Military electronics distributors expect strong growth in wake of attacks

Dec. 1, 2001
Distributors of military and aerospace components see continued growth for the military market after the terrorist attacks on September 11, while the commercial aerospace industry is already showing signs of a dramatic downturn.

By John McHale

Distributors of military and aerospace components see continued growth for the military market after the terrorist attacks on September 11, while the commercial aerospace industry is already showing signs of a dramatic downturn. Aftermarket suppliers also see a long-term increase in their military business.

War can mean improved profits for suppliers of military electronics components and systems, and at the same time war puts immense pressure on suppliers to perform at their best. The successful prosecution of today's war on terrorism will rely heavily in the long run on high-performance electronics for use in tracking, finding, and killing terrorists around the globe. Military designers will need the best components and want them quickly. Often it is up to the electronics distributors to meet these demands.

Distributors had been seeing strong military business over the past year or so, and the attacks of September 11 added to that momentum. Distributors are seeing a significant increase in the number of request for quotes and expect this to continue. At the same time, however, the commercial aircraft industry is hitting a major down cycle because the terrorist attacks are making some members of the public reluctant to fly.

"Our Military business continues to be steady," says Rodney Spear director of strategic military and aerospace accounts at TTI Inc., an electronic components distributor in Fort Worth, Texas. In wake of September 11, TTI customers are asking for parts not so much for new programs as mush as they are for replacements for current programs such as the Tomahawk missile, Spear says.

The war on terrorism will not bring the kind of buildup that was seen during the Persian Gulf War a decade ago, Spear says. Major tank battles are unlikely, and the bombing campaign, while significant, probably will not reach the level of 1991, he explains. The ground campaign will be more guerilla warfare than conventional engagements, Spear adds.

"What I see for the future because of 9/11 and the Bush Administration's track record is that technology companies will have a vital role to play in defense," Spear says. There is a strong long-term outlook toward more and more electronics being used in upgrades and new programs, he explains.

In terms of the war in Afghanistan "we've seen an increase in missile and guided missile procurement," says Phil Angelotti director of military and aerospace sales at Avnet in Phoenix. Yet since September 11 Avnet leaders also have seen cancellations in the commercial aviation business, he says.

"Commercial aviation has taken a nosedive since the attacks," says Tom McCartney, senior vice president at the Avnet Kent subsidiary in Phoenix. Boeing officials plan substantial cutbacks in their aircraft production, which will drastically affect the company's main subcontractor, Honeywell, and Boeing's other suppliers as well, he explains.

"We are also seeing a fast erosion in the commercial aviation market," TTI's Spear says. "However, it has not reduced backlogs yet." All of Boeing's suppliers have to re-forecast their revenues to deal with the downturn, he adds.

Despite the downturn in commercial aviation, Avnet is holding its own thanks to a 20-month run of steady growth in its military business, which company officials expect to continue, Angelotti says. The company has seen this growth despite the recession that hit the commercial telecommunications industry prior to September 11, Angelotti says. Nevertheless, an industry maxim says military gains never fully offset commercial losses, says Joel Levine, president of the Avnet RF & Microwave segment in San Jose, Calif. The military market might show a steady profit, but not much in the grand scheme of things, he adds.

Falcon Electronics in Huntingdon, N.Y., is an electronics parts distributor that focuses primarily on the military market. Falcon leaders also see signs of increased business in the aftermath of the attacks. "I have a lot of quote activity," says Brian Diaz, president of Falcon Electronics. Falcon is a distributor of high-reliability diodes, transistors, and integrated circuits.

The boost to the military electronics business as a result of the war is coming, but it has not fully materialized yet, says Skip Wecker, vice president of marketing at Falcon.

Steady marketThe military business always just plods along without the peaks and valleys of the commercial world, says Falcon's Diaz.

The downturn in commercial business is encouraging traditionally commercial companies to take a second look at the military market, Wecker says. However, they usually only stay until the commercial market is going strong again, because it is a tough market to break into and takes long-term commitment, he adds.

John Vilardi, president of connector distributor March Electronics in Bohemia, N. Y., says he is also seeing an increase in activity in his military business. It is a combination of quotes and orders for products for existing programs and new ones, he explains. About 60 percent of the company's business is supplying mil-spec components, Vilardi says.

It is still too soon after the terrorist attacks to see major increases, but the next couple of months should be more telling, he says. Even before September 11, military demand for electronic components was growing. More growth is expected, especially with the Bush Administration set on increasing defense spending, Vilardi says.

The military market did not go the way of the telecommunications market, which was doing gangbusters, "but then tanked in January," Vilardi says. The military electronics industry is looking good for the foreseeable future, he adds.

Officials at Arrow/Zeus Electronics in Purchase, N.Y., could be reached for comment by presstime.

COTS after September 11The increased demand on designers of military systems during the war on terrorism will put even more pressure on quality assurance, Avnet's Angelotti says. Design engineers are heavily concerned with reliability of components for use in military systems, he says.

This is where the Qualified Manufacturer's List, or QML, comes in, Angelotti says. "QML is COTS," he adds. It helps separate commercial-grade from a rugged or mil-spec product available off-the-shelf, Angelotti explains.

QML takes things a step further, Angelotti says. It provides the due diligence necessary when choosing products for mission-critical military systems, he adds. When purchasing a commercial-grade product there is no guarantee that it will survive in extreme environments, Angelotti says. What you see is what you get, he adds.

However, QML assures customers that the devices they purchase meet military reliability guidelines and will not fail when military commanders need them most, he explains.

Obsolescence is a major factor when dealing with COTS, Levine says. Managing obsolescence is also where distributors bring much value, he says.

When productivity increases in the military electronics industry such as during wartime, supply chain management becomes even more crucial, Levine says. Customers must have the ability to plan ahead for the end-of-life process of electronic components, he adds.

Distributors can help by getting involved early in the life cycles of new systems, says Bryan Brady, director of the military product business unit at Avnet. Distributors also work with the designers to help them select the best components while mitigating parts obsolescence issues, also known as diminishing manufacturing sources, or DMS, he adds.

The key is to give the customer options such as lifetime buys, after-market suppliers, or using the distributor as an aftermarket supplier, Brady says. Avnet leaders also recently got into the aftermarket business themselves, he adds.

Obsolescence is not the same for connectors as it is for integrated circuits, March Electronics' Vilardi says. Connectors have a longer shelf life than integrated circuits, and have stable designs that have been around for years, he adds. Just as with integrated circuits, many military designers prefer mil-spec off-the-shelf as compared to commercial-grade connectors, Vilardi says.

Aftermarket suppliersOne essential component in the distribution chain is aftermarket suppliers, which warehouse obsolete parts and the means to remanufacture these parts. Aftermarket suppliers, who say they also see strong growth for their business after September 11, often can be the only available suppliers of old parts necessary to upgrade existing military systems.

"Business has been good," says Dale Lillard, president of Lansdale Semiconductor in Tempe, Ariz. Military officials are considering an increase in production of the Patriot anti-missile system, which could mean increased sales and profits for Lansdale, he says.

Lillard also says he has seen some increase in the request for quotes since the terrorist attacks. There is also a rumor that the government will need more Tomahawk cruise missiles, specifically the old design, for which Lansdale supplies electronic components, Lillard says.

"My business picked up about 60 percent back in 1991" during the Gulf War, and the war on terrorism should increase Lansdale's business as well, he says. He cautions, however, that his sales probably will not increase by as much as 60 percent.

Thanks in part to the selling of Lansdale's wafer fabrication facility last year, the company weathered the recession prior to September 11 quite well, Lillard says. "This is the worst recession I have ever seen and I have not had to lay anyone off," he adds. "I'm happy."

Wafer fabs are expensive to operate, and slumping demand can be a serious drain on profits, Lillard says.

Curt Gerrish, president of Rochester Electronics in Newburyport, Mass., says he sees a definite increase in business. Since the terrorist attacks Rochester's quotes and bookings have been noticeably up, he adds. "I've been in this business for 35 years and can sense when things are picking up just by walking through the sales room and hearing the sales reps on the phone," Gerrish says.

Gerrish says he believes his company is well positioned to handle the increased business due to the close relationships he is forging with manufacturers and distributors. Rochester leaders are working more closely with the companies from which they buy lines of products to make the end of life process seamless for the customer, Gerrish says.

In the past Rochester's customers would not disclose ahead of time when a product was ending its run, he continues. In such an environment is was typical for Gerrish's team not to have time to set up a line quickly enough to start manufacturing obsoleted parts in time for customers who needed a component the day after the manufacturing company stopped shipping the product, he explains.

That was then; this is now. Today that problem is more the exception than the rule, Gerrish says. The process has become much more efficient, which in the long run benefits everyone, especially the customer, he explains.

To continue making things easier for their customers Rochester has also started working more closely with distributors, Gerrish says. "We have recently signed a letter of intent with Arrow to distribute our products." Gerrish says.

Lansdale is in a similar situation and is taking similar action to deal with the problem. Lillard says he is also "trying to align more closely with distributors," and is currently speaking with Avnet about a distribution agreement.

When companies obsolete a product line, their customers, usually are getting these products through a distributor, Lillard says. Therefore, by working closely with distributors, these potential customers can find out about Lansdale, he adds. It is another way of getting the word out, he adds.

Lockheed Martin's JSF win is good news for electronics distributorsMilitary and aerospace electronics distributors are seeing the recent victory by Lockheed Martin Corp. in the Joint Strike Fighter (JSF) sweepstakes as a long-term boost to the electronics industry in the United States, says Tom McCartney, senior vice president at Avnet Kent in Phoenix.

The program will have a significant influence on the electronics industry, says Rodney Spear director of strategic military and aerospace accounts at TTI Inc., a distributor of electronic components headquartered in Fort Worth, Texas.

Many component modules will be necessary for the planes, McCartney says. The JSF program will probably use the modular approach because it is effective at keeping costs down, he adds.

The contract may be worth $200 billion, but Lockheed Martin and the Department of Defense officials will still be looking to keep costs down, Spear says. That means they will need commercial-off-the-shelf electronics, he adds. Military electronics firms can expect steady economic growth especially if the military meets their goal of producing 3,000 planes or more, Spear says.

It is also seen as better than an early Christmas present for many citizens and Lockheed Martin employees of the Texas city where the program will be based.

People were literally shedding tears of joy at the news, Spear says. Employees at Lockheed Martin say they believe the JSF win, estimated at $200 billion over the life of the program, has given them job security for the next 30 years, he says.

The Lockheed Martin facility in Fort Worth is the home of the U.S. Air Force F-16 jet fighter, and has seen anywhere from 10,000 to 15,000 jobs eliminated as F-16 production winds down, Spear explains. The JSF win is bringing renewed hope to the city, he says.

People are actually saying that not only will they be able to send their kids to college, but their grandchildren will go too as a result of the large defense contract, Spear says.

Fathers and sons spent entire careers working on the same plane, the F-16, and Fort Worth residents are optimistic the same thing will happen with the JSF, he adds.

Distributors look toward Exostar to do military electronics transactions over the InternetFour major defense contractors are joining together and forming a company called Exostar to perform business transactions for military electronics components over the Internet.

BAE Systems, Boeing, Lockheed Martin, and Raytheon formed Exostar as an independently incorporated and neutral electronic marketplace designed to increase the efficiency of supply chain transactions and improve design collaboration across the aerospace and defense industry, Exostar officials say.

The international headquarters for the business-to-business (B2B) exchange will be located in Washington, D.C., with a significant presence in Europe and Asia, company officials say. Commerce One in Pleasanton, Calif., serves as the core technology provider for the exchange. Other aerospace and defense suppliers and buyers around the world are invited to participate.

Exostar is similar to RosettaNet, a non-profit consortium dedicated to the development and deployment of standard electronic business interfaces to provide distributors and customers with a common way to do business on the Web, says Rodney Spear, director of strategic accounts for military and aerospace at TTI in Fort Worth, Texas. Exostar just focuses on the military marketplace, he adds.

The four current participants do business worldwide with more than 37,000 suppliers, hundreds of airlines, and nearly every national government for a total combined procurement outlay of about $71 billion. The aerospace and defense industry has total sales of more than $400 billion worldwide.

Under terms of the definitive agreement, each founding partner has agreed initially to take equal ownership stakes in Exostar. Adjustments to this allocation will be based on each partner's use of the exchange over the first three years.

"We are forging a new e-commerce world for the aerospace and defense industry," says Vance Coffman, chief executive officer and chairman of Lockheed Martin. "The multi-national aspects of Exostar reflect our aspiration to create a global e-marketplace for our business."

"Our open architecture and integration capabilities allows participants to join the exchange quickly and benefit from a common way of doing business across the industry," says Mark Hoffman, chairman and chief executive officer of Commerce One. "We have also made certain that all services are provided with secure and fully protective protocols and safeguards for sensitive information."

Exostar is a good thing, says John Vilardi, president of March Electronics in Bohemia, N. Y. It is an efficient method for doing business over the Internet, he adds.

It has only been around for just under a year and has yet to reach all potential users, Vilardi says. For example Lockheed Martin has so many facilities worldwide, it will take time before they are all up and running on Exostar.

Internet commerce is still coming along, but it is gaining users everyday, says Phil Angelotti director of military and aerospace sales at Avnet in Phoenix. Avnet is involved with RosettaNet and Exostar, he says. However, Exostar is the way to go for military business, Angelotti adds.

Internet ordering has not been the panacea that people thought it might be, Spear says. It also has not sounded the death knell of distributor original equipment manufacturers as some predicted, he adds.

Internet ordering can be an efficient tool for doing business, but it will not replace phone conversations or face-to-face meetings, Spear says. Forging relationships face-to-face is how trust is built in this business, Angelotti adds.

RosettaNet, launched in 1998, saves companies a lot of money when doing transactions, Spear says. Today 80 percent of the paper costs on a single-board computer cover only 5 percent of the actual design space on the board, Spear explains. It will be much less expensive to replace that paper trail with e-commerce solutions, he adds.

However, a standard was necessary, and that is where RosettaNet and Exostar come in, Spear says. Currently, if 1,000 different companies all of a sudden wanted to buy something through TTI's site and logged on at the same time, TTI would be unable to respond because each of those customers would be using a different interface and it would jam up the system, Spear explains.

The most popular way for doing business electronically has been over telephone lines with the Electronic Data Interchange, or EDI, which is commonly used for passing purchase orders back and forth, Spear says. However, EDI is expensive and if companies are not already invested in it, they might be better off going with something like RosettaNet, he adds.

For more information on Exostar contact the company on the World Wide Web at For more information on RosettaNet contact the consortium on the World Wide Web at

Who's who among electronic parts distributors and aftermarket suppliersAustin SemiconductorAustin, Texas512-339-1188http://www.austinsemiconductor.comArrow/Zeus ElectronicsPurchase, N.Y.914-701-7400http://www.arrow.comAvnetPhoenix480-643-2000http://www.avnet.comElectronic Material Industries Inc.Toluca Lake, Calif.818-763-9584http://www.militarycomponents.comFalcon ElectronicsHuntingdon, N.Y.631-351-8515http://www.falconelec.comGD CaliforniaLivermore, Calif.925-456-9900http://www.gdca.comInsight ElectronicsSan Diego858-450-8543http://www.insight-electronics.comLansdale SemiconductorTempe, Ariz.602-438-0123 ElectronicsBohemia, N.Y.631-563-6000http://www.marchelectronics.comNEL Ltd.Plainview, N.Y.516-420-9272http://www.microwavemart.comNow ElectronicsHuntingdon, N.Y.631-351-8300http://www.nowelectro.comRichardson ElectronicsChicago800-737-6937http://www.rfpowernet.comRochester ElectronicsNewburyport, Mass.978-462-9332http://www.rocelec.comSager ElectronicsHingham, Mass.781-749-6700http://www.sager.comTTIFort Worth, Texas817-740-9000

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