Set against the backdrop of Avnet Inc.'s pending purchase of Kent Electronics Corp., pressure to serve OEMs around the world is forcing some midtier U.S. distributors to seek creative ways to gain a global presence without making acquisitions.
Tapping new markets while keeping their independence, All American Semiconductor Inc. and Jaco Electronics Inc. are developing separate strategies that will bring them deeper into Europe this year. And Nu Horizons Electronics Corp. is using its logistics arms in Asia and the United Kingdom to assist EMS customers doing business in those regions.
"Being able to serve customers on a global basis is one strength that has become an increasingly important factor for a distributor going forward," said Steven Fox, an analyst at Merrill Lynch & Co. Inc. in New York.
Kent began losing contracts and preferred-supplier agreements when it became unable to fulfill business in Europe and Asia. That's why the distributor agreed late last month to Avnet's $550 million stock swap.
Avnet is one of a handful of franchise distributors, including Arrow Electronics, Future Electronics, Memec, and TTI, doing business on a global basis.
As distributors battle to achieve a worldwide presence with economies of scale, the threat of consolidation has sent executives back to the boardroom to hone strategies and forge tighter alliances.
Aiming at Europe
After spending a year in negotiations, Miami-based All American formed an alliance in January with Abacus Polar plc, a Berkshire, England, distributor with $300 million in sales last year. The two companies linked their IT systems, enabling them to access each other's inventories and offer supplier lines they are not franchised to sell.
So far, the deal has earned All American between $5,000 and $20,000 a month. The distributors each retain a percentage of the other's sales based on the resale price of components.
"They made a presentation on their business model and I felt as though someone had stolen my strategy," said Bruce Goldberg, president and chief executive of All American. "They viewed their challenges from a European perspective very similar to ours in North America."
Those challenges include expanding its global footprint. All American's net sales reached $522 million in 2000; with shipments to Mexico and Canada accounting for less than 8% of sales, and shipments outside North America representing less than 1%.
While All American's shipments outside the continent are extremely small, its alliance with Abacus will help support its North American customers conducting business in Europe, where the market potential is huge.
Paul Hurst, an analyst at Europartners Consultants, a market research firm based in the U.K., said the distribution total available market for Europe in 1999 was about $12 billion. Industry prognosticators expect that number to grow 30%, to $15.6 billion in 2000.
All American is considering merging with Abacus, giving it immediate access to the growing electronics market in Europe.
"We'll see if this makes sense culturally and then try to venture further into the relationship with the ultimate goal of merging," said Goldberg, stressing that no financial obligation currently exists between the two companies. "We're in very preliminary stages with three similar relationships."
Abacus' agreement with All American adds to an existing relationship with privately held Rotronik Elektronik Vertriebs GmbH of Germany.
"These agreements work well and at this time we don't see a need for a merger, but one never knows," said Abacus chief executive Martin Kent. "We have this type of alliance with other distributors as well. It enables us to support customers in different parts of the world where we lack a presence."
Are others doing the same?
A similar alliance has existed between Pioneer-Standard Electronics Inc. in Cleveland and Britain's Eurodis Electron plc since 1998, and World Peace Industrial Co. Ltd. in Asia since 1997. The three companies, which collectively generated worldwide sales of more than $3 billion in 1999, entered an agreement to collaborate in global key accounts, purchasing, marketing, and operations.
"Prior to the alliance, it was very difficult for us to deal with international customers," said Arthur Rhein, president and chief operating officer of Pioneer-Standard. "We recognize as time progresses, having these global capabilities becomes increasingly important. When the right opportunities present themselves, we will move forward."
Pioneer-Standard currently has a 13% equity stake in Eurodis, and a less than 10% stake in privately held WPI. The distributor declined to comment on whether it has plans to acquire Eurodis or WPI.
"Basically, a distributor has two choices, either make acquisitions or partner with some quality distributors," said Robert C. Damron, an analyst at Tucker Anthony Capital Markets in Milwaukee.
Nu Horizons, Melville, N.Y., is finding that a growing number of OEM projects initiated in North America are being outsourced to EMS manufacturing facilities in Asia. To respond, Nu Horizons is using its logistics business, Titan Logistics Co., to transition products from North America to EMS production facilities in Singapore and the United Kingdom.
Nu Horizons expects to expand its warehouse or acquire a larger facility, according to Dave Bowers, the company's vice president of marketing.
"We're expanding in Asia because more of the projects we develop in North America transition to Asia," Bowers said. "EMS companies need the capability to transition designs from the U.S., so we'll take our one-stop specialty focus and move into Asia stronger to support them."
While Nu Horizons' international business is less than 5% of its total revenue, Bowers expects it to become a "significant" part of the business within the next year. Bowers wouldn't elaborate on the company's goal.
Customers requesting support outside the United States will take Jaco Electronics Inc., Hauppauge, N.Y., into Europe before the end of 2001.
"We have detailed the move into Europe and we are ready to set up support facilities near our customers," said Joel Girsky, Jaco's chairman, declining to comment on the specific strategy. "Moving into the Far East is another scenario and I can't really see that occurring in 2001 because it will take a little longer for us to work through."
Girsky said Jaco's overseas sales for calendar 2000 were about 10% of the company's total of more than $315 million.
"That's not to say our customers aren't requesting that we also move into Malaysia and other regions," he added. "But they're not applying the pressure. At least not in the conversations I'm having with them."
Reptron Electronics Inc., Tampa, Fla., has begun to implement strategies that will take the distributor across the globe. About 93% of Reptron's revenue stream comes from within the U.S., with the remaining 7% from Brazil, Canada, and Mexico.
But president and chief operating officer Paul Plante believes the motivation should come from within the company, vs. external pressures from customers or suppliers. "We have a desire for a presence in the United Kingdom and mainland Europe and the Far East," Plante said. "We are and have been developing our strategies, and we'll move forward at our own pace within the next two years."