Is Amazon the next big thing in the electronic components industry?

Does Amazon have the potential to disrupt the electronic component industry? It is a question, which all the stake holders in the $450 billion industry are looking to answer.

The bar chart below showcases the 2016 revenues and projections till 2022 for the total global electronic component industry. The annual growth projections are set at around 8% [1]CAGR.

Growth rates extrapolated from http://www.4-traders.com

Market Segment - Electronic Industry         Figures from IBISWorld

Revenues in $ Millions

While leading electronic components distributors have recognised the trend of growing business to business e-commerce trade in the industry, stepping into the online platform to challenge the advances of Amazon is another story.

Amazon’s new B2B marketplace, Amazon Business revealed in June 2017 that it has passed the 1 million customer mark since launching in April 2015. Its sales crossed the $1 billion mark with in a year and hit a month to month growth rate of 20% as stated by Prentis Wilson – Vice President of Amazon Business back in May 2016. It also ranked at No. 104 in the B2B E-Commerce 300 [2]in June 2017.

Amazon Business is not focusing on just a single market vertical but rather is successfully disrupting many industry verticals and has already taken strides in the electronic components sector. And with Amazon comes greater price transparency, sophisticated offerings as well as superior user experience.

Since passives such as capacitors and resistors are more standardized products and thus can be commoditized, Amazon can quickly leverage this to increase its market share by sourcing from many suppliers and third-party sellers, offering products with similar quality to reach new markets.  Over 18% of the total components in industry comprise of passives as represented in the pie chart         above.

Does this mean catalog distributors would face heavy losses in the next few years? No says Tamara Jugerson – Senior Vice President for Marketing at Newark elements14. Adding that the distinct complexities associated with B2B components market cannot be easily met by the Amazon Model.

All the major electronic distributors are also authorised components suppliers and have strong relationship with manufacturers, which help in containing many supply chain risks for clients such as counterfeit materials, conflict minerals, material shortage, quality issues (certifications like ISO-9000/14000) etc. Additionally, component distributors also provide various value-added services such as holding stocks for suppliers, educating customers and assisting in product design.

Electronics components distributor’s market is highly consolidated and only the top 10 distributors had annual global revenues of over $1 billion in 2015. The bar graph below showcases the revenues between 2014 and 2015 for the leading 25 distributors.

 The top four Avnet, Arrow Electronics, Taiwan based WPG holdings and Future Electronics Inc together command close to 81% of the market share majorly due to the vast orders for heavily customized products. Though the big market for customized products would act like a defensive shield against Amazon’s foray into the industry, getting into the passives component market sector could be a different story for Amazon.

As pointed out earlier many third-party sellers and scores of Chinese manufacturers would be more than happy to sell their products through Amazon and reach new markets. In an industry where the margins are already water thin, Amazon’s incursion into the sector would further erode the margins for component distributors. The operating income percentage* to sales for top three distributors are shown below.

Committing towards digital transformation would allow catalog distributors to provide efficient value-added services and importantly better price transparency, especially for the more commoditized products. This in turn would dissuade the e-Commerce giant to create a monopoly in the market. Revenue contribution by passive components for Arrow and Avnet are shown above in the two pie charts, highlighting the importance of the passive sector for distributors.

Digital transformation includes betterment in areas such as centralization of procurement, price transparency, value added services in managing client’s supply chain and risks.

Another e-commerce giant, Alibaba has already acted in this direction by unveiling 1688[3] Super stores, which provide digital infrastructure and services for corporate procurement that include electronic components.

Bottom line is digitalization would help distributors in not only cutting operating costs to improve margins but also aide in providing superior solutions to customers, increasing satisfaction and repurchase rate.

References

·         R. (2016, October 05). Active Electronic Components Market - Global Industry Analysis, Size, Share, Growth, Trends and Forecast 2015 - 2023. Retrieved November 04, 2017, from https://www.prnewswire.com/news-releases/active-electronic-components-market---global-industry-analysis-size-share-growth-trends-and-forecast-2015---2023-300340188.html

·        Investor Relations. (n.d.). Retrieved November 04, 2017, from http://www.wpgholdings.com/investors/financial_highlights/en/annual-reports

·       https://www.arrow.com/en/media-center/annual-report-2015

·       http://ir.avnet.com/financials.cfm

·       https://www.ebnonline.com/author.asp?section_id=4013&doc_id=282618&page_number=1 Alex Moazed, Founder & CEO, Applico

·       https://www.ebnonline.com/author.asp?section_id=3219&doc_id=280519 Hailey Lynne McKeefry 

·       Bort, J. (2016, July 28). A business Amazon launched a year ago has already generated $1 billion in revenue. Retrieved November 04, 2017, from http://www.businessinsider.com/amazon-business-hits-1-billion-in-a-year-2016-7

·       4, 2. P., Paul Demery | Dec 6, 2016, Paul Demery | Jan 12, 2017, Paul Demery | Dec 17, 2015, & Don Davis | Jun 7, 2016. (2017, March 15). Amazon's billion-dollar B2B portal is growing rapidly. Retrieved November 04, 2017, from https://www.digitalcommerce360.com/2016/05/04/amazons-billion-dollar-b2b-portal-growing-rapidly/

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[1] http://www.4-traders.com/INFINEON-TECHNOLOGIES-436299/news/Global-Active-Electronic-Components-Market-Trends-Outlook-Overview-and-2022-Forecast-24956842/

^[2] B2B E-Commerce World’s Ranking of Leaders in the B2B E-Commerce

[3] https://yicaiglobal.com/news/alibaba-open-1688com-super-stores-facilitate-corporate-procurement

Manufacturing Sector- The growth engine of the economy

GDP dynamics - An important factor for developing supply chain strategies

Manufacturing sector has been the growth engine of the global economy for the better part of the last two centuries. The transition from an agrarian to manufacturing economy is still an important indicator of growth, prosperity and rise in living standards for a country.

For developing nations, improving and investing in the manufacturing sector continue to be a strategic focus area. Even for a country like India, which has a robust service sector with close to 57% of the economy in 2016 mainly driven by global services trade from information technology and business process outsourcing industries, building up the manufacturing sector is a sign of development and rise in living standards.

Figure 1

The above diagram shows the percentage of total GDP coming from the manufacturing sector. For rapidly developing countries such as China, Thailand, India and Indonesia, manufacturing sector plays a significant role in boosting their GDP growth. Sufficient skilled labor, improving and adept infrastructure, settled supply chain networks, favorable investment and tax policies and strong support from government are all vital ingredients to promote the development of manufacturing industry.

GDP has close ties with the supply chain initiatives and over all strategies for the manufacturing industry. Global companies such as Fed Ex use GDP predictions to plan their future investments in a country. Everything from demand planning, price of raw material, labor, inventory etc. is tied to GDP to a certain extent.

Figure 2

If we see the historical GDP figures from 1990 to 2015 for the top 25 biggest economies on an area chart above, it is evident how Unites States dwarfs other countries in terms of the sheer size of the economy. Other visible high peaks knowingly include Japan, China, United Kingdom and Germany.

Rightly so the manufacturing sector in these countries had been contributing the bulk of the economy as shown in the figure 1. In fact, the US manufacturing sector is so huge that if it were its own country, it would rank as the tenth largest world economy.

The measure of the compounded annual growth rate (CAGR) between 2000 and 2015 brings forth an interesting picture. CAGR marked by the bar chart on the second axis in figure 2 showcases the fastest developing major economies. The BRIC nations along with Indonesia, Saudi Arabia and Nigeria are on the top half of the fastest growing economies in the last fifteen years. If these countries can sustain these enviable figures for the next few decades, a change in the world order is definitely on the cards, especially with the current trend of lower GDP growth rates seen within the developed nations.

Figure3

The above world map showcases the GDP growth between 2013 & 2014 and without any surprises China and India come under the dark green shade – fastest growing major economies. One can also see the devastating effect of the Libyan civil war on the country’s economy with GDP contracting manifolds during the same period.

With globalization and international markets today’s businesses have become complex to manage. For efficient demand planning and forecasting a thorough understanding of the current economic trends and GDP is paramount.

Furthermore, for industries and manufacturing companies, choosing the right manufacturing location is one of the critical decisions to be made. When it comes to deploying its future supply chain strategy such as where to manufacture its products, a company should also take economic forecasts and manufacturing sector growth into consideration.

Emerging market undoubtedly is a good location strategy for businesses. Not only because these countries are equipped with elaborate supply chain, labor, technology and infrastructure but also they are the future target consumer markets. A forecast from McKinsey mentioned that “By 2025, it is estimated that developing economies could account for nearly 70 percent of global demand for manufactured goods.”

For example, Apple sees India having a potential for huge market for its flagship product iPhone, where it plans to open its newest manufacturing plant. Though traditionally the cost of iPhones was considered expensive for the Indian market, the rise in disposable income and healthy middle class segment in India has made it affordable for people to use Apple products. The decision to open a manufacturing/assembling plant in India in partnership with Taiwanese based smartphone manufacturer Wistron would certainly have been made after carefully considering all the economic factors apart from seeing solid sales growth of above 50% between 2015 and 2016, corresponding to over 2.5 million iPhone units.

Moving forward business leaders and decision makers have to be agile and flexible with regards to the turbulent worldwide dynamics of GDP growth and manufacturing development, tapping into the opportunities and being prepared for challenges in the near future.

Predicting growth, GDP etc. would never going to be straight forward but understanding what creates value for your business from goods, services, revenue to knowledge-technical knowhow and other intangible benefits such as customer loyalty would certainly guide in making well-informed future decisions. And don’t be wary of using predictive statistical methods, something I’ll touch in my next blog, there are quite a few business softwares out there in the market that can run complex forecasting models for you.

Drivers of Economy

Gross Domestic Product (GDP) is an important indicator to measure the wealth of a country.

The year over year percentage change of a country’s GDP helps in understanding several critical social and financial aspects such as unemployment levels.

GDP in simple terms can be defined as the sum of all the income generated in a year or what everyone has spent.

This paper will try to analyse the relationships and interdependencies among several variables, which drive the economy, keeping GDP as the dependent variable.

1.           Historical GDP figures (GDP vs Growth Rate)

    To start with its important to see the state of the current global economy, by looking at the historical GDP figures.

               By plotting the GDP figures from 1990 to 2015 for the top 25 biggest economies on an area chart, it is evident how Unites States dwarfs other countries in terms of the sheer size of the economy. Other visible high peaks knowingly include Japan, China, United Kingdom and Germany.

                       But the measure of the compounded annual growth rate (CAGR) between 2000 and 2015 brings forth an interesting picture. CAGR marked by the bar chart on the second axis showcases the fastest developing major economies. The BRIC nations along with Indonesia, Saudi Arabia and Nigeria are on the top half of the fastest growing economies in the last fifteen years. If these countries can sustain these enviable figures for the next few decades, a change in the world order is definitely on the cards, especially with the current trend of lower GDP growth rates seen within the developed nations.

The above world map showcases the GDP growth between 2013 & 2014 and without any surprises China and India come under the dark green shade – fastest growing major economies. One can also see the devastating effect of the Libyan civil war on the country’s economy with GDP contracting manifolds during the same period.

          2     Labor – Independent variable

Availability of labor force is important for any country to grow and sustain the economy. For the purpose of evaluating total labor force - who meet the International Labour Organization definition of the economically active population have been taken into consideration. As expected China, India and USA feature in the top 5 of this group.

           3.    Human Capital (Education spending) – Independent variable

As skills, knowledge and ideas can drive innovation, productivity and in turn economic growth, government expenditure on education, expressed as a percentage of GDP becomes an important variable to study.

          4.      Life expectancy – Independent variable

The changing trend of the average age human beings are expected to live can indicate the effort and investment put into the health care system by the government. The assumption here being increased life expectancy will positively affect the economy.

(Chart details – Average life expectancy vs average log labor. Color showcase average of education spending %. Size showcase average GDP figures. All figures are between 1990 & 2014)

Putting the above three independent variables on a bubble chart, visually represents their effects on the GDP. It can be seen how some of the most developed economies of the world also possess high average life expectancy figures, with Japan having the best figures-above 80 years.

Intuitively one would expect the developed economies to spend more on education, which exactly is the case here with all the developed economies shown in the color blue and developing economies in color red, meaning more effort is required from the up and coming economies in this direction.

  

Statistical Modelling

To see the relationships among all the independent variables and their effects on the GDP, statistical modelling-regression & multivariate analyses are carrier out.

GDP and labor figures are changed into logarithmic values to better fit on the chart.

As positive correlation, can be seen between Labor, Life expectancy and GDP, as a subsequent step regression analyses is carried out.

Regression Statistics

Actual by Predicted Plot

Summary of Fit

RSquare	0.873785
RSquare Adj	0.871504
Root Mean Square Error	0.334779
Mean of Response	10.45144
Observations (or Sum Wgts)	170

Analysis of Variance

Source	DF	Sum of Squares	Mean Square	F Ratio
Model	3	128.80141	42.9338	383.0732
Error	166	18.60483	0.1121	Prob > F
C. Total	169	147.40624		<.0001*

Parameter Estimates

Term	Estimate	Std Error	t Ratio	Prob>|t|
Intercept	0.1652146	0.314512	0.53	0.6001
Life Exp	0.0565166	0.002803	20.16	<.0001*
Log Labor	0.9721186	0.034714	28.00	<.0001*
Education spending % 2	0.0146473	0.015146	0.97	0.3349

Effect Tests

Source	Nparm	DF	Sum of Squares	F Ratio	Prob > F
Life Exp	1	1	45.572311	406.6151	<.0001*
Log Labor	1	1	87.893706	784.2242	<.0001*
Education spending % 2	1	1	0.104821	0.9353	0.3349

A high R square indicates that 87.3% of the variability of GDP (Log GDP) can be explained by the variability of life expectancy and labor. Education spending % is oddly not coming out as a significant predicting variable with a high Probability value of 0.33, perhaps more specific and direct data is required, but for the purpose of this analyses education spending can be removed.

The equation after performing the analyses again without education spending:

Log GDP = 0.24 + 0.96(Log Labor) + 0.06(Life Expectancy)

For further research, other important driver variables explaining areas such as ease of doing business, innovation, technology level etc. can be taken into consideration to optimize this regression model and enhance its explanatory power.

Though trained labor force has been a critical aspect of the economy and overall growth, which is also highlighted by the above equation, the rise in effectiveness of artificial intelligence and robots could very well change this trend with machines substituting for human capital in the near future becoming a more realistic scenario.