In Part 1, Gallagher mentioned that it will take two to three quarters to address the supply chain inventory issues. However, new challenges like geopolitics and supply chain/market regionalization are also just beginning. Who will be the one to emerge in this next generation? During the conversation between Avnet CEO Phil Gallagher and DIGITIMES founder Colley Hwang, they offered a basic direction for thought.
Defining the five major sectors before proceeding to regional markets
Hwang pointed out that in the past 20 years, the majority of the semiconductor sector's income came from mature sectors like PCs and mobile phones. Companies needed brand names, rather than consolidate manufacturers. Now, the situation is different, as we are witnessing the trend of "application driving demand." Nvidia's market value has exceeded US$ 1 trillion, and Taiwan houses about 50 suppliers within Nvidia's supply chain.
He believed that with this scenario, there would only be around 8 countries/regions worldwide that could become major "players." These countries include the US, Taiwan, South Korea, Japan, China, India, the EU, and possibly Mexico.
Taiwan's IC design industry currently holds around 18-19% of the global market share, while India's share is nearly negligible at 0%, and South Korea at only 2%. This shows that Taiwan should leverage its leadership position and collaborate with others, especially as we move into the "application-driven" phase. It should not be limited itself to just current markets.
Some companies were considering an expansion to emerging markets like Mexico, but the challenge lies in understanding the local infrastructure situation. Hwang recommended that companies define "five major sectors" before proceeding to regional markets.
The first is computing equipment, which will account for roughly 33% of market share. The second is communication, around 35%. The third is consumer electronics, around 9%. The fourth is transportation, which accounts for 11% now but could grow to 30–40% by 2030. The fifth is industrial PC and defense.
Gallagher acknowledged the abovementioned five sectors, stating that these are also categories that Avnet needs to pay close attention to. Personal computing still has massive potential, and so do transportation and defense.
Avnet is continually expanding its footprint, whether it's through strengthening internal capabilities or collaborating with third parties. Avnet is very proud of the progress it has made, with an entrenched presence in over 250 locations globally. This expansion strategy is one of Avnet's responses to the continuously evolving demands. The aim is to ensure resilience against any unforeseen challenges. Agility and flexibility are key advantages for Avnet and will be crucial when facing uncertainty.
Source: Avnet, compiled by DIGITIMES, September 2023.
The risks of geopolitical cooperation/competition
Regarding geopolitics, Gallagher acknowledged that Avnet has to do further analysis. While he personally found it challenging to consider events that have yet to occur, he still hoped that the US could take appropriate actions when required.
As a major distributor, Avnet is actively exploring strategies to reduce risks and has disaster recovery plans in place. However, the impact of geopolitical events is often far beyond what one can prepare for. Furthermore, these impacts are often global, as seen with the Russia-Ukraine war and the US-China trade war.
For Avnet, devising strategies to buffer or store critical components is a requirement. Additionally, there's a shift happening from traditional capital allocation to value driven by new technology. Traditional sectors still have their importance; for instance, maintaining existing equipment is vital as redesigning within 18 months is economically unfeasible
A war in the Taiwan Strait would have a much more significant global impact than many expect, said Hwang. This is because the five major airports that handle international cargo are all located in East Asia (Hong Kong, Shanghai, Incheon, Taoyuan, and Narita). If a war broke out in the Taiwan Strait, the world could be looking at losses of over US$10 trillion.
From Taiwan's standpoint, avoiding war may seem challenging, but we need to establish successful industries to make the world aware of Taiwan's importance. Therefore, we need to cooperate with Thailand, Vietnam, and even Ukraine when it conducts its reconstruction.
Regarding the equipment China imports, how much of it is invested in China by companies like Samsung, SK Hynix, TSMC, VIS, and Intel? If the U.S. restricts equipment exports to China, these shipments might redirect to Europe or other countries like India.
Major relocation in the electronic industry chain
Gallagher stated that when looking at customer trends, they've indeed observed that the electronics industry's supply chain seems to be shifting the additional investments from China to other locations. This change became more apparent when they closely monitored certain customers.
Avnet is currently in an expansion phase, but it has also received requests from customers who are exploring "non-traditional approaches." These customers are also thinking about expanding their businesses and initiating response strategies.
Avnet's president of the Asia-Pacific region Prince Yun brought up the concept of "geomix" and "second mix." He stated that Avnet observes a trend where some customers who used to manufacture their products in China are now moving their business to Vietnam. In addition, Avnet has also received requests from North American customers who are interested in moving their businesses to Mexico. This shift marks a major development for Avnet, especially in North America.
The geographic distribution of Avnet's operations is well-structured, with an Asian portfolio that provides balanced business to Japan, Taiwan, and China. Similarly, its secondary customer portfolio also contributes to this balance. Globally, Avnet's overall strategy and coverage are spread out relatively evenly.
In a challenging market, some companies often focus on specific areas, such as PC/IT products. In contrast, Avnet maintains a diversified investment portfolio and does not overly focus on any specific sector.
Regarding Avnet's market strategy, its geographic portfolio and secondary customer portfolio are balanced, ensuring a fair distribution between "different regions" and "customer groups." In China, around 30% of Avnet's operations are related to EVs, and around 10-15% are in the industrial control sector. Both of these sectors still have significant room for growth in China.
Gallagher added that Avnet has already set up a design process in the US that can trace customers. At the same time, the Avnet Group has a workforce of over 600 people in India.
Avnet's global revenue is approximately US$26 billion, following through with a previous point about "not relying on a single major customer." In fact, no single customer contributes more than 5% of Avnet's revenue, which aligns with its strategy of diversification.
Source: Avnet, compiled by DIGITIMES, September 2023.
