See also: Distribution World, our blog for news and developments from the electronics supply chain
Mike Long, newly appointed CEO of components distributor Arrow Electronics, talks with our US sister site Electronic Business about the gains distributors have made during this hardened economy, market growth opportunities, and the changes in how suppliers are doing designs. What follows are excerpts of that conversation.
You entered your new role as CEO at a difficult time in economic history when global economic uncertainty is the single greatest factor affecting the electronics industry and electronics distribution. How is the distribution handling all of this and is it growing at all?
Long: I would agree with you in terms of the economic history right now. One of the items that is different compared to the last several downturns is the fact that the ability for people to borrow money in the downturn has caused many companies to make sure they are cash flow positive and can continue to operate as the market goes down. That has caused some unlikely benefits, if you will, in the business today. One of them is that customers are using their inventories first before they buy. Obviously, you look at that and in many ways you could say that that causes volumes to go down and it's bad. But an end does come to that and the companies that have done that have freed up some cash for themselves to keep them strong, which is what you really like to see with your customer base when you are a distributor. If your customer base is strong, you will ultimately be strong as the economy changes.
The other thing that has been beneficial is that the supply chain itself is more efficient than it's even been. If you go back to the 2000 decline, distribution, the direct manufactures, and the customers were all stuck with an abundance of inventory. This time, that's not the case. The supply chain flow is much better, on-time deliveries are much better, and if you really take a look at it, lead times today are at the low end of normal, which means customers are not having problems getting their products, other than an occasion blip.
As far as the trends, North America as we know it saw the downturn come first. In many ways Europe has followed North America, and China has had its own basic economy which hasn't necessarily followed any drum beat for the last five years. In China, as example, we see the 3G business picking up. I don't believe overall that we are prepared to call the bottom in any relative form, but what we do see is a segment of the business there picking up. In North America, we still see opportunities. We see opportunities in lighting here. The LED market is expected to triple over the next six years. Whether or not it hits the full $12 billion that's projected to be that market in 2012 or not, I think we will all agree that that is a trend that is going to happen and it's going to happen all over the world. We do see medical devices increasing their electronic content. The military/aerospace business will remain stable and the industrial business will ultimately come back, too. Positioning ourselves right now to make sure we are calling on those customers as a distributor is still real important.
Electronic Business: How do you see distributors serving some of these markets?
Long: One of the things that's happening right now which gives me security that the market will turn eventually is the amount of design activity that is going on out there today. There's an awful lot of design work being done in the medical segment, there's a lot of design work being done in the lighting segment, military/aerospace is still doing design, the industrial space is doing design. So even at a time when customers aren't necessarily buying a lot of product to support their businesses today they are doing an awful lot of design work and not necessarily cutting their costs there. We do believe the market will be robust as it turns. The best thing we can do right now is to continue to work with our manufacturers and our customers to connect their product and their technology together.
Electronic Business: In military/aerospace are you hearing anything from your suppliers and customers about concerns regarding environmental regulations and how that is impacting supply?
Long: Not right now, but I do believe that the environmental issues will continue. A couple of years ago, the whole ROHS change over did create extra business that popped up at that time as the change over of products was taking place. I believe that the electronics industry fulfilled its place in the green economy as that was going on and did that with very few hitches over the course of that couple year period. The distribution industry knows how to do the change over in parts, knows how to deal with those changes, and can do it and keep the supply chain efficient. That's one of our towering strengths. As those regulations come up, we are in a great place to handle that.
Electronic Business: Speaking of efficiency, is Arrow's FAE (field application engineer) strategy changing at all in this economy and as the Web grows as a revenue source?
Long: There are many ways that I see the application engineering activity changing. We see more and more customers now doing design work with us over the Internet. What that does is allow many of our design engineers to make more calls with more customers and to help solve more customer problems without getting in a car and actually driving over.
There is sort of a change in the way companies are doing designs. If you go back 10 years, every engineer wanted to see another engineer that was around product specialization. Well today, the engineers are more interested in solving a solution problem versus a part problem. That requires our engineers to be more broad in their thinking and to have the knowledge of how different types of manufactures and their products work together. That's how that job is changing. Customers aren't interested in us doing a design for one part - they want the total solution to be efficient and they want the solution to be designed with products that will be readily available for longer periods of time.
Electronic Business: It sounds like you see a lot of opportunity in design chain or demand creation.
Long: Absolutely. I think that's the number one positive we are seeing in the market today.
Electronic Business: Are relationships with suppliers changing?
Long: I would say in many ways they are getting stronger. We are looking for ways that we can increase or take on different portions of the supply chain workload so we are not duplicating efforts as much as we used to. Suppliers would like us to continue on our journey to be more technically astute and bring their technology to more customers than we have in the past and those are great conversations to have. Increasing the number of customers we deal with is a top priority for a distributor and if you can bring a manufacturer's product to more customers, you will ultimately grow as the market changes.
Electronic Business: Would these relationship changes have happened if the economy hadn't hit the rocks the way it did?
Long: I believe everything has migration points to it. As you know the North American market has not been growing for a couple of years in a big way and many of the large customers did move their manufacturing to Asia over the last several years. What's happened is there are a lot of new accounts out there starting up that use electronics. As a distributor, we've had to go look for those new accounts and try to develop smaller accounts into larger accounts. That activity has really been under way, but it takes something like a major crisis to bring it to the forefront, if you will.
By Suzanne Deffree, Managing Editor, News - Electronic Business