Friday, April 2, 2010

Distribution Schmistribution

Avnet LogoElectronics distribution giant Avnet recently announced it would acquire Bell Microproducts. The deal values Bell at $250 million after paying off debt. Bell's annual sales are north of $3 billion, but electronics distribution is not a high margin business.

Some of the commentary surrounding the announcement expresses a lack concern about consolidation amongst distributors, because the chip manufacturers have firm control of pricing. I'm not sure that faith is warranted: distributors lack the ability to control pricing because there is so much fragmentation in the market. Each manufacturer has multiple channels for distribution and can play them off against one another. As the number of strong distributors dwindles, that power shifts to the remaining middlemen.

Distributors regularly show they will take complete advantage of any leverage they get. For example, chip manufacturers give preferential terms to a distributor who wins the design-in at a particular customer: no other distributor will be allowed to offer better prices to that customer. This is reasonable... until the distie takes it to the next level. Distributors do a great deal more business with contract manufacturers than almost any individual customer. A distributor can legitimately win the design for a particular chip, then request the bill of materials from the CM. In almost all cases the CM will give it to them. The distributor then registers as winning the design for every component on the BOM, even those they had nothing to do with. As a customer you suddenly find yourself unable to obtain better pricing on anything in your product, based on a single deal for one component.

If consolidation amongst distributors gives those which remain significantly more power over pricing, does anyone think they won't abuse it?