It pays to look before you leap, particularly when your playground is an ever-shifting obstacle course of global economics, world politics, disruptive technologies and the often unpredictable whims of consumers. Even more so when the playground is worth more than half a trillion US dollars, which is a conservative estimate of the global market for electronic components.
Component manufacturers compile volumes of data on sales in major regions around the globe, and one of the figures they are most interested in is TAM, or the Total Available Market, which is in essence the revenue opportunity for their products. A portion of these components is sold to end-customers through direct sales channels, but the lion’s share is sold through distributors and comprises DTAM, or Distributor TAM.
In any country or region, one will find a mixture of ‘home grown’ component distributors and local representatives of multi-national distributors. South Africa is no exception in this regard, but the local market has always been somewhat inscrutable in terms of yielding accurate and complete data.
There are a number of reasons for this lack of transparency. For one thing, distributors have tended to be reluctant to disclose their sales figures for fear of their competitors using them to attack their market. Since the vast majority of components for local consumption are imported rather than made locally, one would think that the government’s import statistics would paint an accurate picture, but those figures are unreliable since 1) the tariff codes used to differentiate the different component types are often not specific enough to provide a meaningful classification, and 2) many electronic components enter the country in the form of knock-down kits that are assembled locally, meaning they do not form part of local DTAM.
Due to historically strong links to the European market, South African distributors have been known to sift through data published by the International Distribution of Electronics Association (IDEA) in order to infer information about the local market. As an indication of the aforementioned strong links, IDEA counts the South African Association of Representatives for the Electronics Industry (AREI) among its members.
In recent years, a number of South African distributors have begun submitting their annual sales figures to an independent, overseas organisation which compiles a presumably comprehensive, informative report. It is necessary to apply the word ‘presumably’ because this report, as well as the data on which it is based, are confidential and provided only to those distributors that contribute their figures. Although the data itself is not available for public consumption, the general consensus among those that are privy to it is that these reports are highly reliable, provided a sensible degree of uncertainty is assumed.
With component distribution forming such a vital link in the supply chain, two of the biggest South African distributors – EBV Electrolink and Electrocomp – share their insights on the health of the local market.
“Grey market imports, and a tendency with certain manufacturers to purchase offshore, are a serious challenge facing the market at this time,” says EBV Electrolink’s managing director, Steve Stafford. “There have been some cases of costly quality issues with grey market imports, but in the long run most local manufacturers are recognising the true value-add of dealing through legitimate distribution channels.”
“The component distribution companies in South Africa are not an industry but a service to the electronic manufacturing industry,” Glynn Watkins, director at Electrocomp, explains. “At present the electronic manufacturing industry has the following opportunities: 1) A weak Rand affects complete equipment importers more than the local manufacturers. Local manufacturers have a large part of their costs in Rands whereas a completely imported product is fully exposed to our weak currency. 2) In weak markets there is normally no planning and local manufacturers have an advantage in delivery times. 3) Many of our local manufacturers have an export component to their sales. A weak Rand is a massive advantage in this respect.”
Needless to say, the accelerated weakening of the Rand (particularly relative to the dollar) that began towards the end of 2015 has presented difficulties to importers, and component distributors are no exception. “The volatility of the ZAR poses a real challenge to distribution to assist local manufacturers to stabilise their input costs,” states Stafford. “The more progressive local purchasing departments are paying much more attention to the currency aspect of ZAR cost price than in the past, and negotiating currency hedging upfront before any price negotiations commence. Despite the currency issues, the overall local business conditions for distribution still remain stable.
“For many years, managing currency fluctuations has been a core part of the distribution business,” he continues, “and it is standard daily practice where we have mechanisms in place to ensure that our customers are protected. In cases where customers are willing to ‘ride the currency wave’ and accept variable pricing structures with their suppliers, they need to be confident that the suppliers will correctly apply any correction, be it a price increase or decrease.
“My advice to electronics manufacturers looking to minimise the adverse effects of currency volatility on their business is to work very closely with distribution partners, and understand how they can manage these fluctuations in a way that suits their business. They should base component prices in Euro/USD and use either fixed or variable rates as needed,” he continues.
Watkins concurs that a volatile Rand is difficult to manage. “Each individual distributor is forced to implement systems to ensure its customers are not too badly affected. Margins can be badly affected by a volatile currency,” he states. “Any import with a lead time is subject to this Rand volatility but we do still have the option to purchase foreign currency contracts which helps.”
Measures can be taken by component distributors to protect themselves, as well as their customers, from this kind of volatility. “Distributors with local stock holdings are able to give fixed prices to their customers and foreign currency contracts can certainly help,” says Watkins. “In my opinion the weak world markets, weak local markets, as well as many other challenges might seem insurmountable, but we need to keep positive and adapt as far as possible. Every downturn is followed by an upturn,” he concludes.
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