Front End I Electronic Components Supply Network
Semiconductor industry consolidation - an Authorised Distributor perspective…
In the last issue of Components in Electronics ecsn chairman Adam Fletcher looked at the recent unprecedented level of consolidation activities within the semiconductor industry from a customer’s perspective, as reports in the media generally concentrate on financial implications and make little reference to its effects on other players in the organisation's supply network. In the second part of his overview Fletcher examines the impact of consolidation on the supply network from the Authorised Distributor's perspective
acquisition process within the Authorised Distributor network itself is factored in it becomes obvious that the current “merry- go-round” is very likely to continue to play out well into 2019…
For Authorised Distributors - all of whom have been or will be affected by this realignment process, the short-term impact on revenues and profitability is relatively easy to measure, but the potential impact on the roles and number of employees within their organisations and how that ripples down to their customers is much harder to assess.
Adam Fletcher T
he consolidation in the semiconductor industry and the rationalisation by manufacturers of their channel partners (Authorised Distributors) following a M&A will I'm sure prove to be a ‘zero sum game’ in the medium-to long-term. After all, the size of the pie isn’t changing, it's just being sliced up amongst the existing players in a different way. However in the short-term, consolidation is likely to prove a 'headache’ for many parties in the electronic components supply network.
All change
The consolidation process invariably involves the transfer of distribution agreements from the newly consolidated semiconductor manufacturer from existing Authorised Distributors A and C to new Authorised Distributors B and D. At the same time another semiconductor manufacturer will be moving his allegiance from Authorised Distributor B and D, to Authorised Distributor A and F. Add in the potential problem of “line conflicts” (the possibility of two strongly competing semiconductor manufacturers finding themselves on the same Authorised Distributor's line-card) and further rationalisation becomes inevitable as at least one party needs to move to avoid the conflict. When the ongoing merger and
10 May 2017
Customer service The role of the Authorised Distributors is predominantly to satisfy the needs of their customers, they are primarily in the customer service business. They work very closely with their customers and typically meet their needs from a portfolio of products from a variety of manufacturers with whom they have 'authorised' agreements. When a conflict arises between their customer and a manufacturer they represent, they will always seek to ensure the needs of their customer is Priority #1 and will ‘move heaven and earth’ to ensure that any potential disruption in supplying products to their customers is minimised. Potential risks are identified with the customer and then mitigated, often by negotiation with the manufacturer, by putting buffer inventory in place on the customer's behalf or by working with their design team to identify alternative product solutions from the existing or possibly an alternative components manufacturer.
Other short term issues Any change to the status quo will have a direct financial impact on investment, profitability and cash flow. Authorised Distributors typically invest in resources (primarily people and inventory but also in IT, commercial property, advertising, vehicles, etc.) to do an effective job for their customers and the manufacturers they represent. Authorised Distributor were generally able to amortise much of their cost of these resources over multiple manufacturers, normally as a percentage of sales revenue. In this way the sales revenue, cost of sales and therefore profitability could be effectively allocated and
Components in Electronics
meaningfully monitored from either a manufacturer or customer perspective. Over the last two decades however it has become common practice for component manufacturers to insist that their Authorised Distributors invest in costly additional resources exclusively for their product line. These people, typically Application Engineers, Product Marketing and Sales personal, function as a direct extension of the manufacturer's organisation but within the Authorised Distributor's infrastructure. These are the employees that are now finding themselves exposed to potential change as a direct result of the semiconductor manufacturer consolidation process. The semiconductor manufacturer considers them in-direct employees and accepts little ongoing financial responsibility for them.
product line. In my opinion this is unlikely to be a strategy for success.
E-commerce solutions
All organisations and industries find the cost of engaging with existing and potential customers expensive and the move towards greater use of E-commerce promised in theory to reduce these costs. Sadly, for the electronic components supply network the reduction in the cost of sale have not yet been realised. The complexity of the products we handle has meant that the cost of implementing, managing and maintaining their IT systems has been significant, with components manufacturers and authorised distributors having to transfer huge financial and personnel resources to support, develop and maintain their E-commerce platforms. I
Authorised Distributors take a very pragmatic view about all this and strive to find a sensible balance between the costs of retention, recruitment and redundancy. Welfare issues apart, they recognise the talents of their employees and the value they deliver to their business. They want to retain these valued employees by redeploying them to other existing or new potential product lines within their organisation. That said, the current situation is very fluid with a high degree of change and I suspect many Authorised Distributors are incurring significant additional short term costs in managing the process.
Profitability and partnership Coupled with the consolidation amongst semiconductor manufacturers is an ongoing squeeze from the newly consolidated organisation to further reduce the gross profit margin of their channel partners (Authorised Distributors). The gross profit margin (GPM) of semiconductor manufacturers has always been under pressure but has consistently been greater than 60%. I find it odd that semiconductor manufacturers are attempting to force their Channel Partners' GPM down to single digits at a time when they demand the allocation of additional customer support and demand creation expertise to their
suspect this situation will improve over the next five years as much of the early investment and learning has now been completed and improving economies of scale will see costs reduced.
Improved communication Authorised Distributors have always been able to adapt quickly to changes in the electronic components supply network primarily because they are constantly engaged with their customers. This proximity to their customers enables greater understanding of their current needs and potential wants which are communicated and acted upon quickly. The electronic components supply network is going through a period of turbulence and customer concerns are understandable but it is only by talking to their Authorised Distributor partner and through them, to the appropriate semiconductor manufacturer that customers can be assured of an appropriate response to their needs. My best advice is for all parties is to continue, and where possible enhance, their engagement in positive discussions both up and down their supply network and together identify solutions that amicably meet their competing needs.
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