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Electronics distribution executives reveal supply chain insight

Improving product mix slows average selling price (ASP) erosion for systems. Distributors and suppliers may be gaining pricing power. Systems distribution industry should grow faster in 2010 than historical 4% to 6% growth rate. Electronics components distributor Avnet experiencing customers offering to pay for better allocation.

The Global Technology Distribution Council (GTDC) (www.gtdc.org) is just what is seems, a consortium of wholesale distributors in the IT industry.

The purpose of the GTDC is to bring together the best minds in the distribution and vendor communities to discuss issues and topics of mutual interest that can ultimately lead to efficiencies in the way products and services are brought to market throughout the IT supply chain.

Each year, the GTDC hosts two events, the Technology Distribution Summit and an Investor Relations Conference.

The Technology Distribution Summit is an intimate, invitation-only event that pairs the highest level distribution executives with the top executives and channel advocates from the industry’s leading vendors.

The Investor Relations Conference brings together both buy- and sell-side financial analysts with the CEOs / presidents of the world’s leading distributors.

This event is also invitation-only and it allows analysts from the country’s leading brokerages to hear from individual distributors, but also in a unique format focused solely on distribution and its role in the IT supply chain, to hear from vendors and resellers about the important role distributors play in an effective and efficient IT channel.

Investment bank Credit Suisse recently met with IT distribution industry executives at the venue above. In its report, Credit Suisse highlights key takeaways from those meetings. Excerpts from that report follow.

Product refresh and improving ASP trends boost systems distribution
Electronics distribution executives cited a long-term 4% to 6% growth rate in the systems distribution industry, but all noted the industry will grow faster in 2010. Participants cited:

  • product refresh cycles in servers, PCs, and printers, and…
  • slower than typical ASP erosion as the product mix improves with the cyclical recovery.
    • Specifically, Credit Suisse noted Tech Data Corporation, which distributes microcomputer-related hardware and software products to value-added resellers and retailers, and Synnex Corporation, which is a business process services company providing services in distribution, contract assembly, and global business services and operates in two segments; distribution services and global business services, indicated the market would grow “5% or higher” in 2010, whereas electronics distribution company Avnet sounded more optimistic: Avnet said it expects systems distribution to grow “high single digits” in 2010.

Pricing power in components
At the event, Avnet stated further it expects its electronics components segment to grow “mid-teens to 20%” in 2010, which Credit Suisse noted looks conservative relative the investment banks 26.8% organic growth estimate for the calendar year.

More important, Credit Suisse notes Avnet stated the Company is beginning to see customers offer to pay upside for better allocation – an interesting anecdote suggesting distributors (and by extension, suppliers) may be gaining pricing power today.

Lead times coming down to earth
The report goes on to state several distributors and VARs (value added resellers) cited shortening lead times. Westcon Group, a leading distributor of networking and communications technologies operating in the IT channel, noted that lead times for Cisco System have declined from 12 weeks to 16 weeks three months ago to 6 week to 8 weeks today, but noted these levels are still high relative to the pre-credit crisis level of 4 weeks to 6 weeks.

Additionally, Credit Suisse notes a VAR stated that HP printer allocations have “loosened up” in the last 8 weeks.

Expect M&A to continue
Looking at mergers and acquisitions in the sector, it appears industry executives made a compelling case for M&A to continue, based on 3 key points:

  • large global distributors have strong balance sheets and easy access to credit
  • acquisition targets have solid visibility (backlog) today, making deals more palatable to acquirers, and
  • suppliers continue to favor distributors with larger scale and wider geographic scope, suggesting smaller distributors that don’t participate in consolidation will likely lose share over time

Component manufacturers vs. distributors
The Credit Suisse report continues, that, while there are some clear signs of late-cycle behavior (very high book-to-bill ratios, product shortages, and certain double-ordering) the firm believes the limited supply growth will delay any ‘over-supply’ situation for at least several more quarters.

As a result, the bank feels some component manufacturers could like experience improved earnings power from both improving demand and channel refill over, say, some distributors that normally outperform their suppliers financially in the latter part of the cycle.

Source: Credit Suisse, VentureOutsource.com, May 2010




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