The Upside of Industry Consolidation

Victoria Kickham is a freelance writer specializing in manufacturing, distribution and supply chain issues

There is much talk about the risks associated with a consolidating supply base, but there are rewards for buyers, too—most notably in selection and service.

A  consolidating supply channel is often met with skepticism and frustration on the part of buyers, and with good reason. Price increases, a loss of negotiating power, and product availability are often chief concerns, leading to renewed requirements to manage risk. Given the frantic pace of acquisitions in the semiconductor market over the last two years—and a flurry of activity in the distribution sector as well—electronics buyers are wise to focus on the issue.

But there are pros to balance out the cons—especially in today’s evolving electronic components landscape. Rob Lineback, an analyst with Arizona-based industry researcher IC Insights, points to a shift in the market away from specialization and toward providing a more complete solution—a trend that brings pluses in the form of broader product selection, a wider service offering, and a more streamlined development process. The changes are being driven by a combination of factors: suppliers’ need for expansion in an era of slow growth and an evolving desire to serve Internet of Things demands.

“In the ‘90s, the trend was toward more specialization. Companies became focused on certain areas and you saw a lot of divesting of businesses. Now we’ve swung back to where companies are looking to provide complete solutions,” explains Lineback. “The IoT has played a big role in this. No one really knows what the IoT is, yet it’s everywhere and it’s everything—and it has caused companies to scramble and grab what they can.”

Suppliers’ efforts to broaden their portfolios and capabilities—especially in hot IoT areas such as sensors and MCUs—can be a good thing for buyers who consider the opportunities along with the pitfalls of the new landscape.

One-Stop Shopping
Brian Matas, vice president of market research at IC Insights, says consolidation has brought some stability to the semiconductor market, and he emphasizes the value of accessing a broader range of solutions from fewer sources. He points to On Semiconductor’s 2016 purchase of Fairchild Semiconductor as a case in point.

“Where ON had strength in high-voltage parts, and Fairchild in low-voltage parts, combined the company now has a broad portfolio of solutions,” he says, adding that instead of providing a ‘bag of parts’ to customers, the merged company has the potential to bring design services and system-level solutions to the table. “You hear the term one-stop shopping; that’s kind of the way things are beginning to transition.”

Essentially, buyers can support more of their engineering teams’ needs in one place—a scenario that makes sense in a world where customer needs and demands are growing.

“What I’m seeing from system designers is that they are demanding more,” adds Matas. “They want parts, design help, validation, and testing.”

Component distributors play an important role as well, in many cases stepping in to help buyers navigate a broader offering of products and services following a merger. Minnesota-based distributor Digi-Key emphasized this aspect of the business to customers following Analog Devices’ recent acquisition of Linear Technology, for instance.

“We’ve had long-standing, successful relationships with both Analog Devices and Linear Technology for many years, which enable us to help our customers understand their extensive product portfolios,” said David Stein, the distributor’s vice president, global semiconductor.  “Our strong stocking position with both companies covering a global footprint will allow us to continuously exceed customer expectations from a service perspective.”

Enhancing Efficiency
Another service “plus” is the growing availability of software solutions, which Matas says is a byproduct of greater collaboration in the supply channel. Suppliers and customer are working more closely to develop solutions and speed time-to-market requirements, making software tools that allow greater flexibility in product development a more and more attractive option.

“Chip companies are now providing almost ‘plug-and-play’ with different components online, so that you can see what your output is—so you can do the validating in advance, so you know what kind of parts you want to buy,” says Matas. “It promotes a smoother process. A lot of cooperation on that back end just makes the whole process go a bit smoother.”

The end result? Efficiency.

“Suppliers are trying to make it easier for their customers to roll out products quicker and be more successful in the market faster,” Lineback adds. “They’ll do everything they can to help them succeed.”

The challenges and opportunities in this new landscape are still developing, as it takes a few years to work out the kinks and fully integrate consolidated entities. But the bottom line is that buyers need to pay attention to both sides of the coin, taking advantage of the opportunities and minimizing the challenges.

“It’s never totally negative, it’s never totally positive,” Lineback says of a consolidating marketplace. “For buyers, this means the potential for having a more complete solution from one vendor—which makes it easier and faster to put products together and get them out the door.

“The downside is that it’s harder to negotiate good pricing, and there’s also a challenge in dealing with new companies and the potential for disruption. Buyers have to look at all the trade-offs.”