Business remains robust for high-service distributors

However, slower overall economic growth, inflation and continuing shortages for some components could weaken sales growth later in the year.

High-service distributors that focus on engineering say sales were strong in the first quarter of the year but are concerned that slower economic growth, continuing inflation, downward movement of the stock market and the war in Ukraine may impact business for the rest of the year.

Some high-service distributors experienced record sales in the first three months of this year. “We are one of the companies that had strong growth,” said Chris Beeson, group senior vice president electronics for RS Electronics. “In the first three months of the year we were at a record level.”

He noted the 60 per cent of the UK-based distributor’s sales come from Europe, Middle East and Africa (EMEA), 25-30 per cent is in North America through its Allied business while the Asia-Pacific regions accounts for 15-20 per cent of sales.

“Asia-Pac is on the rise for us,” said Beeson. “I would say we have focus on China but we’re encouraged by the growth we are seeing outside of greater China as well as in Australia, the greater Singapore area and Taiwan. There’s certainly a lot of upside there,” he said 

He said while growth has been strong, there are certain “variables that we can’t control” that could impact business. Such variables include the situation with Ukraine, COVID-19 lockdowns in China, continuing inflation, downward movement of the stock market and falling GDP in the first quarter.

Mark Burr-Lonnon, senior vice president global service and sales for Mouser

Demand remains strong

Despite those variables, “overall we feel very good about the business,” said Beeson. Component demand remains strong and in North America there has been reshoring which is resulting in more opportunities for the distributor, he said.

Beeson also noted RS has a “long tail of customers and is not subject to any customer making up a large percentage of our business.” It focuses on design and supports high-mix, low-volume manufacturing as well as maintenance and service.

Beeson said there is “more stability in design” and does not have the volatility involved in supporting high-volume manufacturing. “We have consistency in our business model,” he said.

Mouser Electronics has also seen strong growth in the first four months of the year. Year-to-date in April, Mouser’s business was up 60 per cent in Europe, 46 per cent in Asia Pacific and 43 per cent in America, said Mark Burr-Lonnon, senior vice president global service and sales for Mouser.

“There’s been no sign of any real weakening,” he said. “There were couple days around Easter” when business slowed but now it continues to be strong, said Burr-Lonnon.

What has helped Mouser grow sales is inventory. “We keep building inventory and inventory now is at all-time high. It was up to $923 million as of late April, he said. “We also have close to $2 billion on order,” said Burr-Lonnon.

More inventory needed

He said inventory is needed because “everybody wants to buy just about anything and everything.” Business is strong across all customer segments including defense. 

“Our military customers are buying a lot of parts,” said Burr-Lonnon. The U.S. and other countries are supplying weapons systems to Ukraine and defense contractors need to build new ones so component orders are increasing. 

Burr-Lonnon said high inflation should not have a “big impact on high- service distribution” because companies are always designing new products and systems. “Design is the one thing that never stops. If the market goes bad, people have to redesign,” he said. “If the market is good, people want to design faster and use new technology so we are in a sweet spot,” said Burr-Lonnon.

Another high-service distributor with strong sales growth is Newark. “Newark’s performance has been strong throughout 2021 and delivered record global sales numbers in the most recent financial quarter,” said Uma Pingali, business president for Newark, a subsidiary of Premier Farnell. “Overall results were driven by a strong performance from the Farnell business, with sales increasing 35.3 per cent year-over-year to $441 million, to which the Newark business strongly contributed,” he said.

Farnell’s operating margin grew to 13.7 per cent in the second quarter of the company’s fiscal year from 10.9 per cent in the first quarter and 8.3 per cent in the final quarter of fiscal 2021, said Pingali.

North American sales grew strongly with “excellent performance in passives, connectors and electromechanical devices and semiconductors,” he said. “In addition, Newark’s e-commerce sales nearly doubled, with e-commerce growth expected to continue in the coming quarters,” said Pingali.

Growth was also strong in Europe with electrical, connectivity, and the contract manufacturing sector showing the most significant growth. In Asia, strong sales performance has been driven predominantly by market segments such as industrial automation, medical and electronics manufacturing services, said Pingali.

Dave Doherty, president and COO of Digi-Key

More demand from defense, EVs

In its overall business, Newark is seeing increasing demand from the defense, electric vehicles and industrial automation segments, “with the expected range of growth in these segments between 40-50 per cent year over year,” he said. Demand is increasing in these market segments “due to growth in design, development and production. Additionally, component shortages are also contributing to demand,” said Pingali.

While demand has been strong, there is uncertainty in the market because of Covid-19, inflation and the war in Ukraine.“ However, Newark is in a strong position to manage these challenges and continues to be a valuable distribution partner for our customers, according to Pingali.

Dave Doherty, president and COO of Digi-Key, says year-over-year bookings, billings and shipments are up more than 25 per cent. “We continue to see strong double-digit growth in all regions,” said Doherty.

Digi-Key’s inventory is also rising on a dollar basis but less so in units received because of  constrained supply from component manufacturers. “In some cases, we’re already placing orders as far out as mid-to-late 2023 to ensure that our inventory is pipelined accordingly,” said Doherty. 

He said that so far, the war in Ukraine is not putting “any additional strain on our current supply chain issues.” Digi-Key does not have any employees living in Russia or Ukraine and prior to the Russian attacks, Digi-Key did “very little business in Russia due to compliance policies,” Doherty said.

Generally, Digi-Key is seeing demand from all customers, but some “hot areas we’re seeing right now are in climate mitigation, automation & control, urbanization and IoT,” said Doherty. Those areas “are heavily dependent on the parts that we stock,” he said. 

The problem is while some components have “normal” lead times, some semiconductor lead times are still long. “Microcontrollers, sensors, commodity linear, analog and discretes are still a struggle to obtain in full supply as lead times in many cases have continued to remain in the 40+ week area,” said Doherty.

Supply will improve

Supply should begin to improve at the end of this year, he said. Over the past several years, manufacturers have been investing in new technologies to produce cutting-edge products and increase production, Doherty said.

“Semiconductor manufacturers in particular have made strong investments into 12-inch wafer capacity over the past couple of years, and we are expecting to see that supply come online at the end of this year and into 2023,” he said.

However, there has not been an equal level of investment into increasing output of some of the older technologies based on 6- or 8-inch wafer fabs, despite the fact that there are still many products that are based on those processes, such as automotive or industrial designs, according to Doherty. “Unfortunately, those products cannot be easily shifted over, so there will likely continue to be a pinch in this area for the next several years,” he said.

It is hard to determine what the impact of Covid-19 may still be having on the supply chain. Doherty said at the height of the pandemic, lead times were affected fairly evenly by both supply chain issues and manufacturing capacity.

“Today, we estimate that only about 20 per cent of extended lead times are due to supply chain issues, while closer to 80 per cent of delays are due to lacking manufacturing capacity,” he said. 

Doherty added Digi-Key’s is closely watching supply-chain issues as Covid cases increase again, and “conflicts continue to pop up ad hoc in different regions of the world such as Eastern Europe or China, “ he said.