While Chip Manufacturers Are Suffering, Distributors Are Seeing Profits

February 11, 2022

Blog

The global chip shortage has significantly impacted the production of goods ranging from cars to personal electronics. The profit-related struggles faced by chip manufacturers are widely covered. However, many people may not know that some distributors found that the need for chips helped them make money.

Customer Bases and Product Inventories Grow

It appears that many customers who need semiconductors hope distributors will be the link that make those purchases possible. Smith is a global distributor of semiconductors and electronic components. Leaders there said 2021 was an incredible year for the company.

Bob Ackerly, the company’s co-founder and director, said, “2021 was a banner year for Smith, and we are ready to take on even bigger and more exciting opportunities in 2022. Our expansions and investments — from our skilled workforce and global footprint to our state-of-the-art equipment and pioneering, data-centric digital tools — will allow us to continue to build new relationships and strengthen our existing partnerships worldwide.”

The company invested more than $1.1 million in equipment and process automation centers across its three distribution centers. It also saw a 44% increase in its customer base in 2021 compared to the previous year’s numbers. Smith also expanded its unique part offerings inventory by 30% in 2021 compared to what it provided in 2020.

Thriving Despite the COVID-19 Pandemic

Country-specific lockdowns to curb the COVID-19 pandemic worsened already-severe supply chain disruptions in the semiconductor industry and elsewhere. Many people were forced to learn new ways to work, learn, and live during a global health threat, and some decided they needed new electronics. One study found that U.S households had 11 internet-connected devices in 2019. However, that number rose to 25 in March 2021.

A market analysis also showed that consumer electronics growth would help the embedded software market maintain momentum. Researchers expect the sector to surpass $21.5 billion by 2027. Those examples show that the pandemic was good for some industries, even as it exacerbated the chip shortage.

Mouser Electronics Sees Soaring Business Gains

Mouser Electronics is a global semiconductor distributor that saw handsome gains during the pandemic, too. Mark Burr-Lonnon, the company’s senior vice president of EMEA, Asia and Global Service, said, “Our business has gone through the roof, and it seems like there’s no ceiling. Globally, bookings are up 50% and billings up 32%, with European billings up 48%.”

He continued, “Some of that is due to laying in a lot of inventory, and the risk of allocation and long lead times helps distribution. But it’s also the whole move to the digitalization of the supply chain that is also driving the growth.”

Burr-Lonnon also spoke of how Mouser Electronics is part of TTI, a privately held group. “The TTI group view is that inventory is very important,” he said. “We’re not on the stock exchange where we don’t have to report quarterly figures. This means we can do the right thing to make sure we have the right inventory at the right time.”

He spoke of planning, saying, “We’ve heavily invested hundreds of millions of dollars in extra inventory in recent years, so we were well prepared. We had $800 million on the shelf and $500 million on order, and our inventory is based on being wide. It’s there for everyone.”

Even as the company saw significant success during COVID-19, it did not escape the challenges the pandemic posed to most other businesses that kept operating. For example, leaders had to grapple with maintaining minimal disruptions once workers developed the virus. They also broke the warehouse into zones for ease of disinfecting after identifying positive cases.

Distributors Land in Hot Water for Unusually High Price Increases

The chip shortage has also slowed the momentum of the world’s ongoing transition to electric vehicles. One estimate indicated that by 2022, this electrification would require $7.4 billion more in semiconductor materials compared to scenarios without those cars.

The chip shortage hit automakers especially hard in China. That’s primarily because 90% of those components used in the country are imported goods. However, the nation’s regulators ruled that three chip distributors operating there took advantage of the demand for chips and practiced price gouging. The trio was fined the equivalent of $400,000 for their increases.

Regulators found that prices were sometimes 30-40 times higher than normal. Sources also suggested that a fire at the Asahi Kasei Technosystem chip factory encouraged distributors to raise their prices and take advantage of the increased marketplace demand.

STMicroelectronics gradually raised its prices three to four times the initial rate. Doing it more slowly was the organization’s way of seeing what customers were willing to pay. However, this case of three distribution companies getting fined for raising prices above the norm shows that even high demand levels don’t allow for driving up profits too aggressively.

A Lesser-Known Side of the Chip Shortage

These examples show how distributors have figured out ways to make the chip shortage work to their advantage. It’s anyone’s guess whether the boosts to their bottom lines will continue for the foreseeable future. Regardless of that, they’re making the most of the situation while it lasts.

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