If the North American distribution market does not recover significantly in the second half of the year, the ranking of global electronic component distributors may change significantly in 2024. Based on the latest financial reports of various companies, "International Electronics Business" ranked the top eight listed distributors in the first half of this year (H1), and the listed distributors in Greater China performed outstandingly. However, revenue does not represent gross profit margin. While focusing on revenue, we also pay attention to the gross profit margin of the top distributors.

01 Inventory of 30 distributors' revenue in the first half of 2024

As of early September 2024, electronic component distributors have successively released their semi-annual reports. According to the revenue table of 31 listed distributors in the first half of 2024 (see Table 1 for details), it can be seen that the trend of the global electronic component distribution market is roughly in line with our previous expectations.

In the first half of this year, 23 companies achieved year-on-year revenue growth, all of which were from the Asia-Pacific region. The performance of distributors in Greater China was the most outstanding, with 17 companies achieving double-digit revenue growth. Among them, 5 companies achieved year-on-year growth of more than 50% in the first half of 2024, and their growth rates from high to low were: Supreme Electronics 101.91%, WT Microelectronics 83.66%, Shannon Chip Creation 80.18%, China Electronics Port 57.45%, and Fengyi Electronics 53.21%.

In contrast, the performance of Japanese distributors in the Asia-Pacific region has increased and decreased. Focusing on the data of the past year and a half (from 2023H1 to 2024H1), and observing it in a half-year period, the revenue growth rate of Macnica Holdings and Marubun Co., Ltd. has declined. Since entering negative growth in Q1 this year, the downward trend has not been reversed in Q2. Restar Holdings and Kanematsu Co., Ltd. have maintained relatively stable growth, and the performance of both in the first half of this year is better than the first/second half of last year.

Restar Holdings 25/3 month 1Q (CY2024Q2) quarterly report shows that the increase in consolidated net sales in this quarter is mainly due to the increase in sales in the automotive application field. With the recovery of the smartphone market, the performance of the EMS business has also improved, as well as the optimization of the structure of the consolidated subsidiaries; the increase in operating income is mainly due to the sales growth of the equipment business unit, and the increase in ordinary profit; the increase in net profit attributable to the owners of the parent company is partly due to the tax effect of the business reorganization implemented in April 2024.

In addition, there are also cases of corporate mergers in the Japanese electronic component distribution market: On April 1, 2024, Ryosan and Ryosan Electro Ltd. merged into Ryosan Ryoyo Holdings. Because Ryosan Ryoyo Holdings only announced revenue data for Q2 2024, the company's revenue and YoY% data for other quarters in Table 1 are based on the data of Ryosan and Ryosan Electro Ltd. in the same period.

Let's look at the situation in the North American distribution market. Arrow Electronics' revenue in the first half of 2024 was US$13.817 billion, a year-on-year decrease of 19.91%. The declines in Q1 and Q2 this year exceeded 19%; Avnet's revenue in the first half of 2024 was US$11.217 billion, a year-on-year decrease of 14.18%, and its Q2 revenue YoY% was slightly lower than that of Q1. The above information shows that as of the end of Q2 2024, the North American electronic component distribution market has not shown a significant improvement.

02 Distribution trends continue to be out of sync across the globe

In mid-May this year, the author pointed out in "2023 Global Electronic Component Distributor Revenue Ranking TOP50": The market conditions of distribution markets in various regions around the world are not completely synchronized. Generally speaking, the distribution market of electronic components is closely related to the local semiconductor market. A good market means more transactions in the market and better results for distribution companies. However, at the same time, there are different differences in the distribution markets in different regions.

In fact, after experiencing the high prosperity in 2021, the distribution market in Greater China ushered in a slowdown in growth in 2022, and then entered a negative growth phase in 2023. Starting from Q3 last year, with the price inflection point of storage products and the emergence of a large amount of demand for artificial intelligence applications, the Greater China distribution market was the first to show signs of recovery. Then in Q1 this year, the distribution market in the region ushered in a strong recovery.

The performance fluctuations of North American distributors were relatively stable. Even in 2021, when the market was very good, except for the rapid growth of individual independent distributors, the growth of many other distributors was within 30%, while the growth of most Asia-Pacific distributors in the same period was more than 40%. In 2023, the global distribution industry is facing a stage of performance pressure, and the decline of North American distributors throughout the year is generally smaller than that of Greater China distributors. However, the period of industry downturn in the region is also slower. According to the quarterly financial report data released by listed distributors, since North American distributors entered negative revenue growth last year, they have not reversed the negative growth trend in Q2 this year.

Recently, SIA announced the year-on-year and month-on-month data of semiconductor sales in various regions in June this year-China's semiconductors increased by 21.6% year-on-year, the United States increased by 42.8% year-on-year, and other Asia-Pacific regions increased by 12.7%, Japan decreased by 5.0%, and Europe decreased by 11.2%; China increased by 0.8% month-on-month, the United States increased by 6.3% month-on-month, Japan increased by 1.8% month-on-month, Europe decreased by 1.0%, and other Asia-Pacific regions decreased by 1.4% month-on-month.

At the same time, the author also observed the data from 2023Q1 to 2024Q2 compiled by the World Semiconductor Trade Statistics Organization (WSTS). According to Figure 1, semiconductor sales in the Americas fell below $30 billion in 2023Q4, but in the first half of this year, semiconductor sales in the region have been increasing, reaching $44.324 billion in Q2 this year.

The above data means that at the end of Q2 2024, China's semiconductor industry has recovered well, Japan and Europe's semiconductor industries have developed slowly, and the US semiconductor industry has shown signs of improvement. However, at present, we are not sure when the improved semiconductor market in the Americas will be transmitted to the electronic components distribution industry.

03 The top eight global listed distributors in the first half of the year are announced

The top eight global listed distributors in the first half of the year are released. In the first half of this year, the revenue of WT Microelectronics and WPG has surpassed Avnet, and the gap between the second-placed WT Microelectronics and the first-placed Arrow Electronics is very close. Therefore, the distribution market trends in various regions around the world in the second half of this year are particularly critical.

Although the top four in the first half of this year are some old faces, the specific rankings have changed. From first to fourth, they are: Arrow Electronics, WT Microelectronics, WPG, and Avnet.

Specifically, Arrow Electronics' revenue in Q1 this year was US$6.924 billion (YoY% decrease of 20.74%), and its revenue in Q2 was US$6.893 billion (YoY% decrease of 19.05%). Sean Kerins, President and CEO of Arrow Electronics, said: "In many of the market segments in which we compete, we have seen signs of gradual improvement in leading indicators, with bill-to-order ratios in all regions improving and bookings growing continuously. Although the automotive and broader industrial markets remain weak, we now believe that we are in the late stages of a cyclical adjustment in the industry." This view is roughly in line with the trend of improvement in the US semiconductor industry.

Avnet FY24Q4 (corresponding to CY2024Q2) briefing data Image

[Source: Avnet]

Avnet achieved revenue of US$11.217 billion in the first half of this year, with revenue YoY decreasing by 14.18% in the first half of the year. The above figure cites the data of Avnet's FY24Q4 (corresponding to CY2024Q2). According to the revenue of different regions, Avnet's revenue in Asia decreased the least, and the revenue in the Americas and Europe decreased by more than 20% in the quarter. This set of data also verifies the statement that the distribution market of electronic components in Asia performed best in the first half of the year.

The revenue of WT Microelectronics and WPG was NT$436.298 billion and NT$389.878 billion respectively, which is equivalent to US$13.653 billion and US$12.200 billion in US dollars respectively. This achievement helped them win the second and third places in the world in the first half of the year, while the difference between WT Microelectronics and Arrow Electronics was less than US$200 million.

WT Microelectronics has achieved rapid growth in recent years, mainly due to the following aspects:

On the one hand, the company's data center and server business is developing rapidly.

Amid the global AI boom, WT Microelectronics was the first to reap the AI dividend. In Q1 2023, WT Microelectronics' data center and server revenue was less than NT$20 billion, and by Q1 2024, its revenue exceeded NT$90 billion, with a quarterly revenue growth rate of 451% in just four quarters. At the same time, starting from Q3 2023, the proportion of data center and server business exceeded 20% of the company's total business, and by Q1 2024, the proportion of this business in the company's total business reached more than 40%.

On the other hand, the company's comprehensive strength will be enhanced through mergers and acquisitions.

After completing the acquisition of Singapore distributor Shijian Technology in the second half of 2022, Wenyi Technology completed the acquisition of Canadian distributor Future Electronics on April 2, 2024. The new acquisition strengthened its strength in automotive electronics, industrial and equipment, and consumer electronics. Future Electronics is one of the top ten global distributors, with an annual revenue of US$7 billion in 2022. The impact of the merger of the two companies on the competitive landscape of the component distribution industry is emerging.

Zhishang Electronics also performed very rapidly in the first half of the year, with its revenue in the first half of 2024 surging by more than 100% year-on-year. In the first half of 2024, more than 90% of the company's revenue came from the Chinese (including Hong Kong and Taiwan) market. By product classification, nearly 80% of the revenue in the first half of the year came from storage products. The recovery of the distribution market in Greater China and the continued growth of the storage market are the main reasons for the company's excellent performance in the first half of this year.

China Electronics Port is the No. 1 distributor in China. The company's revenue in the first half of this year reached RMB 24.717 billion, a year-on-year increase of 57.45%. During the reporting period (January-June 2024), the demand from key downstream industries such as consumer electronics and automotive electronics increased, and the AI and computing industries drove the increase in shipments of memory and processors-memory achieved operating income of RMB 10.541 billion, a year-on-year increase of 236.65%; processors achieved operating income of RMB 7.711 billion, a year-on-year increase of 55%.

The development trend of storage devices in the second half of the year will have a great impact on distributors such as China Electronics Port and Zhishang Electronics, which have a large proportion of storage business. However, storage prices will face downward pressure in the second half of this year, which may affect the revenue performance of some distributors. In August this year, the forecast data released by TrendForce showed that the price of DRAM in Q3 increased by 8%-13%, and the price of conventional DRAM increased by 3%-8% in Q4, both of which were lower than the 15%-20% in Q2; the price of NAND Flash increased by 5%-10% in Q3, and it is expected to fall by 0-5% in Q4. The price growth rate of HBM is relatively stable, and it is expected that both Q3 and Q4 will be between 10%-15%. For some distributors with a large proportion of storage business, the revenue growth rate in the second half of the year may be lower than that in the first half of the year. In addition, there have been some signs of recovery in the semiconductor market in the Americas, which may begin to be transmitted to the electronic components distribution industry in the second half of the year. The above trends will bring more uncertainty to the distribution market in the second half of the year.

04 The problem of low gross profit margin of distributors in Greater China is more prominent

Of course, to judge the profitability of a company, we should not only pay attention to its revenue, but also its gross profit margin. Although the revenue performance of Asia-Pacific distributors in the first half of the year is very impressive, the profitability of distributors is more important to look at the gross profit margin. Applying a simple formula, the company's gross profit margin = [(operating income - sales cost) / operating income] × 100%.

In the first half of 2024, the gross profit margin of China Electronics Port's electronic component distribution (accounting for 99.79% of total revenue) was only 2.68%. Although its revenue increased by 57.68% year-on-year, its operating costs soared by 59.05% year-on-year, resulting in a 0.84% decrease in gross profit margin compared with the same period last year; Wenye Technology's gross profit margin in 2024H1 was 3.64%, a decrease of 0.15% from the same period last year; Wanda's gross profit margin was 3.73%, a decrease of 0.15% from the same period last year; Shannon Xinchuang's electronic component distribution (accounting for 97.94% of total revenue) had a gross profit margin of 5.6%, an increase of 1.69% from the same period last year; Zhishang Electronics' gross profit margin was 3.32%, a decrease of 0.4% from the same period last year.

Like Arrow Electronics and Avnet in the United States, their gross profit margins are basically in the double digits, but the gross profit margins of both companies have declined in the first half of this year - Arrow Electronics' gross profit margin was 12.38% in the first half of 2024, compared with 13.08% in the same period last year, and Avnet's gross profit margin was 11.64% in the first half of 2024, and 11.99% in the first half of 2023. In addition, the gross profit margins of Japan's Restar Holdings and Macnica Holdings are basically between 8% and 12%. Overall, the problem of low gross profit margins of distributors in Greater China is still prominent.

In summary, although electronic component distributors in Greater China achieved a relatively high revenue growth in the first half of 2024, the problem of generally low gross profit margins is still significant. Compared with their foreign counterparts, distributors in Greater China have a certain gap in profitability. In order to improve gross profit margins, distributors need to work hard in multiple dimensions, including optimizing cost control, achieving product and service differentiation, accurate market positioning, enhancing customer stickiness, promoting technological innovation, and expanding business scope.

In the future, distributors in Greater China will have a long way to go in their development, and how to improve profitability will be an important issue they face. International Electronics Business will continue to pay attention to the development trends in this field and provide useful references and insights for the industry.

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