Although some would say the industrial market is shrinking, others would argue it's growing. With their packages of automation solutions, those distributors catering to original equipment manufacturers (OEMs) appear to be holding their own.
In terms of percentage of electrical distributor sales, the industrial market is withering, according to surveys conducted by Electrical Wholesaling. In 2003, the industrial market accounted for 30.5 percent of the total electrical distributor pie, down from 45.8 percent in 1992.
Nonetheless, the OEM and factory automation segments of the industrial market have remained relatively stable in terms of percent of sales: 9 percent in 2003, just one percentage point less than 1992's 10 percent.
“The pie is not getting much bigger,” John Reilley, vice president of Minarik Corp., said of the OEM slice of the industrial-market pie. With its headquarters in Glendale, Calif., and 15 additional locations scattered throughout the United States, the motion-control and automation distributor attributed 70 percent of its 2005 $121 million revenue to OEMs. “We figure through service, product lines, value added and consignment stock, there are ways to partner with the OEM market that other distributors aren't doing.”
“In one way, I'd argue the market's expanding,” said James Baker, president, Electro-Matic Products Inc. “It's a question of perspective. We're doing far more international business than I'd ever dreamt we would do. From another perspective, we're closed out of a lot of contracts at the large companies because of integrated-supply contracts.”
With headquarters in Detroit's Farmington Hills suburb as well as a technology center and a cable assembly center, the automation-product distributor also has U.S. locations in Bryon Center, Mich., and Brunswick, Ohio. Ninety-five percent of its 2005 $48 million revenue was from industrial accounts, with 70 percent from the OEM market. “It's changing; I wouldn't necessarily say shrinking. But it's changing,” said Baker. He said some large plants once supplied by his company are now turning to a large national distributor to service their business.
Changes over the last decade at OEMs include downsizing, outsourcing and globalization, according to several distributors catering to industrial OEMs. In response, distributors shifted their strategies for serving this complex customer.
These distributors look to their vendors for best-in-class global product solutions. They look to their expanding engineering and technical staffs to solve OEM customers' automation problems and to bring OEMs next-generation products that can make their machines faster, better and stronger.
They rely on the Association of High Technology Distribution (AHTD), Philadelphia, as a means to network with approximately 130 other automation distributors. “It enables us to get together with other distributors with like needs who are facing similar challenges,” said Paul Galioto, president, Zeller Corp., Rochester, N.Y., and a former member of the AHTD's board of directors.
“A number of our key manufacturers are also a part of the association, so we get to see them on a semi-annual basis and talk about their strategies and how they relate to what we're doing,” he continued. Speakers at AHTD meetings address industry trends specific to automation distributors. “We get a little bit of knowledge up front before things are coming down on our shoulders,” Galioto said.
Mostly, these automation solutions providers listen to the their customers' needs and respond accordingly.
While OEMs downsized their technical labor pool in the last decade, distributors catering to OEMs up-sized theirs. Many of the salespeople for these distributors are engineers with strong technical selling capabilities, and these distributors employ mechanical engineers and physical engineers in pure engineering capacities as well.
“We've expanded our engineering, which has really been a big difference for our customer base,” said Kenneth Walter, president and owner, Steven Engineering, South San Francisco, Calif. “That's very important for the OEMs. They call and say, ‘I've got this problem. You need to help me solve it.’ So, we go out there and solve problems.” If the company's engineers can solve an OEM's problem, Steven Engineering is going to get that OEM's business, said Walter.
With 85 percent of its 2005 $36.4 million in sales to the industrial OEM market, Steven Engineering also provides technical support through its Web site's engineering area, which includes numerous PDF files of data sheets, drawings, application information, dimensions, parts numbers and the like. “Any engineer can go online and do all their homework in preparation for building a machine by using our engineering site,” said Walter.
Strong technical support ranks high among the characteristics an OEM customer expects in a supplier. “They look to us to have knowledge of all the latest development in automation products,” said Electro-Matic's Baker. “They look for us to be able to help them with their implementations, training, troubleshooting, etc. I think that's probably the top issue.”
“I think that almost goes without saying,” agrees Larry Stern, president, Standard Electric Supply Co., Milwaukee, Wis. “Without that foundation, they would not view us as a good partner.”
Staying Competitive Means Value Added
With 60 percent of Standard Electric Supply's 2005 $50.5 million revenue from industrial OEMs and 35 percent from industrial maintenance, repair and operations (MROs), the electrical distributor has regarded the shifting industrial market carefully. Stern says his company is “blessed to be in a part of the country where there still is a strong OEM manufacturing base.”
Nonetheless, Standard Electric Supply's OEM customers in Wisconsin and northern Illinois have had to focus on remaining competitive in a global marketplace. “They've had to look at their own operations and look at ways to improve productivity,” said Stern. “They've done a lot of things to automate processes and reduce the cost of labor to remain competitive.
“We've asked ourselves, ‘Based on what has changed with them, what can we do to take on these functions and help them reduce their costs to help them to remain competitive and improve productivity?’” said Stern.
The distributor responded by significantly growing its automation products area with programmable logic controllers (PLCs), motion products and drives. The products help OEMs reduce either the cost of the equipment they're building for the end-user manufacturer or in their own manufacturing by automating the processes more and reducing the cost of labor.
Standard Electric Supply also grew its inventory management services. Instead of the OEM continually cutting purchase orders and handling incoming products, Standard Electric stocks bins on the production floors for the OEMs.
“We view the changes as opportunities for us to add our own services and capabilities to meet those needs so they can continue to be competitive,” said Stern.
Like Standard Electric Supply, other distributors catering to the industrial market have also had to adjust. California's Steven Engineering continues to see manufacturing operations shift to locations outside the United States — a move made to capture dramatically reduced labor costs, said Walter. “The manufacturer itself has not left. They just ship over the manufacturing or some part of it — maybe the PC boards or an assembly of a certain item. If the business hasn't gone out of the country, it's moved out of state.” Walter says contract manufacturing is moving out of California to states where labor is less expensive such as Mississippi, Arkansas and Texas.
“We always want to penetrate new markets because the old market is getting smaller,” he said. “Even if we're going into a new market and it's half the size it once was, we don't know that because to us it's a new market.”
About five years ago, Steven Engineering entered the world of pneumatics when it began carrying the pneumatic automation product line of SMC Corp., Indianapolis. “It is now our largest line by double,” said Walter. By carrying SMC's line of pneumatic products, Steven Engineering has one source for cylinders, valves, tubing and other pneumatic automation products.
In addition to taking on the pneumatic product line, the distributor has expanded its list of services. By offering vendor-managed inventory (VMI), Steven Engineering now manages some of its large customers' inventories. “They don't even have to think about it as long as they send us manufacturing data. Basically, we download or upload it into our system; we know what their usages are going to be. We inventory for it, and we deliver accordingly.”
The California distributor also does quality testing for its manufacturer customers, puts together small assemblies, does engravings and has dedicated an entire warehouse to creating custom box enclosures. Instead of waiting weeks for custom boxes, customers can order enclosures from Steven Engineering and have them in two days.
Kitting, too, plays a huge role in the businesses of many industrial distributors. OEMs rely on their suppliers to take multiple components and put them together to make one part that gets used in the piece of equipment the OEM builds. Instead of purchasing items separately, the OEM buys the new part with its own unique part number as one kit.
“OEM customers need to do more with less, so they've asked us to assume more responsibilities for the tasks that they used to do internally,” said Gary Haseley, CEO of Zeller Corp., which serves the state of New York, with the exception of New York City. Approximately 60 percent of Zeller's 2005 $42.3 million in sales was generated from industrial OEM accounts.
“We have to have the capability today to do the design work for our customers. We have to be able to develop the documentation for them. That's what customers in our segment ask of us,” said Haseley.
Although industrial distributors have responded to OEMs' desires to reduce production costs with value-added services, consolidation and globalization continue to blur the horizon of the industrial market.
The world has become smaller — or perhaps bigger, depending upon one's view. With consolidation, an OEM once based in the United States is now the subsidiary of a company with headquarters in Europe or Asia.
“Probably one of the biggest challenges is our OEMs want broader coverage,” said Zeller's Haseley. “If they've got a facility in Rochester, N.Y., they have one in Chicago, and they also have one in Munich, Germany. They want for us to be able to support them on a broader geographic basis, if not a global basis.”
OEMs used to make equipment specifically for the American market or the European market, but they now must often produce equipment that will meet global design standards.
“We have to align ourselves with vendor partners that have a global footprint,” said Electro-Matic's Baker. “We have to be selling for companies that are truly global players.”
Two years ago, Electro-Matic aligned with a German engineer who had worked for machine tool shops in Germany and also had relationships with several auto manufacturers. Today, as a salesperson for Electro-Matic, he serves as a liaison between the distributor and the machine tool shops. “Many of those machine tool companies sometimes have an operation in Germany or Switzerland and an operation in the Midwest,” said Electro-Matic's Baker. “Most of the design decisions are made in Germany, so for us to penetrate it in the United States was nearly impossible. He helps us with the technical side of it, the language barriers, and helps us negotiate trade agreements back and forth. Now with these relationships, we can go into those businesses and get new opportunities.”
Top 10 Distributors Serving Industrial OEMs
Among Top 200 distributors providing both 2005 revenue and a breakdown of sales by customer segment on this year's Top 200 surveys, these electrical wholesalers come out on top in terms of total dollars sold to industrial OEM customers.
|Company||2005 Revenue from Industrial OEM||Percent of Total Sales from Industrial OEM|
|1. Rexel Inc., Dallas||$944.9 million||40.8 percent|
|2. McNaughton McKay Electric Co., Madison Heights, Mich.||$419 million||82 percent|
|3. Sonepar USA, Philadelphia||$354.5 million||15 percent|
|4. Industrial Electric Wire & Cable, New Berlin, Wis.||$108 million||90 percent|
|5. Minarik Corp., Glendale, Calif.||$84.7 million||70 percent|
|6. The Reynolds Co., Fort Worth, Texas||$83.4 million||30 percent|
|7. Summit Electric Supply Co. Inc., Albuquerque, N.M.||$66.9 million||25 percent|
|8. Wholesale Electric Supply Co. of Houston, Houston||$64.2 million||30 percent|
|9. Stoneway Electric Supply, Spokane, Wash.||$53 million||40 percent|
|10. Van Meter Industrial Inc., Cedar Rapids, Iowa||$46.5 million||30 percent|
Industrial OEM Standouts
Among those Top 200 companies reporting percent of sales by customer segment on Electrical Wholesaling's Top 200 survey this year, 55.8 percent serve industrial OEM customers to some degree. The reported percent of sales to industrial OEM customers ranges from zero percent to 90 percent, with an average of 11.4 percent and a median of 4 percent.
Ten distributors on the Top 200 list stand out with at least 50 percent of sales to industrial OEMs.
- Industrial Electric Wire & Cable, New Berlin, Wis. (90 percent)
- Steven Engineering Inc., South San Francisco, Calif. (85 percent)
- McNaughton McKay Electric Co., Madison Heights, Mich. (82 percent)
- Minarik Corp., Glendale, Calif. (70 percent)
- Electro-Matic Products Inc., Farmington Hills, Mich. (70 percent)
- Zeller Corp., Rochester, N.Y. (60 percent)
- Standard Electric Supply Co., Milwaukee (60 percent)
- Southern Controls Inc., Montgomery, Ala. (50 percent)
- CBT Co. (Cincinnati Belting & Transmission), Cincinnati (50 percent)
- Broken Arrow Electric Supply Inc., Broken Arrow, Okla. (50 percent)