Mega Mania

Mega ManiaMega-Disties are becoming the thing for semiconductor distribution with Europe, spawning huge centralised warehouses. Is it a good thing for the semiconductor manufacturers if local distributors get gobbled up by their globalised neighbours? Will the end customer lose out in the long run? David Manners asked the chip manufacturers for their views
The urge to merge has transformed the semiconductor distribution industry. Farnell/Premier, Arrow/FES, Raab Karcher/ Wyle are takeovers which have fired the trend to the Mega-Distie.
But is this an animal to be loved or hated by the people who the disties are traditionally meant to serve – the semiconductor manufacturers?
“The big are getting bigger – the acquisition and merger trail continues – and I think that’s OK,” says Motorola’s Bob Cameron, Northern European and South African semiconductor group sales manager.
“No entrepreneur can take my product portfolio to market,” explains Cameron, “a specialist distributor can take a narrow range to market but it wouldn’t have the infrastructure or the financial muscle to take our product line.”
“Distributors are operating on a global basis dealing with global customers who have locations across the world. Customers across the world are looking for constant service levels. Distributors have to realise that the market is now the world – because the customers are global,” continues Cameron.
That means distributors are being forced to develop their businesses along common lines. “Slowly but surely people are centralising their warehousing facilities across Europe. Some distributors are doing it faster than others, and there are different approaches: some are physically centralising their facilities, others are centralising electronically by linking their locations via computers so that they have visibility to eachothers’ stocks,” continues Cameron.
As well as centralising, distributors are investing in service. “All the distributors we deal with are investing in logistics programmes and value added services programmes – just-in-time, ship-to-stock, PROM programming etc – it’s getting more and more sophisticated,” reckons Cameron.
A third move is the people mix. “We see our distributors investing heavily in achieving the right people mix, the mix between the demand creation people – the sales and technical people, and the support function people – the internal sales function and admin people,” says Cameron.
“We like to see more people in front of the end customer so they can truly understand what the customer requirement is, and learn how to take costs out of the end customer’s operation,” adds Cameron.
“I think the distributors are moving down the right path, the only thing I think they should be doing more on is working on their own costs. If distributors wish to engage in a serious way with customers with larger spends – as the manufacturers have done – then they need to reduce their own costs faster,” concludes Cameron.
Also welcoming the Mega-Distie is Philips. “If you put a package of semiconductors together there’s no reason why customers shouldn’t go for it. The way a distributor reduces his costs is to supply as broad a range of products as possible – that reduces the cost of ownership to the customer. We want competitive suppliers but a low price is less important than total cost of ownership,” says David Winter, Philips Components’ sales and marketing director.
The enthusiasm of Cameron and Winter for the Mega-Distie is not universally shared. “The strong are doing the buying and the small are getting bought,” says Hitachi’s Andy Harding, the company’s UK distribution manager, “a year ago I would have said that the big acquisitions are over, now I think the biggest are yet to come – and I don’t think it’s good for the semiconductor manufacturers or for some customers.”
“It means we lose control of our network,” explains Harding, “could our biggest distributor get bought tomorrow? I suppose it’s possible, and it would make a major change to our network.”
“It reduces customer choice and I don’t think that can be good,” continues Harding, “but it’s not all bad – there are benefits to customers. As distributors get bigger, the cost of sales gets effectively less.”
“One of my concerns is about the trend of some of the big distributors to go and offer a customer every single product which that customer might want to buy,” says Harding, “they’re going to OEM-type customers, not traditional distribution customers, and offering value-added services such as kitting and EDI and putting their people into the customer’s business to manage the component flow.”
“They say that they can buy cheaper than other manufacturers, and so can offer the value-added services, but the reality is that often they can’t buy cheaper. If customers want the value-added services they should be prepared to pay for them,”believes Harding.
“Because of the move by distributors up the customer pyramid to bigger customers, the small to mid-sized customer – that includes customers which could be doing ?5m worth of business a year – get overlooked,” explains Harding, “some people have seen this as an opportunity, for instance Future Active International have come in and identified these people as being a key market, and Abacus Express was set up to target these customers.”
“There’s an unspoken rule that if you ignore the 80 per cent of your customers that make up 20 per cent of the business you’ll go out of business,” warns Harding.
“Probably the biggest issue for us with the changing face of the market with these mergers and acquisitions is ‘How do you supply the technical support to customers?’,” continues Harding, “our need for technical support people is increasing faster than we can add them, and we need our distributors to take on people. We went to all our distributors last year and told them we need dedicated applications engineers. Two of our distributors have already taken on dedicated engineers, and only one has not responded at all.”
So Harding disagrees fundamentally with Cameron and Winter on the advantages of the Mega-Distie. Somewhere in between are the views of Siemens Semiconductor and National Semiconductor.
“Until these larger organisations actually do become transparent European entities, then I don’t believe the customer will necessarily see any benefit from their creation,” reckons Tim Conway, sales and marketing manager for Siemens’ UK semiconductor group.
“Pan-European distributors will form only a part, and not the whole, of a well-balanced distribution network. There will always be a place for the local distributor which can differentiate itself through the service it provides,” continues Conway.
Siemens has not awarded pan-European franchises. “This may breed complacency in certain areas with the likelihood of of good operations in some countries and not so good in others, but we prefer to develop franchise agreements region by region, based on solid results,” says Conway.
“Today there is only one true pan-European distributor, the others aspiring to this are essentially a combination of regional operations under an umbrella. That said, it is only a matter of time before these groups will consolidate into more integrated operations,” believes Conway.
“The advent of the Pan-Europeans may, in the long term, have an effect on margins. In order to succeed, distributors are going to have to roll up their sleeves and sell,” reckons Conway.
Siemens aims to address the market on three levels: Pan-European, regional and local plus catalogue sales. The company used to have ten distributors in the UK. Now it has five:- four broadlines and one specialist (for RF, microwave and optoelectronics) – plus two catalogue distributors.
Despite a partially localised approach, Siemens’ policy is to have common pricing, terms and conditions throughout Europe with as much automation as possible.
“We are looking for more and more from our distributors. Increasing technical complexity coupled with customer demand, means that higher levels of technical support are required. Today’s products need to be designed-in as much as sold-in. Distributors must have a high degree of technical competence in order to compete,” asserts Conway.
“To the customer’s eyes the link between Siemens and the distributor must be transparent. Distributors must be responsible partners and be considered as an extension of a manufacturer’s own direct sales teams,” says Conway.
Also favouring a a mix and match approach of specialists and broadliners is National Semiconductor “We favour the guys who have made these investments in materials management programmes such as ship-to-line, ship once or twice a day, and consignment inventories,” asserts National’s Ray Sinclair, distribution manager for Europe, “if a distributor has made these investments then we don’t have to make them.”
“We also lean towards distributors who can help with FAE (Field Applications Engineer) design programmes and provide technical support,” adds Sinclair.
“Some distributors focus on the bigger customers, some are more nichey – focussing on design wins. If a distributor is not making the big investments in materials management programmes, then it will have to move towards the design-in area,” reckons Sinclair, “there will be a differentiation between these two types of distributor, but we will need both.”
For some semiconductor manufacturers, none of the the conventional distributor models work. “Under the Korean business model, we hold the stock at our expense and our risk, and we look to our distributors for technical support, sales support and promotion of the professional image of our product,” explains LG Semicon’s David Leith, general manager for LG Europe.
Will the Mega-Distie inherit the earth? Will the design-intensive specialist add the real value? Will they co-exist? Or will some new manufacturer/ distie model emerge to revolutionise the current market scene? “The big are getting bigger, and I think that’s OK”
Motorola’s Bob Cameron
“The strong are buying and the small are getting bought, and I don’t think it’s good for the semiconductor manufacturers”
Hitachi’s Andy Harding
“If a distributor is not making the big investments in materials management programmes, then it will have to move towards the design-in area, we will need both types”
National Semiconductor’s Ray Sinclair
“We hold the stock; we look to our distributors for technical and sales support”
LG Semicon’s David Leith
“There will always be a place for the local distributor which can differentiate itself through the service it provides”
Siemens’ Tim Conway
“If you can put a package of semiconductors together that reduces the cost of ownership to the customer”
Philips’ David Winter

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