As manufacturing continues to migrate from the United States and Europe to China, North American components distributors are taking a hard look at what it means to support their customers and what it will take to have a major presence in China. Among the challenges they face are cultural differences, setting up logistics centers and tracking designs.
"Distribution, along with other participants in the technology sector, has felt the impact of businesses' migration to low-cost labor markets and the corresponding shift in components demand. Distribution has had to respond by expanding both its footprint in the Asia-Pacific region as well as enhancing the linkages between Asia-Pacific and the rest of the world," said Tyler Moore, head of Arrow's Global Business Conversion team (Denver).
For some distributors, such as Jaco Electronics Inc. (Hauppauge, N.Y.) and Electronics Inc. (Weymouth, Mass.), the required investment is too great, so they continue to focus on customers in North America. "We've looked at what it would take based on our line card and our size and the culture that we would have to embrace to be in some of those markets; I don't think the return is one that we can afford to currently accept," said Ben Schwartz, vice president of strategic marketing for Jaco Electronics.
Strong relationships with its OEM customers have permitted the distributor to work with global contract manufacturers, Jaco says. The distributor reports some success by working with local logistics companies in Asia and investing in a strong IT system to support its global customers.
Sager's primary focus is the North American small- to midsize customer. While other distributors may be focusing on the high-volume OEMs that are moving internationally, Sager is not seeing much movement overseas in its market, said Frank Flynn, its president. Where customers have asked for international support, Sager is using alliances to help fulfill their needs.
Others, such as Arrow, Avnet, Nu Horizons and TTI, have made inroads into China-in some cases through acquisition. These distributors decided several years ago to have a presence in the region in order to support their large, global customers. "A lot of product is made in Asia as opposed to the U.S. or Mexico, and it would be crippling for a distributor who had a strategy to service worldwide customers not to have some major presence in Asia," said John Davidson, senior vice president for TTI Asia Region in Singapore.
The big reason for TTI's moving into Asia was the global manufacturing strategy toward which its major customers were moving over the last several years, he said: Many customers said they would drop TTI as a distributor if it couldn't support them globally. Davidson said it would not only nullify the business TTI might have but negate the entire relationship, which would also affect its North American and European business.
Although there are several major challenges that distributors face in setting up shop in China, including differences in culture and the way they do business, three key challenges include logistics, geographic coverage and design-win tracking. But distributors said the challenges aren't insurmountable and don't consider them roadblocks to doing business in the region.
"I don't see challenges in a negative way but as an opportunity for those who have the size and scale to move with production or the migration of business around the world," said Phil Gallagher, executive vice president of global business development for Avnet Electronics Marketing (Phoenix). One major hurdle is to create a way to track a distributor's design work through to fulfillment and manufacturing, and to receive a return on its investment in that effort. For instance, about 30 percent of Avnet's business is done through design work in the Americas and Europe that includes assigning field application engineers (FAEs) to do complex ASIC, FPGA and DSP designs. The problem arises when a customer shifts a design from one region and has it built in another.
When the typical paradigm has been built around point of sale and when that point of sale shifts to another region, that leaves Avnet trying to figure out how to get rewarded for the design work. How does the region that did all the work and made all the investments get rewarded for it? There is no easy solution, said Gallagher.
"Our suppliers are working with us on solutions; it's one that has to be worked out or we will not be able to continue to invest in that supplier for engineering resources if we can't capture fulfillment at the appropriate margin," he added.
Arrow Electronics is also working out the problem with its suppliers. "Global distributors have also responded by working closely with suppliers to address issues related to design support and fulfillment as less and less manufacturing is done in the design regions," Moore said. "Developing global design-tracking and support systems along with global compensation mechanisms are some of the initiatives under way to help ensure that distributors will be able to continue to support customers across multiple geographic regions."
Some of the other challenges have centered on communications, cultural understanding and developing relationships. Gallagher said that one of the problems that Avnet is working on is the "link in the regions" for a more streamlined process across all three regions-the Americas, Europe and Asia.
However, a bigger concern is how business is done in each region, Gallagher said. "Our franchises are different in Asia and the way we do business with our suppliers is different throughout Asia. It will take time for all that maturity to come into play as that market grows."
One of the biggest hurdles Avnet has already overcome is taking a customer's bill of materials in the United States and fulfilling it with the appropriate franchises in China or Southeast Asia. But it has reportedly become less of a problem as Avnet increases its presence in the region.
In many cases, North American distributors don't consider local and regional distributors in China major competitors because they typically have a very limited line card-in many cases only one supplier-with a limited customer base. Typically, the local distributors act more like traders or manufacturers' representatives instead of distributors, but they do have an advantage in terms of built-in relationships with the suppliers and customers in the region.
Still, North American distributors continue to expand throughout Southeast Asia and China. Avnet's coverage extends throughout Asia including 17 offices in China with three warehouses in Shanghai, Shenzhen and Hong Kong through three business units: Avnet Sunrise, Avnet Technology and China Tronic Technology. Avnet also has four design centers in Asia including an IC programming center in Shanghai, a programming center and RF Bluetooth design center in Singapore, and two other design centers in Shenzhen and Bangalore, India. "Suppliers in Asia expect us to help them with the design, so application support has to be ongoing," Gallagher said.
Arrow has 35 offices in the Asia-Pacific region with five warehouses in Shanghai, Hong Kong, Singapore, Taiwan and Seoul. The distributor also has more than 80 FAEs in Asia and continues to invest in programming facilities in the region.
In its third year of business, TTI Asia now has two large corporate warehouses in Singapore and Shanghai and four sales branches in Singapore, Shanghai, Taiwan and Hong Kong, with remote salespeople in four other countries. This year, TTI opened its warehouse in the Wai Gao Qiao Free Trade Zone near Shanghai. The distributor will receive its local-currency license in about a month. "The big issue is if you're in China, where are you located, and if you are in Shanghai, can you ship in U.S. dollars and local currency?" Davidson said. Those are very complicated and separate problems that need to be addressed, he said.
Another challenge is vast distances, Davidson said. "People talk about Asia like it's manageable, but it's huge," he said. "We still face building individual relationships with the manufacturers in every single geography.
"While China is opening up by leaps and bounds, and is way ahead of where it was when we first got here, it's still a very time-consuming and exasperating place to do business," he said. "Things just take a long time because it's a Communist country."
For instance, it took TTI five months to get a preliminary business license from the Chinese government to open a warehouse near Shanghai. Once the distributor had the building and people in place and ready to do business, the company discovered that it had to reapply for the license, which took another five months. The SARS epidemic also contributed to the slowdown.
Nu Horizons Electronics Corp. (Melville. N.Y.) has also made very significant investments in Asia over the past three years. Nu Horizons Asia, headquartered in Singapore, continues to expand its franchise agreements with its suppliers in Asia-Pacific and has a warehouse facility in Singapore with sales offices in China, India, Korea, Malaysia, Singapore and Taiwan. The distributor plans to establish a new warehouse near Shanghai this year.
A key reason for Nu Horizons' move into the region was to follow design and development work in North America to provide fulfillment and continuing engineering support in Asia- Pacific. There is a need to fulfill and support the designs that Nu Horizons has done in North America, said Dave Bowers, executive vice president of sales and marketing. "Secondly, we have a vision of Nu Horizons as a global company to work with customers, to do design work and support them wherever they are in the world and to be able to track the production associated with the design work and fulfill that business."
To meet these needs, Nu Horizons is not only investing in fulfillment capabilities but with sales engineers and field applications engineers. "We're building the infrastructure in much the same way as in North America," Bowers said. He believes that it's necessary to have engineering in the region to support transfer projects, and traditional FAEs to work with Asian-based OEMs as they develop new products and design services.
While Nu Horizons has both engineering and FAE support in place today, the company is still looking at different strategies for setting up design services. The distributor does not have any logistics centers in China but expects to have one in three to six months.
Arrow Electronics Inc.
Avnet Electronics Marketing
Nu Horizons Electronics Corp.
Jaco Electronics Inc.