The Indian electronic component distribution industry is in the process of transitioning from offline to online sales channels. Will brick-and-mortar platforms be able to retain their niche in the market, or will they succumb to the challenges posed by online sales models?
By Potshangbam July
The Indian government recently rolled out three schemes to strengthen the domestic electronics manufacturing ecosystem, to help the country become globally competitive. These schemes include production linked incentives (PLI), the Scheme for Promotion of Manufacturing of Components and Semiconductors (SPECS), and EMC 2.0, the new cluster scheme. SPECS aims to reduce the import of electronic components, which Indian industries currently assemble into products. The scheme has come as a breather for the industry, as the latter depends on a significant amount of imported components to meet its requirements. Besides, a shortage of components is one of the pressing challenges in the electronic component industry, which affects the supply chain adversely.
According to Global Industry Analyst Inc., the worldwide market for electronic components is expected to reach US$ 191.8 billion by 2022, and the Asia Pacific region is going to capture a dominant share. Following this global trend, the Indian electronic component market is also poised to grow significantly. This will lead to a huge demand for components in consumer electronics, durables and telecommunications, industrial electronics, information technology, medical electronics, automotive industries, etc. Component manufacturers often face challenges when meeting the demand from OEMs and while interfacing with a large number of companies. This is where distributors step in to handle the supply chain of components to various companies, small and large. They employ distribution channels that could be online, offline, or both.
Let us look more closely at the relative benefits of online and offline channels to gauge which is the best fit in the current market, and which sales channel will capture a bigger market share in the future.
Are brick-and-mortar sales channels still relevant?
With the high volume of business being generated online in the component distribution market, brick-and-mortar businesses are under constant pressure. Many now have a pessimistic view of their future, believing that they will lose market share to online sales channels. Nevertheless, traditional sales channels are still holding their own without losing traction in the market. The online sales channels are making waves because they offer more choices, lower prices and added conveniences like door delivery. They employ various innovative strategies to draw a consumer’s attention, such as heavy discounts, free goodies, loyalty and referral programmes, better EMI schemes or no cost EMI options, etc. What accelerates online sales is the marketing strategies, as it is possible to reach out to a wider customer base regardless of the geographical barriers.
Online marketing campaigns use Web based channels to spread a message about a company’s brand, products, or services to its potential customers. The methods and techniques used for online marketing include email, social media, display advertising, search engine optimisation, Google AdWords and many more. These options have a wider global reach.
Rajiv Batra, managing director, Rabyte Electronics Pvt Ltd, India, explains, “The world is changing fast. The Internet/Web and the cloud are omnipresent now. There is hardly any sector that has not been impacted by the digital revolution, be it communications, healthcare, governance, shopping and what have you. Post-COVID-19, the footprint of technologies that involve automation, the cloud, the Web, etc, which are Internet based, will grow considerably. Business will be transacted mostly through digital platforms aided by artificial intelligence, robotics and the Internet of Things (IoTs). That means online communication channels will have a field day. I foresee that in the coming year’s global trade, electronic goods and components will overtake the global oil trade. Figures indicate that the gap between the global oil trade and electronics trade is closing. Which media will be used for marketing will largely depend on the advantages it has.”
However, there are areas where offline sales score over online channels. Many consumers prefer to physically inspect the products, and directly engage with the seller to get first-hand knowledge about their quality, etc. This is not possible with the online channel.
Also, the online component business is not very easy as electronic components get upgraded routinely. In the case of traditional offline sales channels, it is possible to be in touch with the customers and understand their needs and difficulties. In such scenarios, one can educate them about new products and their uses. Distributors can offer solutions with reference designs and provide technical support to customers, an invaluable service that is missing in the case of online sales channels. Some distributors provide samples of the products to customers to try out in their designs, and in some cases also introduce customers to professional product designers to assist them. Such support is just not available via online platforms. Besides, customers do not have to pay extra for shipping or delays in receiving the products in the case of brick-and-mortar stores. Sales transactions are relatively easy and safe – unlike in the case of online sales transactions for which consumers may hesitate or worry about providing card details and other personal information online.
Vick Aggarwala, president and CEO, Supreme Components International, believes that offline sales channels still have their place in the market. He says, “Online sales shops are set up to cater for low volume sales and hence their prices tend to be higher. Online platforms are not involved in quarterly negotiations and other services like VMI (vendor managed inventory) programmes. Brick-and-mortar stores are relevant especially for the mass production volumes required by OEMs and CEMs (contract electronics manufacturers).”
There is an ongoing debate about the impact of e-commerce and its increasing prevalence in the Indian electronic component industry. Some electronic component distributors are considering digitising their offline stores to keep up with the times. Others have ventured into online platforms by launching their own websites to complement their physical sales. Not all have been successful; some reported that this move did not generate sufficient revenue due to various reasons, which compelled them to close the online version. There is no doubt that online sales are increasing in India. Most of the global distributors have already come up with buying options in Indian rupees. However, it will take a few more years for online sales to beat brick-and-mortar sales. Though there are some valid concerns among owners of brick-and-mortar stores, their presence in the market, especially in India, is still crucial.
What are the challenges?
Online sales models have been projected as the future of the electronic component market. E-commerce intensifies the competition with traditional offline businesses, giving better offers and other attractive deals for consumers. Nevertheless, online platforms have their own share of challenges that are yet to be addressed. There are cases where illegal components are procured from the gray market, and are sold at a much cheaper price online. This makes it difficult to identify which components are from authentic sources and which are not. These bogus components available online at huge discounts not only pose a serious threat to offline sales channels selling authentic products, but also lower the trust consumers have for online sales.
Batra of Rabyte points out another issue with regard to online sales, “Short lead times is the major hassle. The distributor gets very little time to supply the goods. Emergency supplies lead to higher transaction costs, as well as lower margins since the incidentals are very high when a deal is fast-tracked. Creating additional capacities within the manufacturing unit at short notice is also a major problem, which can lead to cost escalations. For example, most of the customers from India currently use the online channel only when they need components for some prototype-design or R&D work. Therefore, it will a take long time to shift this sector to online mode, particularly in India.”
Batra lists the following as key challenges faced by online sales platforms for electronic components.
- Demand forecast
- Managing the stock levels for future demand
- Lack of regular customers
- Transportation charges
- Customs clearance
- Cost competition with offline distribution challenges
- Sudden surge in demand
- Difficulties to meet fast track delivery commitments
Price negotiations are important for any business. Unlike the physical stores, there is a lack of interaction in the case of online sales. Aggarwala says, “In online sales, price negotiations are not possible. Date/code information is not easily available, resulting in delayed shipment. Online sales have strict credit guidelines and are inflexible. And it is not easy to reach key personnel, especially due to time zone differences.”
Traditional offline sales also have their downsides. Sellers find it difficult to reach out to customers who are in far flung areas of the globe. Offline sellers mostly serve customers that are close to them. Batra adds, “In the case of offline supplies, there are several advantages for suppliers, since they can plan things meticulously, can engage the most competitive and economical transportation mode, etc. But there is an additional cost involved in the form of inventory charges, since suppliers would like to deliver the components at the buyer’s place (distributor) just a few days before hand.”
How to balance between the two channels
Online and offline supplies are part and parcel of business processes, for manufacturers of all kinds, including those making electronic components. So how will they be able to cope with business eventualities by balancing both? Batra says, “I feel there is no textbook solution to this. Businessmen will know when the demand peaks and declines. That cycle is a good indication for taking precautionary measures. But there are many things that can happen all of a sudden. For instance, with the COVID-19 pandemic, both global supply and demand chains have gone for a toss. No one in their wildest dreams would have expected this to happen. But, it has happened. My only suggestion in this regard is: be careful in drawing up your contract and incorporate a provision for the force majeure, which can protect the interests of the stakeholders. Long term contracts, to a great extent, will address this problem. Besides, during ‘normal’ times, one can use sophisticated tools for predicting future demand, regularly assess market trends, maintain optimal inventories, develop a data-driven strategy, etc. One should not commit to supplying goods on the basis of a gut feeling. The decision should be based on production capacities, cost of maintaining inventories, etc.”
Which sales channel will dominate in the future
As there is continuous development in the electronics manufacturing ecosystem, the demand for electronic components has increased in India. However, electronics manufacturers often have to encounter certain challenges, such as the lead time between manufacturing requirements and inventory shortage. This is where distributors come into play to deal with issues related to the supply chain ecosystem. The country has a strong base of distributors of electronic components, including domestic and global players, which makes the market very competitive. As a result, there is a proliferation of component distribution and supply activities in the market, which has given birth to online outlets to carry these out. Some of the major players in the Indian online electronic component distribution field include Mouser, Digi-Key and RS Components.
The advent of online sales channels has changed the landscape of the Indian electronic component distribution market to some extent. However, there are not many established online distributors in India yet, so the online presence is still limited in the electronic components domain. However, industry experts say that online component distribution businesses will soon attain maturity in view of the steps taken by the distributors to make their presence felt more strongly in the digital world.
Sharing his perspective on the ongoing battle between the fans of the offline sales channel and the online option, Batra says, “Undoubtedly, the offline sale of electronic components will lead the market for some time. While online channels have got their strengths, offline channels are becoming more innovative and customer supporting. Both channels will co-exist. It is better to consider both the channels as two sides of a coin. As a distributor of electronic components, I would use both business options based on the market demand. The online mode will get its momentum gradually, but it will take some more time to capture a higher market share, particularly in the Indian market. “
In the current scenario, consumers are facing shortages of components and longer lead times for some parts due to the COVID-19 induced lockdown. There are also instances of shutdowns of some component distribution stores because of the pandemic. This has led to increased dependence on online options to meet urgent requirements. The trend is likely to continue, showing positive growth that will become the norm in the country. Further, with uncertainty looming large on the horizon because of the pandemic, the business models will become more diverse and flexible in the future. Observing the current scenario and business trends, Aggarwala says, “Online sales channels are becoming more and more popular and user friendly. COVID-19 has really accelerated sales for online distributors and this is expected to continue after the pandemic abates as well.”
