Taiwan distributors compete by bolstering in-house R&D

ECN Asia spoke to Y.K. Chu, Chairman of Taipei Semiconductor Corporations Association, about the distribution landscape in Taiwan. Excerpts:

What is the situation of component distributors in Taiwan?

The OEM industry’s growth has paved a good way for component distributors in Taiwan.

Distributors here have undergone mergers and acquisitions; the winner-takes-all phenomenon has been settled. On the other hand, the competition caused by globalization brings in a micro-profit era. The distributors have to reflect on their current positions and values in the market to decide how to take the next step. Lately, large distributors are focused on adjusting their business structure to raise profit margin. With strong financial background, Taiwan distributors could lead Asia’s business scope. According to reports, 50 percent of the revenues of Taiwan distributors are generated overseas, especially in Asia.

What is Taiwan distributors’ advantage in the China market?

When the shipment scale increases, the competitive advantages would be products portfolio, shipment capability, technical support, and operation performance – all of the advantages are based on the concept of “Return on Working Capital”. Taiwan-based distributors in China are publicly listed companies, so they have the advantage of raising capital from the stock market. But for China distributors, due to the bank’s requirement for real estate mortgage, the cost of collecting capital is twice bigger than a Taiwan distributor. Aside from providing flexibility in shipment, Taiwan distributors are very familiar with the OEM’s shipping pattern, and this pattern is easy for them to duplicate in China. Therefore, they can build up business in a short time.

Many OEMs and ODMs are now considering to move their manufacturing bases to lower labor cost regions other than China. What will be its impact to Taiwan distributors?

Indeed, China has firmly stood as the “world factory” position. However, with the increase of basic labor wage, some OEMs start to shift part of their manufacturing base to other countries. Some Taiwan distributors are now planning to establish offices in Vietnam. Establishing offices and increasing both manpower and capital investments are crucial. At the very beginning, these distributors tend to allocate shipment through existing offices, such as via Singapore. This trend has two important impacts: one is to bolster Vietnam; and the other is to strengthen distributors’ resources to support Southeast Asia.

How will distributors differentiate their products and local services?

Distributors have to establish their capability to develop products according to local features. Most clients prefer a manufacturing company that has in-house R&D. Fortunately, many Taiwan manufacturers can customize features according to clients’ specification.

What will be the hot application in the Asia market?

Consumer electronics will still take the lead in Asia. Popular consumer electronics will appear in the form of personal applications or digital home. The most important trend is the digital transform of traditional analog products. MP3 is the best digitalized example of the portable cassette player. Moreover, the digitalization of security and surveillance systems will stimulate growth for CMOS sensors, storage, and security software.

HIGHLIGHTS OF THE DISTRIBUTION INDUSTRY

The same as with the development of any industry, the evolution of components distribution market in Taiwan can be divided into three stages: emergence of numerous players, mergers and acquisitions (M&As), and then market maturity. Taiwan has about 11 companies involved in components distribution in 2004; six of them have revenues exceeding $500 million, while the rest, over $350 million. One of the leading distributors is World Peace Industrial Group (WPI Group), with revenues reaching $2.5 billion. The year 2005 is said to be the turning point of Taiwan’s distribution industry. The merger of WPI and Silicon Application Corp. (SAC)— which formed WPG Holdings, said to be the biggest component distributor in Taiwan—has led to a series of M&As in tier two distributors. At present, WPG Holdings is one of the top component distributors worldwide, joining the ranks of Avnet, Arrow and Future Electronics. In Asia, Taiwan currently accounts for 22 percent of the overall components distribution revenue; Hong Kong and mainland China account for 68 percent; and the rest, 10 percent.