An Authorised Distributor's perspective on industry consolidation

The past two years has seen a huge wave of consolidation in the semiconductor industry as organisations leverage easy access to inexpensive capital to increase their market share and penetrate new market segments. The current level of consolidation activity seems unlikely to slow down any time soon. Broadcom’s ongoing bid to acquire NXP and Qualcomm in advance of their proposed mega merger is a case in point - if the bid succeeds it will catapult Broadcom into the top three semiconductor manufacturers by revenue, behind Intel (2) and Samsung (1). It’s understandable that news of mega mergers will grab most media attention, sadly eclipsing the numerous smaller mergers and acquisitions taking place in the same time-frame that will also have a – somewhat subtler but no less critical – impact on the electronic components supply network.

Authorised Distributors - who directly support over 98% of the global customer base - are often particularly impacted by manufacturer consolidation, as the new merged semiconductor manufacturers attempt to rationalise two or more legacy channel partners into a new unified structure. There’s unlikely to be any notable winners or losers in this process. The size of the pie (market) isn’t changing, it's just being sliced up amongst the existing players in a different way. No surprise then that authorised distributors are also taking to the M&A trail, not only acquiring other distributors but also organisations with access to the new technologies they need to provide competitive solutions to their customers as the industry migrates towards what is obliquely referred to as a ‘digital transformation’.

Channel partner re-alignment
In the short-term realignment and consolidation among manufacturers and distributors is likely to prove something of a 'headache’ for many organisations dependent on the electronic components supply network. The critical concern of manufacturers is avoiding ‘line conflict’, finding themselves competing for attention with another prominent semiconductor manufacturer with similar products on the same Authorised Distributor's line-card.

The Authorised Distributors critical concern is whether they will remain in the new channel or have their distribution agreement terminated. In the latter event the Authorised Distributor's infrastructure can be left very exposed. As part of their agreement with the manufacturer they are usually required to invest heavily in inventory, which in the event of a no fault termination they can either retain, sell or return. However, there’s not much they can do to recover their investment already made in essential personal who function as an extension of the manufacturer's organisation, typically application engineers, product marketing and specialist sales staff. Not only must they contend with the loss of this investment in the product line but they also have to absorb the upfront costs - inventory and necessary infrastructure – when they’re appointed by another manufacturer.

Authorised Distributors take a pragmatic view about ongoing changes 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 organisation and make every effort to redeploy them to other existing or potential product lines or in other roles within their organisation. However, the current situation is very fluid with a high degree of uncertainty and many Authorised Distributors are incurring significant additional short-term costs in managing the process.

Customer service
Authorised Distributors are in the customer service business but there’s a fine line to walk between satisfying the needs of their many customers and meeting the commercial demands of the few manufacturers they represent. However, customers are always Priority #1! When a problem arises, Authorised Distributors will always ‘move heaven and earth’ to ensure that any disruption in the supply of products to their customers is minimised.

They mitigate potential risk by leveraging their close relationship with the manufacturer, by putting buffer inventory in place on the customer's behalf or by working with the customer’s design team to identify alternative product solutions from the same or possibly an alternative components manufacturer. In this they can be assisted by the merged semiconductor manufacturer who in a bid to further minimise any disruption to the customer will often facilitate the transition between their existing and new channel partners.

Digital transformation
The cost of physically engaging with existing and potential customers is high and most organisations and industries are attempting to move towards greater use of digital platforms, which in theory promise to reduce the average cost of engagement. Whilst ‘digitisation’ may automate some aspects of the design and daily transactional processes it doesn’t help much when problems arise, where human to human intervention remains the best - if a more expensive solution.

The cost of implementing, managing and maintaining IT systems has been significant and components manufacturers and Authorised Distributors have had to transfer financial and personnel resources to develop, support and maintain their evolving E-commerce platforms. Sadly, this IT investment has yet to deliver a significant reduction in the cost of sales engagement for the electronic components supply network, primarily due to both the technical complexity and the vast range of the available products. This situation is likely to improve over the next five years as much of the early investment and learning has now been completed and improving economies of scale, particularly for deployment, result in the increased usage necessary to drive costs down.

The electronic components supply network is in a period of turbulence and customer concerns are understandable. The current merry-go-round between semiconductor manufacturers and their Authorised Distributor partners is very likely to continue to play out well into 2019. My best advice for all parties is to continue - and where possible enhance - their engagement in positive, amicable discussions both up and down the electronic components supply network. It is only by talking to their Authorised Distributor partners and through them, to the appropriate semiconductor manufacturers, that customers can be assured of an appropriate response to their needs.