The Future of Small and Medium-sized Chip Distributors

You will learn the current situation about Chip distributors and how they should face this challenges.

“In 2015-2016, major OEMs began to purchase and adjust channels frequently. In the process of the whole channel, due to the change of memory process, the changes in industry demand led to large-scale out-of-stocks and price increases. Several large original factories Frequent announcements, no orders! In 2017-2018, the national giant has risen 12 times, and Trump has provoked a trade war with the ZTE incident. Every time the chip makers cut the agents, they will usher in great Concerns. Everyone is in the trade war escalation and Huawei related news screen every day, as a small and medium-sized distributor, we can't help but ask: What do we do when we cut the agent? We don't need to go up and fight trade, what should we do? Earn?" In response to the current difficulties faced by small and medium-sized agents, Jiang Lei asked questions.

(1) Who are you?

The position of chip distributors in the industry chain is between upstream companies (chip design companies, fabs, packaging and testing plants, finished chips) to brands, and is related to agents, solution providers and foundries. According to whether it is stock or futures, whether it is authorized by the original factory, it can be divided into catalog-type distributors with authorized stock, authorized distributors who are authorized to order, stock pickers who are in stock but have no original authorization, and give Terminal companies look for sub-terminal distributors who are out of stock and provide cost reduction.

Among them, catalog-type distributors and stock-type distributors have online attributes. Catalog-type distributors and authorized distributors need to provide technical support, and the red round frame circled above is the area where small and medium-sized distributors are located.

What role does the distributor play in this business chain? The business chain mainly includes R&D, trial production, mass production, maintenance and inventory. Among them, R&D and trial production are places where catalogue distributors play more value. Authorized agents and sub-terminal distributors are used in mass production, and maintenance and inventory are supported by sub-terminals and pick-ups. The production process is mainly in the field of large distributors, and other links are playing a huge role in small and medium-sized distributors. Therefore, small and medium-sized distributors have a very important position in the entire industry chain, especially in the more fragmented, long-tailed IoT market.

(2) Where are you from?

Taking the most representative companies in the distributors as an example, Jiang Lei briefly explained the development history of distributors. She introduced that the typical representative of catalog-type distributors is Digi-Key, which was founded in 1972. Its founder is a Ph.D. in electrical engineering. In the first 10 years, it only provided electronic components for electronic enthusiasts and enthusiasts. The second 10 years began to supply companies. Digi-Key's sales last year were $3.16 billion, processing 3.7 million online orders a year and smashing 1.7 million models.

The largest distributors are mainly concentrated on authorized agents, represented by Arrow, Avnet, and the United Nations. The world’s No. 1 Arrow sales last year was $29.6 billion, and the scale is Digi-Key’s near 10 times.

"After 2000, in Huaqiang North in Shenzhen and Zhichun Road in Beijing, a large number of smuggled distributors were born, and the story of countless 'sports, bicycles and motorcycles' was born overnight. The oldest distributors are fast. After 100 years of birth, where are we going to go in this industry?” Jiang Lei exclaimed. “I remember when I went to the CES show in January this year, I saw the long-lost old electronics companies Dell and Sony. I haven’t been able to think about them for a long time. Instead, eco-enterprises like Alibaba and Xiaomi have started to enter the chip industry. This makes me feel that the entire electronic supply chain will accelerate from the previous strong brand companies. The downward control of the supply chain's model shifts to a model that has data and customers' definitions of the supply chain from the bottom up, and even into the core components sector. The Sino-US trade war will accelerate this trend."

(3) Where are you going?

Every few years, a large whale will jump out in the distribution industry, bringing out a variety of fish and shrimp. The last big whale was born in the field of smart phones. Now, with the joint promotion of Sino-US trade warfare and 5G, AI and IoT, there will be a lot of fresh applications. Now, there are all kinds of cockroaches on the water, and the new big fish will not come out. It is not clear who will jump out of the water. Can those traditional big-name companies continue to create a time that belongs to them beyond the discontinuity of hardware? It is currently difficult to determine.

Jiang Lei shared the changes in the distribution industry that she has been paying attention to in recent years. “Original chopping agents” and “original non-agents” are the reasons for small and medium-sized agents to get into trouble. She revealed that in this context, some established distribution companies may start to consider selling companies because of the lack of passion of the founders. Of course, more distribution companies still choose to embrace change, and are actively seeking transformation or deep-seated in the vertical to do "domestic replacement."

New distribution in the new era

The new distribution required by the "core era", the distribution industry has finally ushered in a huge opportunity for the "three waves" empowerment.

The first is the core opportunity brought by the replacement of domestic chips, followed by the "core track" brought by 5G, AI and IoT, and the new "Internet +" new ecology that our Chinese lead the world. In the face of such historic opportunities, how should we grasp? Jiang Lei summed up the three causes: three causes, namely internal factors, external factors, and genes. The internal factors are the opportunities brought by the industrial chain, the domestic chip replacement upstream of the chip, the downstream 5G, AI, and the Internet of Things. The external cause is the Sino-US trade war, the world economic environment, and the international environment. Genes are our own housekeeping skills. One rate refers to efficiency. Since we need to make some new transformations, we need to be more efficient than some old-fashioned traditional enterprises, even to the order of 10 times.

Then we must distinguish the three major factors. First, the chip distribution industry is the easiest to scale in the entire industry chain, and the scale is very important. The world can accommodate three companies with sales of hundreds of billions. However, China's largest company is only 10 billion yuan, and most small and medium-sized distributors have difficulty breaking through the ceiling of 1 billion yuan.

Second, the role of capital leverage cannot be ignored. Analyze the price-earnings ratio of all links in the secondary market. For example, Taiwan's capital market gives the chip-distribution companies less than five times the price-earnings ratio, and the mature capital markets such as Europe and the United States give a price-to-earnings ratio of no more than 10 times. In China's A-share market, the distribution company can give a price-earnings ratio of about 30 times. With the chip design, the price-earnings ratio can reach 50 times or more, and even more than 100 times. I think that in the next few years, the leverage of capital will play a huge role in our industry.

Finally, doing business, building grain, building walls, profit and long-term stability are rooted in the establishment of barriers. Where are the barriers of enterprises? Is it a relationship with customers? Is it a technology patent? Or is it a scale effect? capital cost?

“In the process of focusing on the domestic chip replacement promotion, I also learned a lot of new skills: for example, clarifying the market upstream of the chip; for example, understanding the foundry, design, packaging and testing, solution providers, agents, foundries, etc. Everyone has the ability to eat for themselves."

Nowadays, small and medium-sized distributors generally have the phenomenon that “the company is not large, the number of employees is small, and the upstream design of the chip and the performance of the product are not well understood”. At the same time, in the process of company management and development, there are also various problems such as “difficult recruitment of excellent talents, management of financial management, how the founders of the company should create personal influence, and where the company's transformation direction is”. In addition, in the process of transformation, especially in the process of promoting the replacement of domestic chips, it is necessary to acquire a lot of new skills, and need to complement their skills in capital operation, organization management and marketing to survive in the new distribution environment of the new era.

Related component: TC7SZ02FU