Is Design The New Gold Mine For Distributors?

The service that electronic component distributors have provided over the years has changed very significantly. Nowadays, distributors help customers in meeting many of the requirements for developing, designing and manufacturing products as well. Looking at the critical need customers have for design in electronics, distributors have started setting up their own in-house design teams.

–By Baishakhi Dutta

As electronics manufacturing has become more demanding, the electronic components distributing ecosystem can no longer offer good services with the old-fashioned just-in-time inventory management. Electronic product manufacturers often face challenges in balancing lead times with manufacturing requirements and inventory shortage. This is where the distributors have stepped in with their expertise and taken on a much greater role within the manufacturing supply chain itself.

Of late, the complexity of electronic circuits and the need for unique product capabilities have increased. This has led to electronic product developers requiring expert support for design as well. In response to this need, some distributors have started introducing their own design packages for computer-aided design (CAD) or electronic design automation (EDA), often integrated with their inventory. These distributors are taking on a much bigger role in the design cycle. They are advising product developers not only about the products but also providing in-depth support at the beginning of the design cycle. Everything – right from the technologies that might be appropriate for their products, to certification, designing for the lowest BOM cost, and many other factors — is now being addressed by distributors.

There are many companies that are developing electronic products, but their fields of expertise lie in other areas. By incorporating electronics into their products they can develop innovative designs, but they may not have the in-depth knowledge about some of the basics.  Even those companies whose traditional area of expertise is within the electronics domain can also greatly benefit from the design engineering services offered by these distributors of electronic components.

What is triggering the shift?
Dileep Jain, CEO, Rajguru Electronics, says, “The component distributors have recognised a vacuum in the design and development space where they can enter, offer customers their components for a particular design, as well as provide support with the design itself.” Moreover, as their relationship progresses, customers of distributors look for more support and feedback from them, not only with respect to sales revenues but also about application areas or product ideas that can draw bigger business. This is gradually raising the demand for design as a service or support from distributors.

For instance, advanced electronic elements, including the more complex field programmable gate arrays (FPGAs), microcontrollers and application-specific parts, have a greater impact on both the cost and performance of the final design. It’s here that distributors have started adding real value to their customers’ businesses.

Bringing products quicker to the shelves is equally important to stay ahead of the competition. Sanjeev Keskar, managing director of Arrow Electronics, says, “All customers are under pressure for ‘time-to-market’ — to be the first to come out with a new product or concept in the market, and this is where a distributor can win a customer through design.” Distributors can provide complete or partial solutions support, which can bring down development cycle time substantially for their customers.

“All customers are under pressure for ‘time-to-market’ – to come first with a new product or concept and this is where a distributor can win a customer through design”

This adds to a distributor’s business, opening a new channel to earn more revenue as well. It also aids their customers who aim to bring valuable products quicker to the shelves without investing much on the design.

Also, when the semiconductor manufacturer relies heavily upon the distributor for demand creation, the distributor will have to report where these products will be used in new designs. This will require distributors to have strong design knowledge in sync with the market, be it in the case of FPGAs and microcontrollers, or for other components or any complete products.

Jawahar Mani, R&D director of Elektronika Sales, says that distributors offer solutions with reference designs and provide technical support to customers. By doing this, they can promote all the components  – active, passive as well as electromechanical.  Mani adds that Elektronika Sales has created new revenue channels by diving into the design arena. He says that the firm’s design expertise allows it to sell 90 per cent of the engineering bill of materials (eBOM), which includes the kit consolidation and business model.

Improved design services will require a rich and versatile R&D culture across the nation. Distributors are taking a step forward to fill the existing gaps by creating a better R&D environment and building a solid infrastructure. As an example, Elektronika Sales is working with customer R&D teams to understand the entire product requirements and, eventually, support the customer with its designs.

How do distributors get the design done?
With the help of their own engineering team, distributors create the design and pass it on to their customers, who are the actual product manufacturers. A multi-layered approach is followed — the design and prototyping process starts from figuring out the hardware architecture, followed by steps like schematic creation, PCB layout design, fabrication, assembly, and so on. The customer might choose to depute the complete design and prototyping task to the distributor partner or divide it among multiple partners, delegating specific steps to each. It may also choose to opt for separate services for design and prototyping.

Vinay Kumar S., director of V5 Semiconductors, a distributor that also provides design services, explains how this works. As a service provider, the company provides support from the schematic level to the assembly level and, therefore, customers with specific ideas or thoughts regarding a product, approach them. After subsequent discussions with the customer’s technical team, V5 creates the final design as well as the assembly operations.

Setting up the design team
The pattern that distributors are following when setting up their design unit is quite interesting from a business perspective. Some distributors are using their technical manpower, which includes technocrats who were originally employed for technical sales or support. These technocrats often have sound knowledge of electronics design or develop this over time. Distributors can leverage their skills to kickstart their in-house design activities, and with time, expand the design teams.

So what kind of a budget and manpower is required for companies that want to get into design? This entirely depends upon the scale of business requirements — the application area and platform the company is into, and the scale of transactions that it carries out. Distributors connect their design experts with the technical team of their customers or aligned partners for design, fabrication and assembly activities.

Boosting the ESDM scenario
A crucial question is: who will benefit the most from this? The main beneficiaries of this strategy include product businesses, large corporates, electronics suppliers and many others. The business model is interesting. For instance, whenever a customer or principal company of the distributor comes up with a reference or development board while launching a new chip/silicon, the distributor companies develop applications using those reference boards.

This business model leads to domestic value generation as the key-value addition for any electronic product lies in the design/IP, components and electronics manufacturing services (EMS) domain. It is important for India not to miss this opportunity to create value-added and indigenously tailored local designs. Distributors in the design space are helping to achieve this value addition. It is clear that this new wave of design practices is beneficial to companies that run original design manufacturing (ODM) and original equipment manufacturing (OEM) businesses since their development cycle becomes shorter. It gives them the option to diversify their product development activities with minimal risk.

Startups also benefit from this trend. Electronics startups have been active in the design space, but lack of infrastructure and finance thwarts their pace when it comes to value creation. Distributors getting into the design space create a support system in this situation.

India has a strong software ecosystem as compared to other countries. Right now, the focus needs to be on the hardware and design of products to back manufacturing activities. This will help cut down our dependence on imports from countries like China for new products or new ideas. It will also help electronics businesses achieve better time-to-market.

Product manufacturing becomes easier when all the elements, including the design, and the supply of components and modules, are available under one roof. “Getting the design from a company that can also provide the electronic components provides a certain guarantee or surety on the performance, compatibility, and longevity of the complete product,” adds Mani.

A threat to IDHs?
This trend may worry the independent design houses (IDHs) in India. Will the component distributors compete with them? Will they lose customers? Will this trend reduce the uniqueness of their services?

“Distributors are not developing production-ready products or application, but rather focussing on developing reference platforms, that too for selected products”

The IDH industry remains optimistic, though. “Distributors are not developing production-ready products or applications, but rather, are focusing on developing reference platforms, and that too for selected products. This means distributors are getting into selective design activities,” says Vinay Kumar S., director, V5 Semiconductors. In fact, most typical distribution companies do not have enough bandwidth to provide full-scale design support. Their core area remains component distribution. While their contribution to design surely acts as an enabler to shorten the development cycle, IDHs are still running the show.

With this complementary relationship between IDHs and distributors, new application areas and product categories are being explored in market segments like consumer electronics, automotive, telecom, and many more.

Revenue model
The revenue strategies vary in accordance with the business plans of the distributors and the requirements of the customer. Kumar explains that the cost of the project will depend on whether the customer assigns the distributor the complete project or parts of it. The customer may have to pay a lump sum if the entire project is to be done by the distributor.

For specific steps assigned to the distributor, the quotations will vary according to the operations assigned. Kumar sites an example, “If the distributor is given charge of the PCB design, the payment will depend on the number of man-hours that will be necessary for the operation.”  So the business model is flexible.

In another practice, distributors provide the complete design and prototype but may choose to retain the IP. In this case, the customer may have to pay a separate fee to obtain the IP. This also ensures a sense of service exclusivity for the distributor, because in case the customer wants to make changes to the design in the future, it has to return to the distributor to get it done unless the IP has been purchased exclusively.

Interestingly, it seems like many distributors are not yet following the traditional pay-for-services model for their design activities. On the contrary, they are providing these services to customers to further strengthen their main business, which is distribution.

Keskar explains that component distributors do not look for non-recurring engineering (NRE) payments like IDHs do. Their interest is to see that end customers take their design to production so that, in turn, they get more component business for the project. This is helping them create overall business exclusivity and stay ahead in the competition.

Designs that create higher demand are helping distributors get better margins from the semiconductor manufacturers too. This is helping distributors recover their investments in the design and FAE team.

“Component distributors do not look for non-recurring engineering (NRE) payments like IDHs”

The requirements and the opportunities in design
To serve more customers may require the distributor to recruit more design specialists to keep providing these services. This means that there is a substantial upfront expense for a distributor. However, it also leads to more revenue and a longer business relationship with the customer.

Having an in-house testing facility alongside R&D centres is of utmost importance to check the parameters or technicalities of a product in order to ensure its longevity. This entire setup, however, requires a huge investment.

For the electronics design ecosystem to develop further, collaboration is needed across segments. This will ultimately result in more product manufacturing in the country. This newly developed design ecosystem is expected to help the overall electronics manufacturing industry to grow faster.