Choosing the middle way

ES June15 Pg28 to 30 America 1Mid-tier OEMs are looking for a certain kind of distributor to support them as they embrace internet of things (IoT) applications. America II’s Jed Pecchioli takes a look at what’s required.

The majority of companies chasing IoT opportunities at the moment exist in the ‘middle tier’ of original equipment manufacturers (OEM) and original design manufacturers (ODM). These mid-tier companies demand a unique blend of characteristics in order to exploit this market, with support required somewhere between ‘tier one’ franchise distributors and fully independent players.

Although America II deals with OEMs and ODMs of every size, one particularly interesting trend has emerged in recent times with regard to ‘mid-tier’ OEMs/ODMs looking to exploit internet of things (IoT) opportunities—they have enormous difficulty finding distributors that can closely align to the business model they require.

Predictions are massive for IoT: International Data Corporation (IDC) sees the IoT market as booming to a whopping $4.6 trillion per annum by 2018, from an already-considerable base of $1.9 trillion per annum back in 2013.

Mid-tier demands

There has been a fair amount of interest in constructing IoT devices from companies of all sizes, but in particular, it seems to have attracted the attention of ‘mid-tier’ companies, which are well placed to service this market

Defining ‘mid tiers’ is, of course, difficult. The majority of interest in this market seems to be from companies of approximately $250M, perhaps up to $500M, depending on region. It’s hard to be specific in terms of revenues, but it seems clear that the majority of companies playing in this space identify themselves in this ‘mid-tier’ bracket.

While the distribution market across-the-board is seeing a rise in IoT-related enquiries, these ‘mid-tier’ OEMs/ODMs are looking for a specific blend of capabilities, services, priorities and characteristics. In their mind, there’s a specific ‘type’ of distributor that can fulfil these opportunities.

IoT requirements

Consider for a moment what an average IoT device component requirement looks like. For a start, they’re generally not ‘high volume’. They’re certainly nothing that would compare in volume to the numbers and streamlined production of mobile phone manufacturing. While the potential for this market may be enormous, generally IoT device manufacturers are producing a relatively small number of devices, yet producing a wide variety of them. They generally, therefore, require a relatively high mix low volume (HMLV) distribution model if they are to source parts economically from one, or at least a small number of, distribution partners.

Secondly the IoT device market generally involves lower margins: the IoT ‘vision’ is for connectivity to move into millions or billions of everyday objects. Given these numbers, for many OEMs/ODMs the current market ‘play’ is to establish initial ‘presence’ in these applications. The appeal of this market is the potential for a ludicrously high ‘install base’ in the long-term. A prerequisite for such penetration however, is that these products are produced and sold at relatively low cost. The majority of viable IoT end-devices are, in fact, likely to be small, low-cost and low margin wirelessly-enabled sensors, with low-margin components. So it’s clear that mid-tier suppliers require distribution partners that can support lower-margin component business where required.

Most IoT end devices are also relatively undemanding in terms of processing requirements. IoT OEMs/ODMs have no need for the latest high-end screen or processor and do not require companies to source microcontrollers at the latest process node. Frankly, the mid-tiers are often looking for more competitively priced devices, such as a 180nm microcontroller, or an older part. Often, this will require a distributor that is either willing to supply older parts via a franchise line, or else provide the flexibility and expertise to access the open market, or both, for maximum versatility.

Lastly, mid-tier organisations looking to take advantage of IoT opportunities are, themselves, generally more vulnerable to fluctuations in the market and less able to hold onto stock on-premises than larger OEMs/ODMs. This simple fact, overall, suggests that the mid-tiers need distributors that can engage in stock holding and inventory management, providing services where components can be sold back to the market should issues occur with stock holding.

Distributor match

Companies looking to produce products with high mix low volume, at relatively low cost and potentially requiring open-market knowledge, will be let down by most distribution models, according to America II.

While perfectly-suited to many businesses, ‘tier one’ ‘franchise distributors,’ have adopted a business model that cannot optimally align with mid-tier IoT device OEMs/ODMs. When a distributor’s priority is in servicing its shareholders, the emphasis moves to keeping turnover high and assets as liquid as possible. This involves favouring high-volume, high-margin supply at the expense of everything else and far from holding stock, these organisations will generally engage in a much higher ratio of ‘just in time’ delivery, potentially involving more risk in their supply chain.

At the other end of the scale, ‘fully independent’ distributors cannot present a viable solution either. Mid-tier IoT OEMs/ODMs generally need guarantees related to volume, supply, scheduled business and quality-control.

Middle ground

The answer clearly lies somewhere in the middle. Rather than using a mixture of both independent and franchise distributors, which could be a time-consuming, expensive and potentially risky approach to fulfilling complex supply chain needs, mid-tier IoT OEMs/ODMs need a distribution partner that offers the best of all worlds.

Access to guaranteed high-volume franchise lines should be considered a prerequisite. But so too should the ability to provide lower volumes within the franchise world, and to provide boutique lines, without an emphasis on ‘high margin only.’ The real secret, however, comes when this can be accessed alongside open-market buying capabilities, for access to those harder-to-reach parts, alongside ‘value add’ services, such as the ability to manage inventory on behalf of clients.

IoT device OEMs/ODMs, and middle tier OEMs and ODMs in general, have specific needs, and it’s a narrow section of the distribution market that can fulfil them.