by Georg Steinberger |
The European component distribution market experienced its second consecutive year of significant growth. According to Dmass, the European distribution association, the market in fact grew by more than 32 percent in 2022, almost reaching close to 20 billion euros (and Dmass claims to represent about 85 percent of the total European distribution market). We should remember that the distribution market had also grown by more than 32% in 2021. However, the situation was slightly different: in 2021 passives and electromechanicals had grown faster than semiconductors, last year it was reversed; moreover, the mix given by price increases, inflation, transportation costs and higher volumes was also quite different. Indeed, in 2022 inflation was higher, manufacturers' selling prices, at least in semiconductors, rose sharply, but transportation costs almost normalized; and delivered volume still grew by more than 20 percent. Under circumstances exacerbated by increasing tensions along the supply chain, distribution companies seem, therefore, to have done a very good job, going so far as to supply customers with almost 50 percent more components than two years ago.
Market trends
Let's take a brief look at the performance of semiconductors, the "hottest" part of the distribution market. Again according to Dmass data, their turnover increased in 2022 by about 40 percent to be worth about 13.5 billion euros in Europe. And since Dmass does not represent the entire distribution market, the total value can probably be estimated at around 15 billion euros. In a market that, according to the World Semiconductor Trade Statistics, has grown globally by about 12.5 percent in U.S. dollars and about 25 percent in euros, we thus note that distribution has gained even more significant shares to account for nearly 30 percent of the total market. Its growing importance becomes even more evident when we consider that manufacturers trade directly only with an increasingly limited number of large customers and leave 95 percent of customers to the channel.
This means that distribution has been able to deliver enormously larger volumes of product, has been able to manage itself boldly by going through a partially still ongoing allocation, certainly by transferring higher producer prices and inflation-related costs to the market. Is everyone happy then? Probably not. Much frustration also built up behind the desks of distributors, due to customers not seeing their orders and demand met. One could argue that this is normal during allocation phases-and many of us have seen several of them in our careers-and yet one shadow of doubt remains, namely whether distribution could have done more, if its value to the market remains what it has been in the past.
The value of distribution
My opinion is clear: its value has never been more important than it is today. I have known distribution for more than 30 years, and I have seen tremendous improvements in processes and services, offered at much lower cost than in the past. And with the increasing complexity of global supply chains and manufacturing, with the increasing complexity of products and the subsequent support needed, most customers would be lost if distributors were not able to manage hundreds of supplier relationships for them, covering much of the working capital and transaction cost issues. Delivering nearly 50 percent more components in two years requires a lot of planning, understanding, skilled workforce and solution orientation. Please remember this, you customers, on your next emergency call.
Issues to address in 2023
However, there are also other issues to address and other questions to ask. What will 2023 bring? How will we deal with geopolitical issues and ongoing movements? What business opportunities will materialize? And also where will a skilled workforce be found? There are no decisive answers, only ideas and speculation, so here, then, is my humble opinion. The year 2023 will see a normalization in the component distribution market and the market in general. While some products such as high-end microcontrollers may still be experiencing shortages, availability in most other product areas is improving and lead times appear to be decreasing. Since many customers seem to have already ordered in advance, orders for the next few months will certainly be lower than in the past. The volume increases of the past two years have certainly not accounted for real demand, which averages between 5 and 10 percent annually; so unless there are massive growth areas in the industry that are starting to take off dynamically, some correction will inevitably come. The best thing to do would be to keep a long-term view on availability trends and not react "digitally." With U.S.-China tensions and a more "sober" view by Europeans on China, there is some expectation on the horizon for a resurgence of electronics manufacturing in Europe, which actually means "reshoring" some manufacturing to the Old Continent. Reducing risks and dependencies is indeed important, but reality will show that low-cost production, before returning here to Europe, will move to other countries in Asia, where cost and labor issues may be significant.
Business opportunities for Europe
In terms of business opportunities, on the other hand, there are many technological innovations underway that require electronic components, such as digitization, e-mobility, and 5G, but it is also clear that a lot of investment in government infrastructure is needed to ensure that, for example, e-mobility meets a grid that can handle the necessary electricity. The market alone will not handle it, and government debts are high, the consequences of the Coronavirus, galloping inflation, and many other challenges continue to negatively impact society. In addition, there is no clear consensus on priorities, which could delay many needed innovations. My best guess is that 2023 is not yet the year of greater unity for Europe. The good thing, however, is that the last three years, which were probably the most challenging in Europe, are over and we have come out of it albeit a bit bruised. Another good thing is that there is an increased awareness of global risks and the need for more cooperation here in Europe. We could see a globalization 2.0, with more consideration for everyone's needs and a lot less singular dependencies. Europe, of this, could be the engine.
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