Distribution's midtier is feeling a tug from OEM and EMS customers to enter China's budding electronics market, but a survey of companies in the sector indicates that smaller channel players will not move to the mainland en masse.
Unlike most of the industry's top-tier distributors, which began forging a sales and engineering presence and building warehouses in China in the early '90s, few midrange distributors have yet committed substantial resources to prime mainland manufacturing locations such as Shenzhen, Shanghai, and Dongguan.
EMS providers say that to support their burgeoning contract manufacturing efforts in these and other growth areas like Beijing, that must change.
"Distributors need to fully establish themselves in the market," said Lawrence Conrad, vice president of semiconductor and distribution global supply management at Solectron Corp., Milpitas, Calif. "There's a lot of discussion about localizing the supply base in China. This is important because local content laws and specific government regulations insist that suppliers must be in China."
Arrow, Avnet, Future, Memec, and Richardson are among those with a significant presence in China either through acquisitions or organic growth. Phoenix-based Avnet increased its presence from three to 23 offices on the mainland last year when it acquired Hong Kong-based Sunrise Technology.
Arrow Electronics Inc., Melville, N.Y., entered China in the early 1990s, and the distributor's Arrow Electronics China Ltd. subsidiary now has 133 employees at 11 facilities and serves about 2,400 customers from a centrally located warehouse and logistics facility.
Pioneer-Standard Electronics Inc., Cleveland, has a global alliance with Taiwan's World Peace Industrial Co. Ltd., a distributor that represents 1.2 billion electronic components. Despite World Peace's focus on the Asia-Pacific region and Taiwan's historically chilly relationship with China, some executives say the partnership could help launch Pioneer onto the mainland.
Expansion under way
Distributors that lack or have a limited presence in China are increasingly expected to commit some degree of resources to support their manufacturing customers on the mainland. While some have plans in place, others are remaining committed to North America until China addresses lingering trade issues that make it risky for smaller distributors to chase new business there.
Richardson Electronics Ltd. recently opened a sales, engineering, and stocking facility in Beijing, its third such operation since expanding into China three years ago with a warehouse in Shanghai. Buoyed by 40% year-over-year revenue growth in China, Richardson plans to add 17 staff positions in fiscal 2003.
"We reached $11.7 million in fiscal year 2002, up from $7.8 million in fiscal year 2001," said Edward Richardson, chairman and chief executive of the LaFox, Ill., distributor.
Semiconductor specialist Memec plc committed to China six years ago and employs nearly 250 staff at more than 43 offices and two design centers throughout the country. Memec operates a warehouse in Hong Kong but is considering opening one on the mainland too.
"We're looking to support EMS providers through [vendor-managed-inventory] services in China rather than supporting them as a stocking distributor," said Gerry Fay, vice president of global operations at Memec United CMS, San Diego. "We're trying to determine if it make sense for us to build a warehouse or contract with a company that has a warehouse in China."
Although far from completing any deal, a "potential acquisition" could put Nu Horizons Electronics Corp. on the mainland as early as September, according to Arthur Nadata, the company's chief executive.
"We serve customers in China from a Singapore warehouse and sales offices in Penang [Malaysia], Hong Kong, and Taipei," Nadata said. "In December we plan to move our Singapore warehouse into a new building, approximately 25,000 sq. ft., double the current size. NIC [Components], Titan, and Nu Horizons share the warehouse."
A relative newcomer to the region, TTI Inc.'s Asian business, which operates as TTI Electronics Asia Pte. Ltd. in Singapore, last week opened a sales branch and regional stocking location in Taipei to support OEMs and EMS providers in the Asia-Pacific belt. The company plans to open a warehouse in China at the end of 2003 or early 2004, but remains wary.
"China, for all its talk about potential and size, is still a long way away from being a friendly and secure country to do business," said John Davidson, senior vice president of TTI Asia, Fort Worth, Texas. "My focus today is still building TTI's business in Singapore, Malaysia, Taiwan, Thailand, and Hong Kong because China remains a challenging place to conduct business. A lot of the manufacturing that distribution handles from an interconnect, passives, and electromechanical standpoint has yet to move there."
Indeed, for all but a few well-established top-tier distributors, the road to China is daunting and has prompted a number of companies to wait it out until the Chinese government makes good on promises to ease restrictions on currency exchange and phase out import duties on electronic goods.
Bruce Goldberg, president and chief executive of All American Semiconductor Inc., said a stocking facility in China is planned, but not in the Miami distributor's immediate future.
"It may not be a dedicated All American warehouse, but I can see us using a third-party logistics and warehouse facility," Goldberg said. "We've been using a third-party logistics company to move product into China for the past six months, but I believe we'll have to stock more components in the region soon as more new business turns into production runs."
For Jaco Electronics Inc., Hauppauge, N.Y., moving into China has recently become a high priority. "Many of our customers are pushing us to understand the market," said Ben Schwartz, vice president of strategic marketing. "We're in the early stages of aligning Jaco with a third-party local company in China."
No plans to go
Still, the volume of business made possible by China's low-cost production climate is not convincing to all. Reptron Electronics and Sager Electronics plan to concentrate on small and midtier OEMs and contract manufacturers that are similarly unlikely to make the necessary investment to establish a manufacturing presence in China.
Frank Flynn, president of Sager Electronics Inc., said the Weymouth, Mass., distributor serves small to midsize OEMs and contract manufacturers with annual revenue up to $500 million.
"We really don't have customers outside North America," Flynn said. "More of the largest OEMs and EMS providers are moving to China, which historically has not been our primary customer base."
Paul Plante, president and chief operating officer at Reptron Electronics Inc., Tampa, Fla., said that despite China's low-cost allure, moving there presents new challenges that many of its customers would prefer not to confront.
"Sometimes customer schedules are so erratic it's difficult for them to meet rigorous production schedules required in Far East facilities," Plante said.
"Our customers don't need that model. They are looking for us to produce the goods domestically."