Distributors of electronics components have invested huge amounts of time, effort and development money in the Internet in the past 18 months, racing to capitalize on the huge earnings potential of electronic commerce. Although those efforts have yet to produce any volume shipments, industry observers are predicting a sharp change in the next 12 months as distributors establish firm Internet infrastructures, either independently or through consolidation.
The swift market takeoff that is predicted will be built upon joint agreements, mergers and acquisitions, and the rapid development of Web sites designed to attract engineers and purchasing managers looking for products and tools. Engineers, in particular, have embraced the chance to access information quickly online, and purchasing managers are following suit.
"We've seen a significant migration of customers to the Web, where they're finding out about products, getting data sheets and other items that help them understand things in more depth," said Tom Pitera, president of Pioneer-Standard Electronics Inc. (Cleveland). "And if they choose, they can also buy products.
"Today, we're running close to 4.5 million hits a month, with 1.5 million-page views," Pitera said. "We have in excess of 250,000 users to our site each month. And I think we probably have not scratched the surface. We're certainly not reaching every potential customer. I'd say we're probably on the light side, that we're not even coming close to saturation."
Visiting a Web site and actually transacting business through one are two different things, however. Although the number of hits to distributor Web sites is climbing swiftly, the volume of business distributors are handling over the Web is not. Further, the orders distributors are processing are limited to small, noncritical items designed to test the techniques and processes for doing business over the Net. Still, while there isn't much true sales activity today, that is expected to change quickly.
"I think if you polled all these people today, the market transactions would be less than $500 million," said Geoff Wild, CEO at TheSupply.com Inc. (San Jose, Calif.). "I project that it will be 10 times that within 12 months, not including what the individual companies do directly with their suppliers. Within two years, I think almost everything will be handled over the Internet. Do you think that three years from now big companies will still be sending purchase orders by fax or e-mail?"
TheSupply is one of many Internet portals that let engineers search the databases of several distributors from one central point. Through the use of a portal, designers are able to find the lowest prices, locate hard-to-find components or perform other functions faster than if they had to search the sites of several suppliers. And building traffic at portals is even more of a necessity than for conventional brick-and-mortar distributors.
"We're providing what we call info commerce, that is, information and the ability to buy parts online," said Michael Shultz, president and CEO of Questlink Technology Inc. (Austin, Texas). "The vast majority of our users are engineers, and the vast majority of what they're taking advantage of is our rich information resources. Clearly, on the information side, business is good. We have 237,000 registered users."
Once those users become regular visitors, distributors expect they will become paying customers. "Questlink this year will approach $10 million in pure-play electronic commerce, and that's growing at a phenomenal rate," Shultz said. "Next year revenue should grow between eight to 10 times, potentially even more. That's breathtaking, although we keep reminding ourselves that our $100 million is part of a $250 billion market, so it's a very tiny piece of the total business."
Although some industry observers once predicted that portals and other Web-based startups would push established brick-and-mortar distributors out of the market, they've backed off those forecasts because most old-line distributors have linked up with at least one portal and expect to do solid business in specific niches.
"We think the portals will be very strong players in the engineering buys, small-order market," said P.J. Bellomo, vice president for electronic commerce at Avnet's Electronics Marketing Division (Phoenix). Most engineers buy only small volumes for sampling and prototype builds, a small niche compared with full-scale production requirements. But "depending on how you measure that, it might be considered a small niche or a very large marketplace," Bellomo said.
Most existing Internet business is done via electronic data interchange (EDI) links between major corporations and large distributors, but it's unclear whether that will remain the case. Other information standards and technologies are under consideration, with RosettaNet leading the pack.
"It's unclear how quickly people will migrate from EDI. If it's not broke, don't fix it," Bellomo said. "But if someone wants to move today, the question is, Do they start with EDI or RosettaNet?"
RosettaNet is among a handful of standards being developed to simplify using the Internet to transact business and provide information. Specifically, it's a common way to display and handle component information and orders, and most of the major distributors and electronic component suppliers support it. And while standardization may not be necessary for distributors to engage in electronic commerce, it can't hurt, many say.
"A transition can occur without standards, but we think standards' coming into place will be a huge facilitator and a driver for business," Bellomo said. "We've got a lot of internal resources focused on RosettaNet. But the reality is, there's an awful lot of detail work the RosettaNet folks have to do. Something like a bill of materials has to be a very precise thing. It has to hold a header. It needs to define how many items are in the header. There's a detail level with certain elements and many other things like that."
RosettaNet has already been demonstrated, and some companies are adopting it even though the formal specification won't be unveiled until October. The standard will grow as developers complete pieces of it, and its acceptance by distributors will also proceed incrementally, with larger companies employing it first. Smaller companies will adopt it later.
"Many of the major players in the marketplace have committed to having RosettaNet up and running starting in October," Pitera said.
"I think we'll see an evolution with Rosetta Net akin to what we saw 10 years ago, when big companies started using EDI and smaller companies followed."
Going beyond RosettaNet, some observers said they hope manufacturers will eventually devise a common technique for numbering their parts. Although there are several different components on the market, many are simply variations of a particular product family.
"There are some flirtations with standards, and I think those are important and will contribute to growth," Shultz said. "But the real driver for rapid growth will be the standardization of a technical information delivery system and a standard for purchasing part numbers. It's still inordinately difficult to get all the information about a product or type of product. There are roughly 2.5 million SKUs today, which is a lot. But of all those, much of the difference comes down to speed, package type and temperature parameters, so there are only a couple of thousand parts with thousands of variants. If there was a standard approach for numbering them, life would be much simpler."
Many observers hope to see more standards appear, noting that there aren't too many technical issues obstructing progress. Most of the technical capability is set, although some vendors said some of their customers are having difficulty meeting growing bandwidth requirements.
"Bandwidth is always an issue," Pitera said. "With more content going up, we are very concerned about putting up information that is relevant, without a lot of unnecessary graphics or extraneous information. That's not a big issue for us to handle, but at many small and midsized companies, the bandwidth coming out of the building is not what it could be."
Most vendors agree that bandwidth supply is a temporary issue. So when it comes to technical questions, the emergence of standards is pretty much the focus, but that doesn't mean that all the roadblocks have been removed.
"There's more of a bottleneck on market acceptance than on the technology side," said Penny Cotner, director of e-business at Wyle Components (Santa Clara, Calif.), which is being merged into Arrow (Melville, N.Y.). "It's not easy to get people to place an order online, changing from the traditional avenues to doing transactions over the Internet. You're removing some human interventions, and there's a different psychology there."
As people become more comfortable doing mission-critical work over the Web, more than sales will grow. Many in the industry believe that engineers will increasingly use the Web for pure design work, so distributors are looking at what they can provide in that realm.
"One area where we're adopting more technology is in design capability, giving engineers the ability to do designs on the Web," Pitera said. "Among the initiatives we're looking at are concepts that let an engineer do a design on the Web starting with a block diagram, then populate it with technical blocks, turn those technical blocks into individual parts, do some simulation and eventually create a bill of materials."
Those capabilities will augment the infrastructure that's been put in place in the past year or so. And as the trend toward Internet activity picks up steam, distributors are likely to continue with and refine the consolidation that has characterized the industry for the past several years.
"I think going into next year, you're going to see more mergers and acquisitions," said William Barron, chief marketing officer at Partminer Inc. (New York). "A lot of people are still flush with cash, and they've got to do something with it."
Some observers claim Questlink's acquisition of NetBuy is the first example of dot-com-driven consolidation in the distribution market. Questlink executives disagree, although they agree with the overall prediction that fewer distributors will exist in 2001 than do today.
"Our acquisition of NetBuy wasn't about consolidation; it was about acquiring critical capability," Shultz said. "I do believe that there will be a fairly significant consolidation in this industry.