And there's a lot at stake. China's distribution total available market (DTAM) in 2004 was about $25 billion, according to China Outlook Consulting Inc. That amount represents about 30 percent of China's $80 billion-plus demand for semiconductors and other electronic components.

Domestic distributors, comprising about 300 franchised distributors and literally thousands of independents, generate approximately $10 billion of the DTAM. The top-20 domestic Chinese distributors accounted for about $1 billion of that figure. In comparison, the three top global players in China--Arrow Electronics, Avnet and World Peace Group--had 2004 combined revenue of about $2 billion.

The domestic share of China's DTAM is expected to rise as the local distributors become more sophisticated, given forecasts of double-digit component demand growth. IC Insights Inc., for example, reported last month that China's semiconductor market grew 32 percent in 2005, to more than $40 billion, making it the largest regional IC market in the world. China accounts for 21 percent of the world's $192.4 billion in semiconductor consumption, up from just 6 percent in 2000, according to the Scottsdale, Ariz., research firm.

Many of China's top domestic distributors are projecting growth rates for their own businesses that are in line with the IC market rate. Most are starting from a relatively small base of sales, so the rapid growth signifies not only a financial boon but also a transformation in operations from small local shops to sophisticated regional and national companies. In addition, there's a likelihood of significant consolidation in the sector as local distributors position themselves to compete with global players in China.

Of course, not all Chinese distributors are cut from the same cloth. Business strategies and product lines differ, as do management styles and personality, all of which contribute to growth prospects.

New service areas

In general, the larger Chinese distributors--with between $20 million and $100 million in annual sales--have been eager to get involved in demand creation, logistics and inventory service and quality and counterfeiting issues. The demand-creation services they can provide are often turnkey design and module services, along with more-limited supply chain services.

Indeed, many local distributors offer design services as well as traditional distribution stocking services.

Kitting is also a common service that can be provided by many Chinese distributors, but only a few companies offer just-in-time inventory management and vendor-managed inventory services.

A case in point is top-ranked Smartech Electronics Co. Ltd. (Shanghai). It's the poster child for growth through demand creation. As a result of a single-minded focus on demand creation, Smartech posted 100 percent growth in 2004.

Similarly, by focusing on turnkey design services, seventh-ranked Linpo Electronics Ltd. (Shanghai) enjoyed 150 percent year-over-year growth in 2004 and projected 40 percent growth for 2005.

Both Smartech and Linpo have targeted the high-growth sectors of communications and consumer electronics. Those sectors are being buoyed by preparations for the 2008 Beijing Olympics and by China's 3G mobile-telecommunications project.

Many factors affect the growth of China's distributors. Here are four that span virtually the entire top 20. Understanding how these factors influence the business strategy of any particular distributor can be important for OEMs and EMS providers evaluating future partnerships.

Targeted focus

Some Chinese distributors focus on specific product lines. This gives them a distinct competitive advantage as they position themselves as the dominant agent in the greater China or the Asia-Pacific region. They typically work closely with suppliers and enjoy higher levels of support because of their specialization. Examples are Secom Telecom, Zhou-Li-Gong MCU Technology, Asia-info and Seed Electronic Technology.

Zhou-Li-Gong has been a sales champion for Philips microcontrollers for four years and is one of Philips' largest franchised distributors in the Asia-Pacific region. In 2004, Philips products accounted for 70 percent of the company's $23 million in sales.

"We want to be a focused MCU distributor and not only serve as a design house for Chinese electronics manufacturers but also export design solutions to other countries," said founder and president Li-Gong Zhou. He launched the company 10 years ago as a design house to help manufacturers develop new products and debug design problems.

Richard Yu, president of Seed DSP Electronics, said, "This [focused] strategy allows us to have a specialty on some product lines and have better price and supply support from the supplier." Beijing-based Seed specializes in Texas Instruments Inc. DSPs.

Hybrid model

Many of the top Chinese distributors offer demand-creation services in concert with their own in-house design operations. For example, Linpo has set up a design center in Shenzhen primarily for Chinese OEMs. The center focuses on designing satellite receivers, tuners and digital-TV-related products. It provides a range of solutions from designs to bill-of-materials management to printed-circuit-board assembly.

"To satisfy customers and grow our business, we have to combine design-house service and distribution service together," said Zhengfeng Gao, technical director at Linpo.

Shenzhen-based Honestar Technologies Co. Ltd. offers a variation on the Linpo model. It focuses on demand creation through a combination of design solutions and IC and component reference designs.

Honestar specializes in design solutions for DVDs, LCD TVs, power meters and PC and handset products with the support of reference designs from suppliers. The company's revenue was $37 million in 2004 and was projected to grow 35 percent, to about $50 million, in 2005.

"Seventy percent of our business came from design-solution service on DVDs, LCD TVs and STB [set-top boxes]," said Yu Cheng Wang, president of Honestar. The company employs 30 field application engineers and 30 design engineers, who work in Shenzhen, Beijing, Shanghai, Xiamen, Chengdu and Hong Kong. Its main product lines are Cirrus Logic audio products plus DSP and flash products from Fujitsu.

"We had over 300 design wins in 2004," said Wang. "We interact on a regular basis with OEMs and suppliers to understand the market. As a result, we are able to provide technical support and customized chip-based solutions to our customers."

Emerging markets

Many Chinese distributors focus on such emerging markets as automobile electronics, set-top boxes, digital TVs and voice-over-Internet Protocol products. For instance, P&S Information Group is projecting growth in 2006 from serving the tax-auditing device market.

An emerging market in China, tax-audit devices are used by Chinese tax authorities to monitor and regulate corporate taxpayers to ensure they are compliant with government revenue reporting requirements. The government forecasts the mandatory installation of tax-audit devices at 5 million between 2006 and 2008. About 90 electronics companies have obtained manufacturing licenses for the devices.

Founded in Hunan, Hubei Province in 1999, P&S is China's only distributor that launched a business combining traditional component distribution with a catalog operation. In addition to serving the growing communications, consumer and computing markets in China, P&S sees big opportunity in the burgeoning tax-audit business.

The company set up a design center in Shanghai two years ago and today has more than 10 design engineers specializing in providing OEM customers with tax-audit device design solutions. "We have worked closely with these manufacturers to provide design solutions," said Rong Hu, P&S's marketing manager. "We are confident about this emerging market because it's being encouraged by the government."

Software to the rescue

To improve business process performance, some top Chinese distributors are investing in software solutions that improve supply chain transparency and cost controls. Secom is a leader in this area and was an early adopter of the Oracle enterprise resource-planning system.

"The initiative of launching ERP is to improve trust between Secom and our business partners such as independent design houses and component suppliers. At the same time, it can improve supply chain efficiency," said Kevin Xiao, president of Secom Telecom.

Oracle's ERP allows Secom to improve its supply chain management in terms of tracking inventory, fulfillment and other product information in real-time, according to Xiao. "It enables us to emulate international practices and provide supply chain transparency to our suppliers, partners and customers. In return, we gain trust from our business partners," he said.

Indeed, trust is a key ingredient for growth, both from suppliers and customers. Suppliers are motivated to win designs in new products that are being developed by emerging companies that aren't even on the map yet. Chinese distributors are well-positioned to find and court these customers. *