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Asia distribution market ripe for consolidation

Posted: 14 May 2010     Print Version  Bookmark and Share

Keywords:Asia distribution  electronics industry  Asia market 

Avnet Electronics Marketing president Harley Feldberg has seen the industry muddle through some of its more challenging moments, as well as shine brightly during years of scorching growth that many thought heralded a new paradigm for the sector.

The successes were hard won, according to Feldberg. And today is no different, as the rise of Asia region's crucial role in the electronics industry's evolution present both challenges and opportunities for the sector, Feldberg said in an interview with EE Times.

Feldberg believes Asia is helping to mitigate the industry's cyclical swings. But he also insists that the Asian distribution market is headed for the type of wrenching consolidation that is just being concluded in North America and Europe. The consolidation may last years-and in Japan it may require jet propulsion to take off-but eventually only a handful of companies will dominate the components and IT distribution market in Asia, the Avnet executive said.

Don't rush for the airport, though. The North American and European markets are still very sizable, quite stable and more profitable than Asia. It's possible some Asian distributors might just want to fire up a new round of consolidation in the West, Feldberg said.

EE Times: How did the last downturn affect distribution?
Harley Feldberg: One previous thesis about distribution is that the sector tends to trail the electronics industry during downturns, getting hit later and coming out later. As a general statement, I would agree, but with one caveat. We have globalized our company over the last 10 years to become a large participant in all parts of the world, and as a result the normal cyclicality of Avnet EM's business has changed.

Asia is now a large part of our business, whereas 10 years ago it was not. In Asia, we tend to follow a pattern similar to [that of] the overall electronics industry.

What was different about the last downturn?
Business started to come to a screeching halt at the end of 2008. Orders were radically reduced, and we had to react very quickly to manage the most critical elements of our financial position.

The big difference in this downturn compared with the ones that have occurred in the past was the way we reacted more professionally by adjusting our inventory to purchases. Although our business dropped dramatically starting in December 2008 and into the first and second quarters of 2009, you'll notice from our financials that we didn't dip into disastrous territory, as we did during the tech meltdown at the beginning of the decade.

Where did the recovery start?
As we moved into the summer of 2009, we started to see an acceleration of activities and new orders, primarily in Asia, and we started to get the tip-off that something was happening there. Previously, when Asia picked up, it was driven by an increase in electronics consumption in the West, but that was not so this time. Our Western business did not show much positive growth initially, even as our Asian business was taking off.

The story line here is that a good portion of our Asian business, unlike in the past, was being driven by Asian consumption. More of the products were being consumed either in China specifically or across Asia. As we got to Q4, we started seeing some improvements in orders in the West, but at the same time we saw no reduction in the activity in Asia.

Would the expansion distributors have made into Asia make it possible for them to gain more of the available market?
Our growth in Asia has been phenomenal-35 per cent y-on-y in the December quarter, for instance. However, there are challenges in Asia that do not exist in other parts of the world.

For example, gross profit mar- gins tend to be lower in Asia, but to offset that, inventory velocity tends to be higher. We can therefore achieve similar profits, but we have to do things differently.


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