Distribution world – One price for all?…

Distribution world – One price for all?…On the face of it the euro should bring pricing into line right across Europe so that whether you’re north or south the goods will cost the same. Harsh reality is however somewhat different……by David Manners
Transparent pricing across Europe? Forget it. It’s a nightmare. How could it happen in an industry where prices are dictated by paranoia and rumour?
Too harsh a judgment? Well, remember the Sumitomo fire when a resin factory burnt down and the price of DRAMs went up? There was no reason why, but rumours of impending memory shortages went round the world and prices jumped.
Or remember when the North Koreans got a little feisty a year or two ago and the Japanese were putting it around that hordes of troops were massing on the Korean border about to sweep into the south and take over the DRAM factories? Get your orders in now, was the hint, while stocks last.
Earlier this month a rumour was going around that Hyundai was about to go on strike in sympathy with the LG strikers. It was untrue, but the threat of the suppliers of 20 per cent of the world’s DRAMs going off-line may have persuaded a few people to hurry up and sign a contract at a higher price than the previous week.
It’s a naughty old world but that’s reality. Suppliers want to get prices up and will concoct or repeat a yarn which helps that happen.
“Yes there are differences in pricing, and it’s not just currency exchange rates”, says Colin Binks, European distribution manager at Toshiba, “with the euro we can put one price on the list for all of Europe, but reality still says we’ll sell for whatever’s the going rate. It’s a market steeped in culture – not just set by the economic policy of governments.”
Reality dictates that a sales guy going into a meeting with a customer will set his price according to the intensity of the competition. If the customer desperately needs the parts, the sales guy will ask an appropriately exorbitant price. If there’s stiff competition he will trim his margin to get the order.
It is the salesman’s decision. Only he can judge the situation on the ground and he will look stupid if he has to ask his boss to authorise a lower or higher price. So, in practice, suppliers give their salespeople the authority to negotiate a deal.
“Pricing depends on a whole bunch of things deriving from the mentality of customers’ purchasing”, says Binks, “for instance, whether a customer’s from a region with a mature attitude. In a mature region you get more stable pricing because you’re not just negotiating for one deal at a time but for long-term supply arrangements. The Nordic countries are the most mature followed by the UK. In these countries customers want more of a partnership agreement with people – even wanting you to fill their logistics supply chain. That sort of culture is not so well developed in the southern regions”.
“Different markets require different pricing structures”, says Colin Moger, International Rectifier’s Northern European sales manager, “in Scandinavia the prices are less because it’s mainly a mobile phone market and the volumes are greater.”
“Payment terms can alter things”, adds Toshiba’s Binks, “in Germany 30 days is the standard time, but in Italy and Spain, if you get anything less than 100 to 120 days you’re doing well”.
Oddly enough that doesn’t mean the prices are set higher in the southern region – generally they’re lower than the north – which suggests that there’s not much benefit in having a ‘mature’ attitude to ordering or a generous attitude to payment.
In one sense there will be transparency of pricing – in the sale from the manufacturer to the distributor. That’s because the big pan-European disties are moving to buy all their stock centrally.
For instance EBV of Germany buys its stock at one point and so pays only one price all over Europe. “From the distie point of view you may get more transparency as the major groups – Avnet, Arrow, EBV – reduce their points of purchase and rationalise their back ends,” says Binks.
At the big distributors there is a realisation that they will have to be more even-handed in their dealings with customers and several have internal programmes now under way which will make their pricing policies more transparent.
Manufacturers have long recognised the need to be transparent. At Hitachi Semiconductors, European director Matthew Trowbridge reckons: “I think we have transparent pricing already.” At International Rectifier, “We make a point that where we have a number of franchised distributors going for the same piece of business they all get the same price from us,” says IR’s Moger, “but it’s up to them how much they charge their customer.”
But whatever happens in the transaction between the manufacturer and the distributor, when distributors come to sell the stock on to customers, there’s not much chance of them charging the same price across Europe. That price will remain at the salesman’s discretion and the market’s whim. “A standard price would be cumbersome and impossible to manage”, says Moger.
In the world of the Internet and the euro this may come as a surprise. Distributors point out that prices are now publicly available on a global basis over the Internet. You can compare prices in different countries or in different regions and this might be expected to have a major levelling effect on prices. But transparency does not mean levelling.
Again, the expectation might be that the Euro would make it difficult to maintain pricing differentials across Europe. Certainly it will increase administrative efficiency. “Roll on the euro”, says Pat Frizoni, European president of TTI, ” we’ve centralised all our inventory in one facility in Germany but we buy it in different currencies, we hold it in one currency and we sell it in different currencies.
The complexity is enormous. The administration is enormous. Life would be so much simpler if we did everything in one currency”.
The euro should also increase transparency as Dick Skipworth, Memec’s chairman, points out: &quo t;I think there is a lack of transparency now. If you look at the local currency pricing you see discrepancies depending on which exchange rate you use – a constant rate of exchange rate in the euro block will increase transparency.”
The trends do seem to be towards a greater knowledge of worldwide pricing, but that does not seem to mean the emergence of a single worldwide price. There are too many, too independent, too fiercely competitive players in the semiconductor industry for it to become totalitarian.
The only thing that greater transparency will mean is that you can see when your competitor gets a better price than you do.
Expectations of universal pricing are as unrealistic as previous, fondly held, expectations in the industry that the supplier/customer relationship will become a ‘partnership’, or that the semiconductor market will become ‘mature’.
They may be topics to muse on in a bar, but things are still as they were and probably as they will be.

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