According to chairman and president Calvin Xiao, 90 percent of Secom's $90 million revenue in 2004 was generated through design services. In addition to 10 field applications engineers (FAEs) and 50 technical sales engineers, Shenzhen-based Secom maintains relationships with independent design houses (IDHs) to complement its own services.

Secom has two divisions, the first serving the communications, industrial and military sectors and the second addressing consumer electronics. Its technical sales engineers handle about 50 percent of customer design requests, its FAEs deal with 30 to 40 percent, and suppliers' FAEs handle the rest, said Xiao.

The company works primarily with IDHs that specialize in handsets and DVD players. "They are strong in system design and implementation," said Xiao, "[but] we have market experience in components."

Secom posted 15.3 percent revenue growth last year, according to Xiao. Since its founding in 1993, it has capitalized on the growth of the domestic handset business through its Agilent Technologies semiconductor franchise. Agilent accounts for about 70 percent of Secom's total component sales.

Whether Secom can maintain its top-tier distributor status remains to be seen. The Chinese government has opened the distribution sector to foreign competition, which puts pressure on local distributors to improve their service offerings. As local OEM customers demand ever-more-sophisticated supply and design chain services, distributors such as Secom must keep pace.

Indeed, the biggest challenge Chinese companies face is improving business processes and management capabilities, said Zaiheng Liu, editor in chief of China e-Commerce and an expert on China's global competitiveness. Since most private Chinese distributors started as a collection of friends and family, trust, hard work and personal relationships were often their primary competencies. That won't cut it anymore, said Liu. "Now they need a management system to keep up the growth," he said.

Top-ranked European, North American and Taiwanese distributors such as Avnet, Arrow Electronics, Memec and World Peace Group all have gained market share in China in recent years, in part because of their service offerings. Global distributors bring sophisticated IT systems, strong global relationships with customers and suppliers, extensive engineering support, flexible inventory-management programs and financial resources, according to Brian Alexander, vice president of equity research for technology distribution at Raymond James & Associates (St. Petersburg, Fla.).

"They bring supply chain tools and technical resources that are difficult for local distributors to duplicate," he said. "Competition may not be limited to [delivery] response speed but [may extend] to overall supply chain and design chain performance."

Case in point: Avnet has established a design center in Shanghai to deliver turnkey design solutions. It employs six engineers focused on set-top-box design, said Sindy Shen, chief engineer of Avnet China & Hong Kong. "Customers can choose from our designs, or we can provide custom designs," she said.

Today's set-top-box market is export-oriented, and Shen believes Avnet's worldwide design capabilities will help Chinese companies build their export businesses.

But China's domestic digital TV market will boost business at home for local distributors. The Chinese government has set a 2015 deadline to shut down analog broadcasting, which will spawn a huge DTV and set-top-box boom. And China's major cities plan to push digital set-top boxes to current analog cable subscribers to prepare for the 2008 Olympic Games in Beijing. Cable operators Shenzhen and Qingdao, for example, are offering free set-top upgrades to analog subscribers.

As global competitors build a presence in China, local distributors must match their capabilities. For instance, Secom provides vendor-managed inventory hubs to its top customers, said Xiao.

At the same time, the company has invested $400,000 in an Oracle ERP system. According to Xiao, the investment goes a long way toward bringing Secom's supply chain practices up to global standards by providing transparency to suppliers, IDH partners and customers. The system has been in operation since November, following 16 months of business process reengineering and IT upgrades.

Today, Secom can track inventory, fulfillment and other product information in real-time. A technical sales engineer can provide product availability information in a couple of seconds, according to Xiao. "We are ahead of our Chinese rivals since we adopted Oracle," he said.

In addition to improving services, Xiao acknowledged, Secom must expand its line card. The risk associated with one supplier's representing the lion's share of sales can be mitigated by franchising new ones. Secom is looking for suppliers whose product features and marketing strategies match its own demand-creation model, with a focus on proprietary semiconductor and design service.

New relationships take time to build and produce results. "It takes us up to two years to see if a new supplier introduction is successful," said Xiao. First, the technical sales engineers and FAEs need about six months to learn the supplier's products. Then they need six more months to find new design opportunities with customers and another half a year to win a design. Finally, customers need about six months to prototype and test-market their product before they can commit to ordering components in production volumes.

The long ramp to full production requires a big commitment to the relationship, both sides of which must provide material and nonmaterial support over that period. But Xiao believes such perseverance will pay off.

One opportunity that is emerging rapidly is China's third-generation (3G) cellular handset and equipment market. Another is the outdoor LED display business. And a third comprises myriad new digital appliance products for both the home and industrial applications. Xiao expects 25 percent top-line growth for Secom from these three market opportunities this year.

Many Chinese handset makers are challenged by the transition from 2G to 2.5G products because they have limited design capacity. Xiao believes Secom's demand-creation model can accelerate their time-to-volume and time-to-market. Similarly, the 2008 Olympics and 2010 Shanghai World Expo will drive sales of large-scale LED panel displays, he said.

Michael Liu can be reached at mliu@china-outlook.com.