The global market is monopolizing distributors and customers, and therefore also their prices
On December 31, 2020, Texas Instruments will discontinue its relationship with Avnet Inc., its historical distributor, as part of changes to its channel strategy. Texas Instruments’ products, in fact, represent about 10% of Avnet’s sales, so in 2020, Avnet will have $19.5 billion less in revenue.
Why this break-up?
The decision to break off relations with its historical supplier is due to the fact that Texas Instruments decided in 2017 to radically change its relationship with its distributors. A Wall Street analyst reported that TI had sent resolution letters to six of its distributors worldwide with the aim of forging closer and more direct relationships with end customers. Its strategy, therefore, is to sell directly by bypassing any intermediaries.
Interruption of the “demand creation” programme
The most dramatic move that TI made in 2017 was to interrupt the “creation of distribution demand” programmes. Under these programmes, vendors rewarded their distributors for assisting customers with product design. TI’s move relegated distributors exclusively to the role of fulfilment: inventory management, delivery of products and provision of other services in the supply chain.
The previous demand-creation rewards were usually paid in two ways:
- a distributor’s margin was directly proportional to the number of pieces it sold (higher prices, higher margin)
- the distributor was assigned a direct commission for its assistance in the design process
These programmes provided an incentive to distributors to participate in demand creation, which however, meant that the profit margins for sales were consistently reduced. 2019 was a year of shortages in the component distribution channels and demand further shrank during the first quarters, creating tensions between suppliers and distributors.
TI’s decision to eliminate these incentive programmes and the intermediate role of distributors was a consequence of this situation, which has worsened over time and will certainly not improve in the future. There has always been conflict over the management of the end customer between component manufacturers and distributors. To date, the situation in the global market has only increased this.