Pretty cool-another name that I didn't have on any list.
techweb.com
Industials take systems path
Barbara Jorgensen
When Patriot Technologies Inc. was just starting out, Avnet Computer helped it
look a lot bigger to customers than it really was.
Avnet provided Patriot, now a $10 million manufacturer of Internet security
products, with financial support as well as a dedicated engineer to help the
company choose a system platform.
"Once we were up and running, we didn't have to rely on them as much
financially; now, we're using them for just-in-time," said Bruce Tucker, president
of Patriot, Gaithersburg, Md.
The company, which recently finished its second fiscal year, buys Intel
processors, motherboards, and various peripherals from Avnet.
With an array of computer-product service and support offerings for OEMs
such as Patriot, and end users and value-added resellers (VARs) as well,
industrial distributors aren't focusing just on semiconductors and other
components anymore.
In fact, capitalizing on one of the strongest growth markets in distribution,
industrial distributors have carved out a significant niche in the sale and support
of computer products and related systems.
There's plenty of incentive: The fastest-growing market segment for industrial
distributors is computer products.
Shipments of computer products increased 18.03% in 1997, accounting for
31.87% of industrial distributors' $27 billion in North American shipments for the
year, according to the National Electronic Distributors Association, Chicago.
Semiconductors represented 35.47% of all industrial distributor products shipped
in North America, NEDA said.
For industrials such as Avnet Computer's parent, Great Neck, N.Y.-based
Avnet Inc., computer products have been the strongest segment in recent
quarters and have helped offset unrelenting price pressure in semiconductors
and other components.
Avnet's North American sales of computer systems and peripherals totaled
$1.34 billion last year. In the first quarter, that business grew 36% from the
same period last year.
Gauging prospects
But the route to long-term growth is complex. While industrial distributors' core
competency still lies in moving large volumes of product, the array of services
the industrials have developed is nearly as vast as applications for the computer
products they sell.
Compared with the traditional industrial-distribution model, in which chips and
other components were sold directly to OEMs, the computer product and
systems channel is highly fragmented. Depending on the vendor, product, and
application, industrials may sell to OEMs, VARs, or end users.
Some industrials, such as Bell Microproducts Inc. and Gates/Arrow Distributing,
offer high-volume business, and others compete primarily in the systems arena
of IBM Corp., Digital Equipment Corp., and Hewlett-Packard Co.
It's still unclear how much-or where-the industrials bump up against commercial
giants such as Ingram Micro Inc., or how much overlap there is with
midrange-systems distributors such as Savoir Technology Group. But it is clear
that the industrials are investing heavily in the computer product and systems
business.
Within the past year, Pioneer-Standard Electronics Inc. acquired $340 million
Dickens Data Systems, a distributor of IBM products; leading industrial Arrow
Electronics Inc. also bought an IBM distributor, SupportNet, a $70 million
operation; and Avnet expanded its overseas computer business by acquiring
U.K.-based computer distributor Bytech Systems Ltd.
Whether they're configuring software at the board level or supporting
enterprise-wide systems, computer products and related services are becoming
a bigger piece of the industrial pie, said Phil Roussey, senior vice president for
computer products marketing at Bell Micro, San Jose. "Each distributor, either
driven by its suppliers or its own strategy, has gotten into one niche or another,"
he said.
Commercial distributors, systems integrators, VARs, aggregators, and even
retail stores still handle most high-volume computer-product sales. The bulk of
industrials' volume is still hardware-related, but as one industrial put it: "We
resell service like it was a part number."
Computer-product custo-mers want basically the same thing components
customers want: a partner that can provide core competencies in things like
materials management and supply-chain management, according to Josh Napua,
senior vice president for computer products at Wyle Electronics Inc., Sunnyvale,
Calif. "We define 'computer products' as board-level products and above," he
said.
Pioneer-Standard, Cleveland, was among the first industrials to tap computer
products' potential, according to analysts.
"Pioneer was the pioneer of this business," said Steve Ashley, an analyst at
Robert W. Baird & Co., Milwaukee. "[Former chairman and chief executive]
Pete Heller led them into this business. Strategically, looking at the size of the
business-the upper-end PC server business-he saw a large dollar market
growing at a rapid pace."
Heller believed that distri-bution's core competencies, such as volume order
fulfillment and transaction management, were easily transferrable to computer
products. Sales of computer products and related systems now account for
nearly 50% of Pioneer's $1.7 billion in revenue.
More change in the cards?
However, industrials' comfortable niche may be changing, Ashley said.
"The world is changing because of the Wintel duopoly, which is showing up on
the enterprise level," he said. "With Merced and Windows NT-platforms that
traditionally have used Tech Data and Ingram Micro-you can start to see those
[products] pull the high-end workstation flow down [from the industrial level] to
Tech Data and Ingram."
Although a number of industrial and commercial distributors said they don't
bump up against one another in the market (see related story on page 56),
Ashley believes they may in the future.
"Wintel has been on the desktop and is moving upstream to the server level," he
said. "You didn't really see Wintel that far upstream."
So far, though, industrials seem secure in their niche, in which they do more than
ship products. Commercial distributors generally cater to customers that know
exactly what they want. Industrials, in many cases, help customers figure out
what they need, help them put it together, and then support it. The difference,
according to the industrials, is margins in the midteens, as opposed to the 3% to
5% the commercials are accustomed to.
A different world
With the acquisition of Gates/FA Distributing in 1994, Arrow established itself
as the largest U.S. distributor and is now the largest industrial reseller of
computer and computer peripheral equipment, with North American sales of
$1.39 billion.
This business segment is growing in the 25% range, according to Mike Long,
president of Gates/Arrow Distributing, Greenville, S.C.
Like most of its top-tier competitors, Arrow Electronics has kept its computer
business strictly separate from the components side.
"The customer bases are entirely different," said Long, who joined Gates/Arrow
from Arrow's former IP&E business, Capstone.
"[Gates] is a different strategic leg, another area of the business we can focus
on, and is somewhat related to the [components] distribution business," he said.
"In the volume business, you can pick a PC like you pick a semiconductor,
common in the form of warehousing. The customer bases are different; there
are no back orders in this business, no scheduled orders. What you book today
you ship today."
Gates/Arrow operates different business units by vendor and customer.
SupportNet sells IBM and midrange products; Scientific and Business
Minicomputers Inc. sells and supports the HP 9000; and CONSAN is a
mass-storage distributor serving VARs, integrators, and dealers.
Dedicated businesses
Most large industrials have separated their computer-products business into
units with dedicated sales forces. Those operations are further segmented
depending on whether salespeople call on an OEM, end user, or a VAR. In
many cases, an industrial distributor will provide services to a customer in
conjunction with a VAR.
Wyle divides its computer products and systems support among OEMs, VARs,
and end users, according to Napua. In 1997, Wyle's parent, VEBA AG,
reported $420 million in North American systems sales, which Napua said may
be approaching $600 million this year.
Wyle counts Compaq Computer Corp., Digital Equipment Corp., and IBM
among its major lines, and its offerings include medium- and small-scale
multiuser systems, workstations, PCs, and related peripheral products.
One of the OEM services Wyle provides is hardware integration, which
includes supplying boards, assembling boards into boxes, loading software, and
shipping the assembled box to an OEM that integrates it into its end product.
Wyle may also provide the box, insert it into the OEM product, and ship the end
product to the user as if it were packaged by the OEM.
Wyle provides a separate suite of services for VARs.
"VARs' core competency is in their proprietary software," Napua said. "They
have us qualify the [hardware] configuration for a specific end user, load their
software for them, test it, and ship to the end user. The VAR meets the
package and plugs and goes, and they spend time implementing the software
with end users and training them," he said.
Among other VAR services Wyle provides is what it calls Formula 4, which
helps VARs develop their business. The program includes incentives such as a
business growth fund, which, based on purchases from Wyle, channels vendor
funds toward VARs' marketing efforts.
Hall-Mark Computer, which became part of Avnet through its 1993 acquisition
of Hall-Mark Electronics, is a high-end technical distributor of open-systems,
connectivity, mass-storage, and peripheral products to the reseller channel,
according to Sean Fanning, vice president of marketing for North America.
Hall-Mark's main lines include Digital, HP, and IBM.
"We have a limited customer base and a select line card, and support that
limited base with the line card and with value-based services," Fanning said.
Hall-Mark's customer base is value-added-application resellers and system
integrators. Customers receive logistics, sales, marketing, financial, and
technical support.
For example, Hall-Mark offers the services of a Technical Enhancement Center
that has vendor-certified technical engineers available to do pre- and postsales
support for VARs, as well as full-scale integration (also referred to as channel
assembly).
"Sixty percent of the systems and servers we ship run through integration and
testing before they ship," Fanning said. Hall-Mark also offers a Solutions Center
by which VARs can test applications on in-house hardware through dial-up
remote access. Hall-Mark will also ship hardware directly to VARs.
Hall-Mark also offers business-management consulting services. "It's a portfolio
we make available to our VARs," Fanning said. "We act as contracted
consultants helping them understand modeling, how to architect their companies
from a value-based model."
Avnet has established different models to serve this market, Fanning said. While
Hall-Mark serves primarily VARs, Avnet Computer concentrates on assisting
end users with complete solutions.
Avnet Computer offers five types of infrastructure solutions: enterprise
computing, departmental computing, enterprise resource planning (ERP),
network integration, and custom assembly.
The unit draws on multiple vendors to design and support the platform of choice.
For example, enterprise computing provides system sizing, platform analysis,
capacity planning, and migration services, and partners with independent
software vendors and VARs.
Departmental computing focuses on providing the technological infrastructure
required for applications such as workgroup/departmental and intranet solutions,
and integrates platforms with software. ERP covers platform integration,
including project and program management, system design, WAN/LAN
installation, capacity planning, platform sizing, installation, and training.
Focused approach
Bell Microproducts, which derives about half its $533.7 million in revenue from
systems integration and related value-added services, entered that arena through
disk drives. The distributor's offerings range from a pure volume play in mass
storage to box assembly from its Quadrus Manufacturing unit.
"We began about seven years ago with value-added programs in computer
products-formatting drives, configuring SPARC boards, and supplying different
CPU modules than was done for the OEM components side of the house,"
Roussey said.
Pioneer's computer business is made up of two divisions: KeyLink, which
handles the distributor's VAR business, and a corporate account group that sells
to end users.
"Our target is the midrange computer-server market, and right now our main
lines are Digital Equipment [for which Pioneer is the largest distributor in the
world], IBM, Intel, Oracle, Computer Associates, and Compaq," said Bob
Bailey, senior vice president of Pioneer-Standard's systems and services
division. "We're focused on the midrange to high end of the server market. We
see the midrange market continuing to be strong."
Although Pioneer warned earlier this year that the merger of Digital Equipment
and Compaq would create customer uncertainty and could affect its bottom line,
the distributor's most recent results have not reflected that. Pioneer's sales in its
fourth quarter, ended March 31, climbed to $433.6 million, from $391.5 million a
year earlier. Quarterly net income rose 5%, to $7.3 million, from $6.9 million last
year.
Pioneer finished the year with sales of $1.7 billion, up from $1.5 billion the
previous year. Net income jumped to $30.5 million, from $23.3 million.
Other tacks
Bell Industries Inc. is primarily on the support side of the computer business and
reported $170 million in revenue from that arena in 1997.
"We sell to commercial users, banks, hospitals, and industrial concerns," said
Gordon Graham, chief executive of the El Segundo, Calif.-based distributor.
"Bell offers delivery of PCs to the desktop, and handles support, helping users
with the available functions of the system and providing help-desk and
networking services.
"We sell desktop delivery and services to the commercial customer base,"
Graham said. "We're more in line with outsourcing-type service, where the
customer is buying PC-oriented product through Bell that is being delivered with
value-added services such as training, help-desk, and other types of services
they would normally have to provide."
Marshall Industries serves end users, VARs and VADs, systems integrators,
and what chief executive Robert Rodin calls a "hybrid value-added OEM."
There's not a lot of black and white among the customer base, but there are a
lot of shades of gray, he said.
"Our main business is made up of mass-storage and display products, and
different sorts of board-level products for specific applications like graphics,"
Rodin said. "We're also involved in motherboard-level activity; and we also do
integration, burn-in for drives, load software, and provide some elaborate
flat-panel-display solutions."
The El Monte, Calif.-based distributor reported $211 million in sales of computer
systems and related peripherals, and sees this segment of the market as a
growth business.
This sector currently accounts for 12% to 15% of Marshall Industries' sales,
according to Rodin.
Copyright ® 1998 CMP Media Inc. |
