In October, Arrow Electronics Inc. announced that it has established a Japanese subsidiary to conduct business for the first time in Japan, one of the last global regions that has not seen extreme distribution consolidation among and offers good possibilities for growth. In doing so, the electronics supply chain giant set up Arrow Electronics Japan, GK (Arrow Japan) and acquired all of the share capital of Universe Electron Corp. (UEC), a Tokyo-based distributor of semiconductor and multimedia products to Japanese manufacturers and firms, which will change its name to Arrow UEC Japan, KK.
William Mitchell, Chairman, President and CEO of Arrow, discusses the global distribution supply chain, how Japan differs from other parts of Asia, and the company’s strategy for the region in this one-on-one interview with Electronic News. What follows are excerpts of that conversation.
Electronic News: What’s your take on the electronics distribution market in Japan? Mitchell: The electronics distribution market in Japan is unlike any other distribution marketplace anyplace else in the world. It still has captive distributors that are owned by some of the large suppliers, it still has Keiretsu distributors, which are the big trading houses that have distribution arms, it has independent distributors that are mainly operate in Japan and a number of them are quite big, and it has something that you see in Japan called directed distribution, which is the suppliers will tell you which customers you may service and will give you a certification that says you are only authorized to service the following customers. It works unlike any place else in the world.
Electronic News: Why set up a presence in Japan now? Mitchell: We’ve been interested in it for some time. It’s still about 20 percent of the world components market and potentially an important market for us on our enterprise computing side and we have been looking for the appropriate opportunity to enter. One of the other differences about the Japanese market is that the M&A [merger and acquisition] has a different flavor than almost anyplace else in the world. Just saying you want to be there and that you are going to go buy something is not a particularly affective strategy in Japan. We’ve been looking for a long period of time to find the right mix of a company and a situation where we could enter as a foreign distributor, gain a foothold and then build the marketplace, as we think the Japanese [distribution] market will, as with many Japanese markets, change over time, but it will change in a way that’s very Japanese in its nature. We’ve been looking for a long period of time, finally found the right combination of people and motivations and market openings and suppliers and that was Universe Electron Corporation and we’re very pleased.
Electronic News: Can you go into more detail on what lead Arrow to Universe Electron? Mitchell: Our [Universe Electron] chairman had formerly been the president of Kanematsu Semiconductor. One of the things you really do look for in Japan is someone who has impeccable credentials within the Japanese industrial establishment, which he did. As he moved away from Kanematsu, he formed a series of companies to invest in some new technologies primarily in the semiconductor field. One of the companies he formed was Universe Electron Corporation. He staffed that with a number of people who had deep history within the semiconductor field, many of whom had lived in the United States. That was one of the first things we were looking for: The people who had the language skills and who had also worked in the international components markets so we wouldn’t run into some of the culture clashes that were a problem with some of the other firms. They also have relationships with all of the players, both customers and suppliers, as well as the other members of the components technology world in Japan that were quite unique. They also did not have any of the binding restrictions that sometimes came in to some of the Kanematsu players. And lastly, we had been encouraged by a number of our supplier and customer partners that they would like to have an Arrow presence in Japan that could bring some of the benefits that we bring -- a global line card, excreta -- to some of the customer base in Japan and to bring some of our suppliers into contact with some of the potential opportunities.
Electronic News: We’ve seen tremendous consolidation here in North America and over in Europe for distribution. How consolidated is the Japanese market? Mitchell: Not at all. If you look at North America and Europe, you’d see the top five that control [about] 85-plus percent of the market. We see in Japan that the among top 25 players, probably there’s no one player who has more than 4 percent or 5 percent or the market. There just aren’t any big players there. In the rest of Asia, the top 10 players control about 50 percent of the market and that looks like its consolidating. The Japanese domestic marketplace has so far not consolidated. Our hope is that it will, but my 20-plus year’s experience in Japan says it will happen at a pace dictated by Japanese realities, not by things that happen in other parts of the world, and it will be done in a very Japanese style. And you have to be there. It was really important for us to have our place at the table as this market develops over time. It is 20 or so percent of the global component marketplace. To be a global player and not be there made no sense at all.
Electronic News: From a design perspective, what’s most important to Japan’s electronics design chain? Mitchell: Well, it is design. What we’ve seen in the U.S. in terms of many things being designed and even prototyped here and then being manufactured overseas, that’s true of many of the Japanese companies also. They continue to have design and supply chain control out of Japan and then manufacture overseas, enabling us to participate in that design build part of it. We also have a joint venture with one of the Japanese independent distributors called Marubun. That joint venture operates outside of Japan as Marubun Arrow and services Japanese customers that Marubun has in Japan along those lines. What this new acquisition does, is open up a whole new potential customer set and supplier set for us and enable us to access a broader piece of that marketplace.
Electronic News: Does the expansion of Japanese companies out of Japan make it easier to do business with them? Mitchell: Beware, because I am about to give you a glittering generality. Our experiences and one of the reasons the Marubun Arrow joint venture is successful is that Japanese companies that we have serviced have typically liked to have had the face that they deal with be a Japanese face. So Marubun basically handles the sales interface in Asia and we handle everything else, the logics, warehousing, fulfillment, design services, and all the mid and back office things. But the face to the customer is a design face in Japan, and the face to the customer, particularly in Asia, is a Japanese face to a Japanese face. That seems to be the preference of those customers.
Electronic News: How does opportunity for distributors like Arrow in Japan compare to other parts of Asia? Mitchell: We have been growing very rapidly in Asia in the 30 plus percent compounded growth rate for the past number of years. We’ve been very excited about the opportunities in Greater China, Southeast Asia, India and Australia-Asia. We did about $2.4 billion a year in all of Asia, except Japan, for 2006, and we’ll show nice growth in 2007. We fundamentally had no presence in Japan, so there’s a real difference in size and scale. But again, it’s 20 percent of the available marketplace and we’re delighted to have a place to start. The Japanese market probably looks more like the more mature markets of North America and Europe in that the growth rate of product that is designed and then procured for manufacture onshore in Japan will grow at a much lower rate than the rate at which product is designed and manufactured offshore by Japanese customers. The same is true in North America and Europe. Japan would fit into the more mature side of the business, but is a very, very important design center and we need to be there.
Electronic News: Where do you see your Japan business a year from now? Mitchell: It’ll still be small. This is a long term investment. I don’t think it will have material impact on the company for some period of time. I would hope that 10 years from now it will be an important piece of the company, certainly in terms of design.
Electronic News: Are there other markets Arrow is looking to expand into? Mitchell: One of the things we are trying to do is to expand in three different dimensions. One of which is geographic. Japan is geographic, but we are also expanding geographically in the rest of Asia with additional capabilities in China, India and Southeast Asia. We’re expanding in Europe with our enterprise computing group and into Eastern Europe with our components group. We see product expansions in terms of, particularly, our passives and electromechanical product lines throughout the world, and in our computer products, our software and storage parts of the business. And we also see some new markets, things like lighting and medical. We’re trying to look at how we can expand our reach geographically, with new product capabilities and into new market segments, all the while tying those together with solutions that customers want to buy.
