to provide great services and acquire customers.”

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