Growing at a double-digit clip and well ahead of the global economy, the electronics equipment industry is forecast to exceed $1.3 trillion in revenue within the next three years. It is expected that the industry's performance will be driven by its continued strength across most market segments, including the telecommunications, medical, industrial and automotive sectors. That's the good news.
The bad news is that even though they still count as major design, production and sales centers today, some manufacturing regions that once dominated the sector are dropping steadily on the electronics totem pole. That prognosis has significant implications for many Western companies in the sector, and some of the effects are already playing out. This can be seen especially in the raft of private-equity buyouts and other mergers and acquisition activities announced since the beginning of the year.
In this analysis, the first in a series on the future of design and manufacturing activities in the industry, we'll take a look at how changes in the electronics supply chain are affecting operations and strategies at component distributors.
How do the regions stack up? China is leading an upswing in Asia-Pacific (excluding Japan). And Japan is accelerating moves to shift production outside the country, although it is concentrating high-level design and chip-manufacturing activities at home. North America, which led the outsourcing that's driving the current manufacturing disruption, faces a gloomy future as a production center, but retains its dominant position as a design, R&D, venture financing and idea incubation center. Europe's future is comparable to that of North America, with the caveat that the region is enjoying a manufacturing renaissance in the relatively lower-cost eastern European countries.
Worldwide electronic equipment manufacturing will total approximately $1.36 trillion by 2011, according to iSuppli Corp., up from $820 billion at the turn of the century. During that period, China's share of global electronic manufacturing will shoot up to more than one-quarter (27.5 percent) from 8.5 percent, according to the El Segundo, Calif., research firm.
The shift in electronics manufacturing to Asia-Pacific has also resulted in higher semiconductor shipments to the region, prompting component distributors to accelerate their activities in that part of the world.
Arrow Electronics Inc. and main competitor Avnet Inc., both of which represent more than 50 percent of worldwide component sales through distribution, have in the course of the last few years devoted more resources to increasing sales in the region through acquisitions, organic growth or a combination of the two.
They've both been rewarded with higher sales in Asia-Pacific. In 2006, Arrow and Avnet said sales in Asia rose 63 percent and 67 percent, respectively. The two companies said sales to the region would continue to rise.
Other strategic changes are also being implemented by executives at the two companies. Arrow, for instance, is targeting small-and medium-size businesses in North America, according to Arrow chairman and CEO William Mitchell.
"The small- and medium-size companies are the underpinning of the electronics industry," Mitchell said. "Large businesses have moved to Asia, but there's strength in small and medium businesses in North America and Europe."
Mitchell said Arrow is not opposed to growth through acquisitions, but insisted the company wants to expand mainly through organic growth and ahead of the industry average. To facilitate this, the company is working on implementing a new enterprise resource planning system worldwide that would link all of its information management system.
The company's processes are done "differently in many parts of the world," Mitchell said. "We couldn't leverage and we couldn't scale them."
Being able to leverage corporate purchasing power and other information metrics has become even more critical due to the shift in manufacturing to the Asia-Pacific region. For component distributors, that global realignment represents both an opportunity and a challenge.