Electronics distributors have found soft and welcoming ground in China’s growing market, but that openness comes at a price. Margins for their products in Asia are far lower than in the United States or Europe.

Distributors, however, claim they’re able to deliver profits on their sales in China. “The margins are tighter, but in the last two quarters we have expanded and improved our margins,” said Andy Bryant, president of Avnet Electronics Marketing, a division of Phoenix-based Avnet Inc. “The Asia margins have stabilized, and now they’re starting to improve.”

Bryant said Avnet has tipped over into the profitable black in China, in spite of low margins. The key, he said, is keeping down the cost of goods sold.

“We’ve built a dynamic cost model in Asia. We’re the No. 1 provider of services in the low-cost area. That has enabled us to improve our margins,” Bryant said, adding that Avnet has delivered income from Asia for two straight years. “We’ve been profitable in Asia for eight consecutive quarters.”

Industry watchers have paid close attention to the margins and operation costs in Asia, because distributors originally entered Asia as an investment. Now, however, companies such as Avnet and Arrow Electronics Inc. have spent enough time in Asia to begin sending home profits. The key has been their ability to keep costs down.

“The margins are tight. When you start trying to get specific details on Asia, especially China, boy it gets fuzzy,” said Clarke Walser, principle of Walser and Associates in Arlington Heights, Ill. “The operational costs had better be lower, since lower operating costs are the only way to profitability.”

According to some analysts, distributors entered China with eyes wide open. They knew their margins would be slight, so they kept operating costs down from the beginning. “As business migrated to China it put pressure on the gross margin. That was the challenge to the business model in China,” explained Rob Damron, managing director of 21st Century Equity Research in Milwaukee. “The gross margins are lower, but the operating expense in China is also lower. So even with a lower gross margin, they can get a profit.”

Part of the reason profits are coming to distributors in China is simply that distributors such as Arrow and Avnet now have maturing operations in Asia. “I think that both Arrow and Avnet have been there long enough that they’re not in the early stages Arrow’s been there for 10 years, Avnet for five or six,” said Joe Abelson, director of China services at iSuppli Corp. in El Segundo, Calif. “I think that they’ve both become very sophisticated and conscious of the differences in the Asian market.”

By: DocMemory
Copyright © 2023 CST, Inc. All Rights Reserved