This final and most intense free-for-all will change the future of distribution!
Different types of component distributors have had distinct boundaries in the past, but you will see that international distribution giants are paying more and more attention to the small- and medium- long-term market, which has a natural connection with the online business model. The number of local component distributors is bound to decrease in the next two or three years.
This is the topic of discussion at the 2018 Global Distribution and Supply Chain Leadership Summit. As one of ASPENCORE’s Global Twin Peaks, the round table BBS topic at this leadership summit is the division of the new ecology of the industry. The guests include Wang Yucheng, the chairman of Best of Best Holdings; Xia Lei, the CEO of ICZOOM Group, Inc.; Tan Rongxi, the president of CEDA (China electronic distributor’s branch); Sha Hongzhi, the chairman of Najing Sunload Electronics Corporation LTD.; Wu Zhengzhou, the senior consultant in the component distribution industry; and Jiang Yixin, Arrow's sales vice President. All of them are from the industries of domestic and foreign electronic component vendors, distributors, and transaction platforms—veterans of the industry association.
Increasing manpower and warehousing space alone to expand the business scale is placing distributors under huge pressure, so more cost-effective online models are beginning to be favored. In addition, local distributors have a gap in operating efficiency compared with large international distributors, and we also will get extra profits from the Further Improvement in Efficiency.
Wang Yucheng, the chairman of Best of Best Holdings, believes that efficiency is very important for distributors. “There is a big problem in our electronic components industry in raising costs including customer acquisition costs, falling profits, increasing personnel costs, and increasing storage and transportation costs. Arrow does well because of their high per capita output, which is much better than local distributors. It has relatively good profit margins in new markets, such as the automobile industry. I am confused about how to develop our business in the future, but e-commerce is developing very well and rapidly. The cost of e-commerce is now relatively lower than ours, so it will develop very fast in the next few years.”
Wang Yucheng, chairman of Best of Best Holdings
According to Xia Lei, the CEO of ICZOOM Group, Inc., the salaries of college graduates today are not what they used to be. As the cost of employment increases, third-party service companies are more needed to serve the electronic components industry. The advantages of traditional distributors are very strong. If they focus on advantages and outsource unnecessary parts to service providers, there may be a win-win result.
Tan Rongxi, the president of CEDA (China Electronic Distributors’ Branch), gives two solutions: one is developing the large-scale to reduce the unit cost and make profitability larger. The other way is the specialization that creates value with potential return, which is better than other companies. Actually, each company has their own way to develop their business; but no matter which way you choose, it will be very different. If you simply follow others’ way, it will be a dead end.
Sha Hongzhi, the chairman of Najing Sunload Electronics Corporation LTD, said that there are two key points in improving efficiency: one is to establish a real system on organization structure. The second is to use the right people—even if you pay them high salary, it is worth it in the long run. But the first question is how to find the right people.
Sha Hongzhi, the chairman of Najing Sunload Electronics Corporation LTD.
Wu Zhenzhou: Mr. Pang from Fortune Techgroup mentioned in his speech, “When a curve is at a certain level of polarization, the middle layer gets smaller, the margins get thinner, and then the problem of efficiency gets bigger and bigger. I think that we do not just need to consider the efficiency problem, we should also see the industry trend in the future. I think that the distribution industry became more difficult earlier than a decade ago. The distribution of electronic components became more and more difficult in these last two or three years. Arrow alleges that they are only IOT, not electronic component distributors anymore. It sounds like the real estate firm, Vanke, says that they don’t do real estate business. Are we also going to consider not being a distributor anymore?”
Jiang Yixin, Arrow's Sales Vice President, thinks that “One day we will not be distributors anymore when big data eliminates asymmetric information. When all the information tends to be more transparent, it will be a big survival crisis for everyone in this room, so what will be our value by then? Instead of considering efficiency or making profits, we might need to consider what our distributor’s value in the future is. It is very difficult to survive if you just rely on a supplier's rebate or a small extra profit from your customer. I think that there will be a big change in the component industry. We will not play the role of a distributor one day, so we can rely on the profit from the top and the bottom when the market is good; but now we need to find a new profit growth point. In the Internet age, almost all other companies died except for the head companies due to the upgraded technology. All of us in this room want to upgrade our business model, but only a few companies can survive.”
Alibaba and JD enter into the electronic components industry to show that distributors should pay attention to the long-tail market and how we still have the opportunity.
Wang Yucheng: “It has been said for years that Internet firms will enter into our industry. Before only the internet companies in our industry try to do E-Business trading of electronic components, there are still a lot of companies doing well in China. Traditional distributors have also tried, but they didn't succeed. I think there are several factors that make traditional distributors unsuccessful. First of all, the vendors have a very strict customer management rule and it is not applicable for the operation mode of electronic components e-commerce; second, the customers in the component industry are too scattered and the service cost is too high, so the traditional distributor can't thrive in this environment. Now the biggest problem is solving the upstream resources problem because they are one of the biggest electricity resources. Some of our components distributors have this kind of upstream resources in the world, so they can cooperate with hundreds or thousands of the original factories; but there is no one in China who can get all of these resources. I feel that both Alibaba and JD have this ability to pull the resources of world factories into China, but Alibaba is thinking how to use those resources. Jiang Yixin, Arrow's Sales Vice President also said that Aliabba and JD are still figuring out how to do B2B business operation. I agree with him.”
Xia Lei: “It’s an interesting matter, but I don’t think these internet giants will get involved. The first reason is that it’s way too slow to make it work. It takes a long time for everyone, and Alibaba is no exception, unless it chooses to spend a large sum of money on acquisition. In that case, it’s a choice made by their high level decision maker, not by their e-commerce team. On the other hand, the e-commerce team is extremely occupied with other “to C” business. Next, The best way to increase GMV (which is a critical indicator of “to C” business) is buying a company. It will bring Alibaba hundreds of billions of GMV. On the contrast, buying our companies will not help a lot. Since Alibaba lacks the motivation to do such acquisition, I don’t think it will make a full effort to get involved in this business. Finally, Alibaba is an IPO company with yearly revenue over several thousand billion dollars, so its development is counted by hundreds of billions of dollars. The electronic components industry does present a highly profitable potential, but it is too scattered to satisfy their appetite.”
Xia Lei,CEO of ICZOOM
Tan Rongxi: “When we look into our future, we should welcome and embrace all kinds of possibilities. I anticipate that the final winner or the final survivor shall be open-minded and co-operative. We are helping the manufacturers to run their Tianmao Stores. And some of our stores show rapid growth rate. From my point of view, different parties have complementary advantages. If a traditional distributor wants to run an online store, internet flow is necessary to get more customers. Who is controlling internet flow? The internet giants are. We still have many opportunities because of our expertise. Alibaba is not as experienced as us. They might be too occupied at the moment, but they can surely see the potential of this market. The electronic components market is a highly standardized market with substantial revenue. The two ends of this market are scattered, which makes it a perfect B2B scenario. So Alibaba will join this market sooner or later.”
Does it mean that we will lose our place as distributors once Alibaba controls the resources of manufacturers?
“I don’t think so. Our target customers are different. Mr. Jiang from Arrow just said that we should pay attention to the Long Tail Market and new customers. The cooperation between Alibaba and us is limited to the IoT area. I would like to take this opportunity to point out that IoT is a scattered and fragmented market, which makes it an ideal area to do testing trials. Please don’t be nervous about it. Alibaba will not take down all the distributors at once. I think it’s impossible because our target customers are different. Distributors serve upstream customers and manufacturers, bringing them unique value. Therefore the advantages of distributors and Alibaba are complementary. Our industry is large enough to embrace all kinds of business. I hope that everyone can stay positive about new attempts.”
Tan Rongxi, Director-General of China Electronics Distributor Association (CEDA)
Sha Hongzhi: “One way is internet giants get involved in the industry; and the other way is the industry integrates the internet to improve its efficiency. Which way is more advantageous? I have been thinking about it for a long time. I believe that the latter is much more vital. Even though the internet giants have high reputation, sufficient capital, and high-level talents, the electronic components industry is highly segmented. For the internet giants, getting involved in this industry will only add to their existing glory. For us it’s a question of life or death. So everyone in this industry will protect their benefits with their life.
“Platforms such as Alibaba and Taobao can take advantage of our weak points with their high reputation, sufficient capital, and control of internet flow. However, it’s extremely difficult for them to overtake this industry completely. But there’s no doubt that it will have its place. So I think that all of these will co-exist in the future.”
Wu Zhenzhou: “You can see that I am wearing a hat. I tend to see myself as a ‘farmer’ in this industry. And most of you are also ‘farmers’. We have been working hard in this industry for a long time, just like farmers working in their fields. From my point of view, Alibaba and Jingdong are more like fishermen. We have been working hard in this industry for a long time. How can they take away our job far from the sea?
"Mr. Wang just mentioned seeding. I don’t think that Alibaba and Jingdong are seeding. They are fishermen, and what fishermen do is cast nets. They are happy if they can get some fish, and they will fish elsewhere if nothing comes in. If there are no fish anywhere, they can only pray. However, farmers are different. There are many steps before harvest. Farmers need to seed, fertilize, and reap. They wait for the crop to grow little by little, and finally they can harvest. The process for fishermen and farmers is not the same. I think that farmers don’t need to worry about fishermen. Farmers work for their customers, and the customers are the ones who we rely on for a living. Our customers have gotten used to agricultural products, so they want to try some marine products. Marine products are good, but they need to have rice eventually. I would like to take this opportunity to point out a detail in Alibaba’s speech. He was talking about ‘users’, which is a typical B2C term. For us, we use the word ‘customers’ instead. So he is an amateur in my eyes. You can see it by the terms. ‘Customers’ have more weight than ‘users’.”
Jiang Yiqi: “I welcome the entrance of internet giants. Actually we are cooperating with Jingdong and Alibaba. We have our own website, and we are cooperating with them in other areas. In the short term, these internet giants are not our competitors because they have different goals, at least in the short term. They told me directly that they will never be companies with heavy assets. They are not good at stocking and loaning. What they want is mega data. After collecting enough data, they will be able to analyze and forecast the needs of customers. And this forecast will in turn help the manufacturers to develop the products that are more customized to the market’s demand.
“I don’t know what is going to happen in 10 years or 20 years. But in five years the principle of Pareto Eyes should work. Everyone will gain and nobody will lose. The internet giants are not making a mess at the moment. They may have a negative impact on the traders to a larger extent because they increase the transparency and reduce the grey zone in the industry. But there’s one thing that will never change: they have a different idea. We might be competitors in the long term. It’s hard to tell. But I see more opportunities to cooperate in the short term.
In the short term I see many opportunities where online and offline can work together to explore the whole market. Each party can make the best use of its advantages. I don’t think that these internet giants are interested in becoming authorized distributors. Even though they have opened a number of stores, most of them are selling developers’ tools or selected models. Some of the customers’ demands cannot be completed on B2B platforms, and they have to be done offline by face-to-face communication or by on-site technical service. We can only complete the exchange step online. In our industry, the internet can only help us to do order placement, and it cannot help with service. Only offline service can work. To conclude, we are allies with these internet giants. In the long term it depends. We will see.
“Next I would like to talk about the future of distributors. Manufacturers are taking up the business with major clients. And the profit of those middle clients has disappeared. Distributors should pay more attention to long-tail customers, if conditions allow. This market is not yet transparent. The supplier cannot find the customers, and the customers cannot find suitable sellers because their size is not big enough to attract the manufacturers’ attention. It’s worthy for distributors to invest in this market, even if it means harder work. As a matter of fact, you may need to complete 3000 solutions to keep up revenue as before. Only in this way can you keep the revenue stable. Otherwise it will drop 90% if you only complete 20 solutions. We should focus on new companies and small- to medium- sized customers. A few companies among them will become large companies in the future. In the long term, participating in the path of B2B is inevitable, which is not an easy way. Each company can specialize in one particular area based on its advantage. Not every company has to become Alibaba and Jingdong in the B2B industry. Companies can survive and thrive in a small sector by professional service.”
Will the history of distributors’ integration repeat itself?
Wang Yucheng: “It’s a law of nature. We can’t run away from it. We have to follow the market because the profit in this industry is too low. It’s a trend to integrate all the resources. Historically, America and Taiwan went through such processes. For example, there are only 6 ore 7 major companies in Taiwan. The rest are extremely small. I anticipate that a few companies will survive in the Chinese mainland. The gap will become larger and larger. There are three types of survivors. The first type is purchasing enterprises. They are and will be serving major consumer markets such as mobile phones and TVs. The second type is technique-centered enterprises. They can help the manufacturers to finish technically demanding tasks. Today we have seen a company that is specialized in the automotive industry. Even though it’s not yet a major market, such distributors are still valuable. The last type is e-commerce. We have a difficult life. We are stuck in the middle. I spend a lot of time thinking about it. I would like to hear what Mr. Xia has to say.”
Xia Lei: “It seems like all of you recognize the distributors as the mainstream and formal way of selling electronic components. It’s been the traditional way of the business for the past 70 years, since the 1940s. For authorized distributors, there two main issues: the profit is too low and the selling is too hard. I suggest they make a choice about what they do. If a company would like to focus on the technology, it shouldn’t get involved in other matters. If a company would like to stock more products, it should make the best use of its money in stocking. It’s even better if you could hand over the work of storage management and supply chain management to e-commerce companies like us. The return rate of capital will increase that way. I can understand why so many owners of distributors are not willing to change. It’s because they have been practicing this mode of business for over 70 years and they can still make a living even though it’s getting harder. Their life is getting difficult; they need to work harder each day, but there’s hope for them. As long as they work hard enough, they don’t feel like they need to give up anything. They want to build their own warehouse in Hongkong and Shenzhen; they want to hire a team of developers; they need to raise money on their own… These are too much. I think that the distributors are still valuable at the moment. They are very competitive, but they need to make a choice.”
Tan Rongxi: “I was in North America in 2000. There were many authorized distributors back then, now there are only a few, just like Mr. Wang mentioned before. I think that history will repeat itself. The large companies will remain large. But it doesn’t mean that they will survive. I was lucky to witness the changes that took place in North America a dozen years ago. Some of the largest companies disappeared. When I say ‘disappear’, it doesn’t mean closing down. At the moment there are more than 1000 authorized distributors in China, not including traders and other companies. The number is even larger if you count in the traders. In the coming 2-3 years, I anticipate that many enterprises will disappear. It’s a trend that cannot be stopped. I don’t deny the value of the distributors. It’s not the same. We need to change and find a way out. The rule of competition and elimination is cruel. Some of the companies will get more capital by merging and acquisition; thus they disappear. Some local companies have a better chance because they have built their own marketing resource. What about other companies? How can they strengthen their company? It’s a big topic. I would like to emphasize that history will repeat itself. You have to change.”
Sha Hongzhi: “We can obviously see the trend that most manufacturers are deducting the number of distributors. The manufacturers have learned the deals of these distributors after a long time of observation. Some distributors don’t seem to have enough value and they don’t have enough customer resource. It’s apparent progress from barbarous growth to streamline. The integration of the market will lead to the integration of the supply chain. I anticipate several ways to survive in such condition. First is the company like Arrow. They have ample capital, large base, strong technical support, and it’s evolving over time. Of course it will survive. The second survivor is the company that reduces the operation cost to the minimal level. It remains profitable even if there’s only 3%’s space. The third kind of survivor is the company that brings true value to the industry. It focuses in a small sector and makes it perfect. And the last type is the company that deals with the long-tail market.”
Wu Zhenzhou: “Mr.Tan just said that history will repeat itself. I agree that history is definitely going to repeat. I started as a trader. Around 1998, there were more than 600 traders in America. And there were only over a hundred traders by the year of 2000. Now there are only a few in the American market. Let’s take a look at the Chinese market. Now there are over 1000 authorized distributors in China, and there are tens of thousands of traders. Will such a situation continue? No. If you are older you may recall that there were lots of travel agencies ten years ago. Where are they now? They are gone. The same will happen in our industry. The number of distributors and traders is definitely going to decrease.”
Wu Zhengzhou, the senior consultant in the component distribution industry
Wu Zhenzhou: “Mr.Tan started as an authorized agent, and I started as a trader. We represent two types of distributors. Actually I don’t see a bright future for traders. But it seems that Mr. Tan has a different perspective. I want to know the reason why he remains positive about it.”
Mr. Tan: “The grass always looks greener on the other side of the fence. Will traders disappear? I don’t think so. When we analyze the layout of this industry, we should see who is making the rules. The rule maker is the manufacturer. If you want to make this industry transparent, only the manufacturer can do it. None of us or our customers can do it. But the manufacturers will not do it because it doesn’t help to maximize their profit. How to maximize your profit? The textbook tells us that we can do it by different pricing. We should sell our products at different prices to different customers. The information barrier is set up by manufacturers. As long as the manufacturers do not change their pricing strategy, traders will always be there. They don’t have to change. It’s just doing the same work in different ways.”
Wu Zhenzhou: “Being a trader is so difficult. We can see that Alibaba and Jingdong are coming into this industry with tens of billions in capital, and they don’t make loans. Not making loans gives them the freedom to do a turnaround. If 10 billion enter into the e-commerce business of this industry, it means that there is 120 billion a year rushing in. It will make a huge impact on the traders. Since the profit in Runxin is quite clear, the profit is definitely going to drop once we encounter such a bottleneck. An order has two sides. We traders know it well. In other words, an order is two-faced. The customer may give the order to someone else anytime. What they want is to make profit. When you analyze the past orders, you will find an astonishing fact: the price is decreasing every year and the time of payment is increasing each year. The business is getting even harder because so much capital is coming from outside and the information is getting transparent.”
Jiang Yiqi: “The numbers of distributors and traders are going down lately. That’s for sure. Which one is more competitive? I think that traders will last longer than authorized agents. Traders make a living by their customer resources or exclusive information. Sometimes they can get some information from other customers as well. So relatively, traders do not rely on the manufacturers that much as the agents because the traders are able to sell the products by their own means. By comparison, manufacturers have full control over the agents. And agents won’t risk their license to challenge the pricing system. If you are wearing their shoes, you wouldn’t do it.
Jiang Yiqi, VP of Sales in China of Arrow Electronics
“Agents have heavy assets, compared to traders. With the profit getting lower and lower, which kind of company will fall first? The agents are prone to fall if they don’t take the right steps. Today we hear the agents are complaining about their hard times. But the traders haven’t said anything about it. Traders’ business is small and nice. They have their own space. Eventually the line between the traders and the agents will be less defined. Perhaps one day we will be doing the same kind of work. Perhaps one day everyone will do our businesses on the platforms. Some of us might survive online and those who don’t will be eliminated. Perhaps we will focus in one small sector such as supply chain or integration service. We will be serving the manufactures to help them to serve the customers. We are here because the manufactures want us to be here. And traders are here because the customers need them. Who will finally decide what the market looks like? Since manufacturers are serving the customers, and they cannot live without the customers, I think customers are the most important. From the point of view of our customers, all of us are traders.”
Is winter coming, or shall we remain positive?
Jiang Yiqi: “Generally speaking, our most important mission as a global company is providing the best solutions for our customers. We have a global layout to help them. We have a European customer at the moment. This customer has a wonderful idea and its product just become successful in the lab. However, this company doesn’t have any supply chain resources. Which is the cheapest place to produce? Which place produces the highest quality? This company has no idea. We can help them to find the most suitable factory for production, and help them to sell the products inside China. Even though the customs policy and global trade is getting tight, we agents can still play our part if we have such capacities. Even though the policies are getting tight in China, south-east Asia remains intact. So we can help our customers to look for other solutions outside China. At the same time, some local Chinese companies want to explore their business abroad. And we are there to help them. We provide suggestions and help them to find overseas customers. So the policy does not have a huge impact on us. We are dealing with the same problems with or without customs. Compared to the direct impact caused by them, its indirect impact is more devastating. Many customers are losing their confidence in this market because of all these uncertainties. They are being extremely reserved in investment, product development, and market demand. The general mood of the market is getting pessimistic. The government has been promoting local enterprises and it is encouraging us to feel confident. It might have more impact on our business next year.”
Sha Hongzhi: “The market is making us extremely vulnerable. It was like a roller coaster last year. All the challenges are like a test. Many companies cannot pass this test. For example, some agents are ruled out by the manufactures. Some distributors that didn’t control risk well are dead. And the customers gave up some companies because of their poor performance during this test. We experienced huge happiness and huge sadness, and they are both hurting. So I think that we should keep the respect for the market and for the customers. If we keep thinking and making changes accordingly, we can survive longer than the others.”
Tan Rongxi: “This industry has gone past a fast growing history. So it needs more time to adjust. Many people are waiting for the right time because of the unstable international environment. The biggest problem is such instability and uncertainty. We just mentioned short-term strategy. I think that it will be nice once everything settles down. No matter what happens, the local demand inside China is large enough to support the industry. It won’t be a catastrophic situation. However, if the problem lasts longer, it will bring more negative effects.”
Xia Lei: “In the short term, the Sino-American war will force us to look for replacements elsewhere. We’re not using the products from America lately. And America cannot block the Chinese market for a long time. I don’t think so. If America continues to uphold such a blockade, we might move our assembling machines to Vietnam, Thailand, Cambodia, or somewhere else. At the same time, it will accelerate the development of Chinese industry. So I stay positive about this matter.”
Mr. Wang Yucheng: “Be ready for the coming winter. And keep up with news updates.”
1.The content, data, charts, etc. of this article come from network reference or other public materials, and the copyright belongs to the original author and the original published source. If the copyright owner has any objection to the quotation of this article, please contact ICZOOM "marketing(at)iczoom.com" and we will deal with it in a timely manner.
2.The quotes in this article are for readers' learning exchange only, and do not involve commercial purposes.
3.The content of this paper only represents the author's point of view. ICZOOM cannot gurarante and assure the accuracy, reliability or integrity of the content. The decision or behavior made by readers after reading this article is based on their own will and independent judgment. Please clarify the relevant results before reading this article.
4.Please contact ICZOOM "marketing(at)iczoom.com" with the reason of reproducing if you want to reproduce the articles that ICZOOM owns the copyright. Without permission to reproduce, ICZOOM will reserve the right to pursue the legal liability.
5. If there is any inconsistency between the English and Chinese versions, the Chinese version shall prevail.
ICZOOM has the final right to interpret this statement.