Electronic parts distribution dominated by duopoly

Defense and aerospace industry consolidation, as well as the rise of COTS-based design, is helping to condense military parts distributors into two separate camps not only for new parts, but also for aftermarket devices

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Electronic parts distribution dominated by `duopoly`

Defense and aerospace industry consolidation, as well as the rise of COTS-based design, is helping to condense military parts distributors into two separate camps not only for new parts, but also for aftermarket devices

By John Rhea

The makeup of the electronics parts distribution business is starting to mirror the military electronics industry that it serves. The distribution side of the business has contracted in parallel with that market`s decline, and today depends on providing a host of new value-added services for its existence.

In the process, distribution is evolving into a "duopoly" of two principal suppliers: Arrow/Zeus Electronics of Purchase, N.Y., and Avnet Electronics Marketing of Inglewood, Calif. The two companies dominate their segment of the industry as surely as the handful of system prime contractors dominate the business of aircraft, satellites, ships, tanks, and other important military and aerospace platforms.

Value-added is not new to distribution; it has been the reason for the existence of this business from its beginning. What is new: distributors cannot simply be distributors anymore. As the number of end users shrinks, distributors can no longer survive by merely assuming the inventory burden for their customers and buying parts in volume to resell them in smaller quantities at prices competitive with those of the manufacturers.

Instead, the distributors must get involved earlier in the life cycles of new systems than they have in the past. They must work with the designers and engineers to select components that wring the most advantages possible out of new technology while avoiding the blind alleys of parts obsolescence — commonly known as diminishing manufacturing sources (DMS).

Adding to the challenge of a traditionally fiercely competitive business are the complications of declining volumes and the trend toward use of commercial off-the-shelf (COTS) components wherever possible. These factors put additional burdens on the already-stretched financial resources of the distributors.

The net result: the distributors have to work harder to stay alive in an ever-shrinking market.

Randy Wyatt, manager of the business center for enhanced solutions at National Semiconductor Corp. in Santa Clara, Calif., estimates that COTS has halved the total available market, or TAM, for military-grade integrated circuits in North America since COTS arose five years ago. COTS has reduced the mil-grade IC market from nearly $1.5 billion in 1994 to around $650 million this year, he says. Wyatt puts the distributors` share of that, known as the DTAM, at about $430 million — or two-thirds of the market — of which Arrow and Avnet account for about 80 percent.

The underlying reason, Wyatt says, is plastic parts. These devices have proliferated in applications considered non-mission critical, or in which their failure would not put crucial tasks or human lives at risk. The resulting decline in the average selling price has forced many distributors out of the business at a time that semiconductor suppliers are exiting the market for military-grade parts.

Moreover, the consolidations among the prime contractors have dispersed their sophisticated buyers and turned parts purchasing into what Wyatt calls a "clerical function." This is not true of all the primes, he hastily adds, but the trend is toward outsourcing functions and focusing on core capabilities. "The aerospace industry has done in five years what it took the auto industry 50 years to accomplish," Wyatt quips.

Into this vacuum the surviving distributors in the military market have to bring more than "feet on the street" for the semiconductor manufacturers, he adds. "They must move from demand fulfillment to demand creation." The semiconductor firms can no longer afford the dedicated sales staffs of the past, and what staffs they can maintain must focus on the growth markets of industrial electronics and portable communications.

Phil Angelotti, senior vice president for the defense and aerospace business unit of Avnet, is equally aware of this vacuum, and he is doing something about it. Avnet has 20 of its employees on site at the major primes, he says, and they have become part of the procurement process there. They use buyers` codes to access needed parts, concentrating on standard products, and serve as a bridge between the parts makers and the end users.

This is a reversal of the way distribution used to be, Angelotti adds. "In the past the distributors took the suppliers` lead," he says, "but now the OEMs want to eliminate the intermediaries." He should know. Avnet has been in the military and aerospace market for 45 years, and Angelotti vows the company is in it for the long haul.

The problem is one of investment, he says — specifically the money necessary to service the accounts. "We`re sitting with hundreds of millions of dollars in high-rel inventory," Angelotti notes. This inventory covers logic, discretes, analog and linear, digital signal processors (DSPs), microprocessors, and field programmable gate arrays (FPGAs). As the military market continues its downward spiral, that inventory looks increasingly less attractive, and everybody concerned is hoping that new programs such as the Air Force`s F-22 fighter and the Army`s RAH-66 Comanche scout-attack helicopter will reverse that process.

Changing IC technologies also cause problems for distributors. As ever-more device functions concentrate at the chip level, fewer devices are necessary. FPGAs and applications-specific integrated circuits (ASICS) enable the chipmakers to do integration tasks that in the past would have occurred with multichip modules (MCMs). "One card replaces six or seven with fewer components," Angelotti says. The components become systems — or at least subsystems — on a chip. An alternative for the distributors is to deal in so-called "known good die," but he says that market remains very small today — less than 5 percent of Avnet`s business.

The same trends that affect the major primes like Lockheed Martin, Boeing, Northrop Grumman, and Raytheon also are evident among the mid-level board vendors such as DY 4 Systems Inc. of Kanata, Ontario; Radstone Technology PLC of Towcester, England; Vista Controls Corp. of Santa Clarita, Calif.; and Mercury Computer Systems of Chelmsford, Mass. The latter group represents the smaller volume today, but is growing quickly, Angelotti says.

Sean Fernandez, president of Arrow/Zeus, also stresses the value-added concept as essential for the survival of distributors in the military market. His approach is to put technical support field engineers at the customer sites during the design phase. These engineers help with the small quantities of parts necessary to get programs started and then assist in the transition to volume production.

The process is known as kitting, in which Arrow ships full kits to the production floor. By using electronic commerce methods the customers can place their orders and link directly to carriers such as Federal Express and UPS.

"On the customer side they`re starting to look at the total cost of ownership, not just the piece part price," Fernandez says. This covers a variety of overhead costs such as invoicing, shipping, bills of materials, and health of the product. Customers particularly want to know if electronic parts are obsolete, if they will go obsolete, and what are the alternative parts.

In the case of parts facing obsolescence, Arrow buys die going obsolete from the original producers and has them built into up-to-date parts at Qualified Parts Laboratories in San Jose, Calif.

Fernandez remains optimistic about the military and aerospace distribution business, noting that it experienced a slight upturn in mid-1999. He says he looks for further grown after next year`s presidential election. In addition to their planned new systems, he says, the military services will have to replace munitions and other hardware expended in the Balkans peacekeeping efforts.

Aftermarket suppliers

There is another duopoly in this business: the aftermarket suppliers. They provide the parts that the semiconductor makers cannot or will not produce. They are Lansdale Semiconductor Inc. of Tempe, Ariz., and Rochester Electronics of Newburyport, Mass. The two companies take similar but slightly different approaches. Lansdale experts make the parts in-house at a 4-inch wafer fab they opened in 1993 at their Arizona headquarters. Rochester, meanwhile, farms out the work to other wafer fabs.

R. Dale Lillard, president of Lansdale, says his business is all about just-in-time inventory. He estimates Lansdale keeps 20 million to 50 million die on hand and the average order is for 280 units. Users can not afford to keep these large inventories, particularly for the low-volume military business, he says.

A central problem is the growing mismatch between product life cycles in the commercial and military/telecommunications market segments, Lillard says. He breaks down the component industry into four eras to prove his point.

In the 1950s, before the advent of integrated circuits, product life cycles typically ran about 20 years each in the commercial and military/telecommunications markets. Divergence began with the era of transistor-transistor logic in the 1960s, as commercial cycles shrank to 15 years and military cycles increased to 25 years. With the introduction of metal oxide semiconductor devices in the 1970s the gap grew to five years for commercial, and 30 years for military. In today`s era of ASICs and very large-scale integration, commercial product life cycles have declined further to three years on the commercial side, while the cycles in the military and telecommunications segment are now pushing beyond 30 years.

These cycles are classical bell curves from introduction to peak to obsolescence, but the component life cycles typically shift considerably to the left and begin plummeting toward obsolescence just as the system life cycles are beginning to pick up momentum. For a system with a 30-year projected life, that amounts to at least 20 years of non-availability of the necessary parts. That is unless the engineers want to stock all the parts they believe they will need, or they redesign their systems to cash in on new technologies. Lillard sees his firm`s alternative approach as a bridge between the out-of-synchronization life cycles.

Joe Chapman, the former Texas Instruments executive based in Midland, Texas, is a business development consultant to Rochester. He stresses the need for suppliers like Rochester (or the distributors) to maintain large inventories beyond the capacity of the system makers. For them, he says, acquiring the necessary logic building blocks and then expecting eventually to turn them into subassemblies is "betting on the come." Chapman estimates Rochester maintains an inventory of nearly a billion die and at least 80 million finished goods.

Another consultant offers a different approach. John Hartman, the former Analog Devices executive who operates Worldwide Business Associates in Eaton Center, N.H., says knowledgeable experts are essential to the process. Rather than make do with what is available from distributors or the aftermarket suppliers and try to match requirements with available parts, Hartman recommends using small, specialized technical sales representatives who can apply their expertise early in the life cycles of targeted end systems.

These sales reps have to be market-specific, he says, and they have to become involved at the earliest possible point in the product life cycle. "Getting designed in is everything," he concludes. "The orders will follow."

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Quality-control engineers at the electronic parts distributors help ensure the reliability of devices obtained from a wide variety of manufacturers.

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Experts at the big electronic parts distributors, such as those at Avnet Electronics Marketing (pictured above), can perform many different kinds of tests to ensure that their parts can meet tough environmental standards.

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Value-added services are becoming a hallmark of today`s electronic parts distributors, but these companies still specialize in parts collection, storage, and bulk distribution.

`One-stop shopping center` for parts available through CD-ROM database

ENGLEWOOD, Colo. — System prime contractors have an electronic commerce alternative to distribution channels for buying necessary parts. This solution comes in the form of a CD ROM-hosted database from IHS Engineering in Englewood, Colo., that designers and engineers can access from desktop computers.

The database, designated CAPSXpert, contains parametrically searchable information on 14 million parts from 1,500 manufacturers. It features links directly to the manufacturers and to participating distributors, says Brian Tepp, product marketing manager at IHS.

The idea is to create what Tepp calls a "one-stop shopping center" that enables engineers at the system primes to find the parts that will meet the requirements of their application, and then determine price and availability.

Another feature of the database focuses on the diminishing manufacturing sources problem by alerting the end users as to which parts have become obsolete or are likely to become so. The company`s own engineers update the database daily.

This is a subscription service that costs $11,000 a year for unlimited access to the parametric information and an additional $8,000 annually for the obsolescence determination feature, Tepp notes. Listing in the database is free to the manufacturers and distributors. For more information about the service, contact the firm on the World Wide Web at http://www.ihs.com/. — J.R.

Another approach to parts availability: known good die and custom packaging

ORLANDO, Fla. — Another alternative to direct sales from component manufacturers to end users and the traditional distribution channels comes from Chip Supply Inc. of Orlando, Fla., which supplies known good die (KGD) from its own wafer processing facility that designers can insert into customer-designed multichip modules (MCMs).

This is a niche market but an increasingly important one because of the complexities of MCMs, explains Cyndy Hernandez, the company`s vice president for marketing. Using KGD gives the users — the system prime contractors and the board-level subcontractors — flexibility in tailoring their MCMs to the applications, she adds.

Chip Supply can then finish up the job with custom packaging and testing, including tape carrier-packaged flat panel display drivers, tape automated bonding, chip-scale packaging, and hermetic encapsulation.

Chip Supply officials claim to be the world`s largest wafer processor, buying 6- and 8-inch wafers, sawing them up, and probing the die. They can also upscreen parts, including microprocessors and digital signal processors.

Nearly half of the company`s roughly $25 million-a-year volume is in aerospace products — "it was 100 percent before the Berlin wall came down," Hernandez notes — with most of the balance in portable electronics.

The company has 21 franchised lines, essentially all of the major component producers except Intel Corp. Like the distributors, Chip Supply is making the best of the declining military components market by delivering value-added services of testing and packaging. — J.R.

Tale of two duopolies: Leading military and aerospace distributors

Arrow/Zeus Electronics

2900 Westchester Ave. #401

Purchase, N.Y. 10577

Phone: 914-701-7400

Fax: 914-251-1583

Web: http://www.arrow.com

Avnet Electronics Marketing

9800 La Cienega Blvd.

Inglewood, Calif. 90301

Phone: 310-665-2600

Fax: 310-665-2692

Web: http://www.avnet.com

...and aftermarket suppliers

Lansdale Semiconductor Inc.

2502 W. Huntington Dr.

Tempe, Ariz. 85282

Phone: 602-438-0123

Fax: 602-438-0138

Web: http://lansdale.com/~lansdale.com

Rochester Electronics Inc.

10 Malcolm Hoyt Dr.

Newburyport, Mass. 09250

Phone: 978-462-9332

Fax: 978-462-9512

Web: http://www.rocelec.com

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