Analysis: Japan still tough for foreign components distributors
Breaking into any Japanese economic sector has always been difficult but the world's second-biggest economy is proving especially difficult for foreign electronic component distributors despite efforts by the biggest players to establish a presence in a region that represents almost one-third of the global available market, according to a research firm.
Europartners Consultants estimates Japan's distribution total available market (DTAM) is worth some $25 billion and says the country's top 10 suppliers-all of them Japanese-control 92 percent of the sector although Arrow Electronics Inc. and Avnet Inc., the world's numbers 1 and 2 leading distributors, respectively, have been making significant efforts to penetrate the market.
In a report, Europartners said it considers Japan's electronic distribution market "a relatively closed market" and indicated efforts by North American distributors to enter the market has met with modest success.
Avnet, for instance, "recently purchased Nippon Denso Industry Co., a Tokyo-based, value-added distributor of electronic components with established design and engineering expertise to expand their presence and enhance their competitive position," Europartners said.
Don't put all the blames on the Japanese. There are no regulations preventing foreign distributors from entering the local Japanese market. Many of the biggest companies simply ignored Japan for decades, holding comfortably instead to their leading positions in North America and Europe.
In fact, Arrow and Avnet made few forays into territories outside of Europe and North America until the last ten to 15 years or so when they began actively exploring operations in China as many of their OEM customers shifted manufacturing to the lower-cost region.
Still, establishing a beachhead in Japan's electronics market can be a daunting challenge. The country's top OEMs were satisfied with a system of interconnected ownership structure and the vertical manufacturing strategy that had served them successfully for years and saw no reasons to shake up the system until recently when they began moving manufacturing overseas.
While a great deal of electronic production still takes place inside Japan, the need to be cost competitive is forcing the leading equipment vendors to explore manufacturing options outside the country, a development that has placed the local components distributors at a disadvantage.
Lacking experience servicing extended supply chains overseas the top Japanese components distributors like Royden, Ryson, Sanshin and Marubun are struggling to maintain their share of the business.
In 2007, for instance, Europartners reported Royden's revenue fell 6 percent while Ryson and Sanshin only managed single-digit growth rates of 8 percent and 3 percent, respectively. Sales at No. 4 market leader Marubun toppled 5 percent while Satori, the fifth-largest distributor, experienced a 3 percent climb in 2007 revenue from the 2006 period.
Meanwhile, Arrow and Avnet have tightened their grip on the worldwide distribution market despite continuing turmoil in the sector and the inability of the group as a whole to expand their share of the total available market.
Canadian distributor Future Electronics, which for years kept the No. 3 global slot, was in 2007 overtaken by WPG & SAC, a Taiwanese company that is largely focused on the South East Asia market, according to Europartners.
The research firm estimates distributors were responsible for only 23 percent of the $336 billion global electronics components market in 2007.
This was an improvement on the distributors' performance in the 1980s when they accounted for "around 20 percent on average for semiconductors and frequently a lot less in the passive and electromechanical area," according to Ingo Guertler, an analyst with Europartners in Germany.
"The distributor today is the extended arm of the component manufacturer," Guertler said. "Distribution today means not selling products alone. Distribution today is providing solution to the markets like sophisticated logistic concepts, deep design-in activities, in some cases preproduction and more."
The growing partnership between distributors and component suppliers as well as increasing reliance of some OEMs on the distribution outlets helped push up the DTAM for the sector 6 percent to $76.8 billion in 2007 compared with a smaller 4 percent growth in the entire global electronic components market, Guertler said.