It is no secret that the electronics and semiconductor markets ebb and flow, with peaks and troughs sometimes spanning years. Colin Strother, EVP of Rochester Electronics, shares his unique perspective as both a distributor and manufacturer of semiconductors and electronics as to how the industry is currently faring and what is to come in the near future as the industry anticipates recovery.
This interview was edited and formatted for clarity.
Tyler Fussner, Managing Editor, Supply Chain Connect
Colin, welcome back!
Colin Strother, Executive Vice President, Rochester Electronics
Hey! Nice to be here again.
Fussner
If you could please introduce yourself to our audience.
Strother 0:25
I am Colin Strother, Executive Vice President of Rochester Electronics.
Fussner 0:30
Colin, I'm excited to have this conversation with you today. I'm curious, from your perspective, from Rochester’s perspective, what is new for distributors? How has the role of a distributor transformed? Is there anything different in 2024?
Strother 0:44
I've been in the industry for over 30 years, and I've worked for a variety of different distributors. I think there was a time where you had more broadline design in, demand creation, catalog distribution, for example. Today, you've got to meet the customer where are they are at, how they want to be met. That's whether it's online, offline, or any combination. Today, from my perspective, we are certainly looking at how we can be of better service and value to our customers and drive and deepen that customer engagement by being relevant to them in the moment and provide them with what they need.
Fussner 1:31
And with that customer-centric focus, what are you hearing from your customers today? What are their challenges? Is there anything new? Are they having new expectations in the way they interact with distributors?
Strother 1:43
I was in in Brazil talking to a customer, and I was asking the customer how they wanted to interact with Rochester. They wanted to be face-to-face, which is great, and we've got a local team in Brazil. But that's not something you can do every day. They also wanted that dedicated contact from an inside sales perspective so that they could call and ask questions. And they also wanted an online experience where they could self-serve, they could place their orders automatically, using their credit terms, on their courier number. After hours, they could go in and see information related to their account, for example, and also use the web to search parts and upload parts lists. That customer was a really great example of how a customer wants to interact.
What we're doing at Rochester is we're really driving our digital transformation and embracing technology, because we also are adding new locations, expanding our physical presence, because with customers today, you've got to be omnipresent in that moment and meet the customer where they're at in the way that they want to be met.
Fussner 3:06
Especially as a global distributor, right? There are no certain office hours, so to speak; it's an “always on” sort of situation.
Strother 3:14
Yeah, and I love that in my role, I will admit. I guess I'm the worst. My quietest moment is a Friday evening because I'm based on the east coast of the U.S. And once our Arizona office is closed on the West Coast, then there's somewhat of a lull, typically until Sunday evening, when Tokyo opens and then Singapore, Shanghai, and so on and so forth. So, personally, I've been at Rochester 17 years. It's not a job. It's not a career. It's a true passion. I actually love it, because there's excitement, for example, where things are fast paced, and they are always moving and you are always on. That just has to be tempered with making sure that I don't overstress members of my team and expect the same from them.
Fussner 3:59
Sure. And, Colin, you touched on something about Rochester’s digital transformation. Every company, no matter the industry, is looking at, “How do we implement advanced technologies? How do we leverage AI to help our operations?” Can you tell me a little bit more about that—How's Rochester going through this?
Strother 4:18
Initially, we went down the road of building custom applications. And we felt our business is legitimately different, as everyone tends to do, but that was a real learning experience because what we ended up with was a range of systems that were a little bit over engineered and a little bit too customized.
The journey we've been on over the last couple of years is with our partner Salesforce. What we're doing is a balance of bringing more sophistication to our business, but at the same point, more simplicity. We're using off-the-shelf products that would also be used by a Ford Motor Company or FedEx or Nike, for example, and Rochester. What tends to happen, Tyler, is I may go to an event and you get a demonstration of how someone uses this technology, not specific to our industry. What you then have to do is try to envision how that could be a benefit to Rochester to drive and enable our customer success.
So, typically, then we'll work with our partner to map the process. They will be able to visualize what it would look like in our instance. Then we work with system integrators to then bring it to life. We are continuing to add to that to try to give us, initially, a 360-view of the customer. The big challenge there is data because you've had data in a variety of different siloed locations. And then, from a new technology perspective beyond that, we are using trusted AI. And I want to express “trusted” where we are using information only provided by our customers with their consent to better understand their needs so that we can then use the data to be more valuable to the customer by providing relevant tailored content, or product updates, that is relevant to them specifically.
Fussner 6:13
It certainly seems like it all comes down to that data and how that is executed on; turning that data into actionable data.
Strother 6:20
Yep.
Fussner 6:21
Colin, another question I have for you. It seems all too often that the industry is faced with disruptive events, whether it's conflict in the Red Sea or jams in the Panama Canal, the collapse of the Baltimore bridge, earthquakes in Taiwan, I could go on and on. Have any of these recent events impacted Rochester? Or maybe more generally, could you tell me, how does Rochester prepare for and then navigate through such disruptive events?
Strother 6:47
It's a good question. I saw some data going back to 1996, and it was the average peak to peak of our industry; on average it was 42 months. I think the shortest was 26 months and the longest was over 50. So, that tells you we are in a very cyclical industry. Not necessarily for the faint hearted. So, how do you navigate your way through that and provide a continuity of service and supply to your customers?
We do tend to get very early signals of market movements. I believe we've got the world's largest stock of semiconductor products; approximately 15 million parts, 5 billion active parts, all authorized, traceable, fully guaranteed. And we tend to see a lot of traffic start from the EMS, for example. And then we are early when we start to see the traffic decline. So, our sine wave as a business, I think it lacks memory but it's maybe a little farther ahead of some of the other distributors and the other manufacturers. We're always looking for that information.
In the background, though, is a continuous improvement. One of the things we did is we are IATF 16949 certified, which is the automotive standard, which I think is incredibly rare for a distributor. I'm not aware of any other that has this. But we have it because part of our business is licensed manufacturing on behalf of our suppliers and manufacturing services. To service the automotive market, we needed to bring in this standard, but we decided to put it across the entire company. That quality management standard is really, in my mind, about best business practices that govern everything we do and is really driving that continuous improvement.
So, an example: Clearly during the pandemic, when I would argue the market was oversold, on time delivery was under duress. When the market shifts and it's typically undersold, our learnings from that period, we then took to the other element of the market. And we've implemented a new warehouse management system, x-ray equipment, transactional APIs, everything that we can do to make everything as transparent, visible, and remove any impediment, whether it's how customers can receive the information, they can execute a purchase order, they can get visibility on where their product is, and then we can deliver on that product within their needs.
It would be foolish for me to say that we are always going to be able to navigate every event. But that drive to continuously improve, which is governed by the IATF 16949, I really feel that that has helped us over the years. And one last thing is we were founded in 1981 and we're a privately held family owned and operated company. So, we can take a longer-term view than maybe some companies that have to report to the stock market every quarter. Our founding principle in 1981 from our founder, CEO, Mr. Curt Gerrish, was to make the customer glad they called. That's very, very simple. But it is all we think about every day, Tyler, throughout our whole business. So, it's just continually trying to focus on that.
Fussner 10:10
Does Rochester offer any advice, or from your perspective, what would you tell customers to better prepare themselves to manage these cycles and get through these?
Strother 10:19
That's a great question. Our model is an inventory model. We have a huge amount of inventory in stock. Our die bank is around 12 billion die. That then facilitates the manufacture of the products that we've had transferred from the original manufacturer to continue to provide.
I will talk to a customer and their engagement with Rochester might be, say, reactive and tactical, where they're connecting with us when they needed something, and then you're trying to respond in the moment to be able to meet that need. And that's fine. But I always say to customers that we could do more and be of more service and value if we engage a little bit more strategically. But that means sharing of information. So, for example, on our web portal, our customers can upload parts lists, bills of material, and that then gives us the ability to then give them notifications on what they're interested in being notified of. Whether that's last-of stock, whether it's incoming inventory, for example. So, for a customer, we will list incoming inventory the moment that we've got the tracking number and it's hit the ocean. And we're physically tracking that with our logistics providers through the ocean and dynamically adjusting lead time. That is giving customers real-time visibility of our product that's not in stock, and customer notifications, early notifications, if it's a part of that they're interested in or they've inquired about.
We're continually trying to be more proactive and add value to our customers, but it does require a partnership where the customer does share their information, and going back to AI, trusted AI, which is only using the information that customers consented to provide to us to then provide them responses that are of relevance. And we've been very successful at that. Since we've implemented some of these features on our online platform, we've seen a dramatic increase in the parts per transaction, for example. So, you're right, it's data. But data in and of itself is just useless. It's about the ability to take structured and unstructured data and make a pattern from that, and then gain insights and then some actionable intelligence. But actionable intelligence is of relevance to the customer in that moment, or it just washes over.
Fussner 12:39
I couldn't agree more. If COVID wasn't the big eye opener, certainly some of these recent events may have been, but it is of paramount importance to shift out of that reactive mode and start maintaining and pushing forward with that proactive communication.
Colin, I'm very intrigued on your perspective here with Rochester being a distributor and manufacturer, I wanted to ask you about the recent setbacks in the construction of new semiconductor fabrication facilities here in the U.S. What does that mean for distributors? What does that mean for the domestic chip market? Can you tell me a little bit about what we can expect from that?
Strother 13:16
First and foremost, I think it's a good thing and it's exciting. For me, I have been in the industry all my working life and semiconductors are now something that everyone's talking about. Three or four years ago, no one really paid attention, certainly my family, as to what I did for a living. So, I think it's really, really great, first and foremost, to see the investment domestically. And for sure, the setbacks that we see are well publicized. But the companies that I see investing, they're very serious companies with proven track records. There might be some short-term hiccups, but there's just no doubt in my mind that they will be successful. From a Rochester perspective, we're a little bit isolated from that, because we are building from our die bank. We're not relying on wafer fabrication. Our in-house manufacturing is wafer processing, assembly and test. So, I'm a little bit more of an observer of this, as it's the industry that I'm passionate about and have always worked in. And therefore, from a Rochester perspective, it's not something I'm concerned about in terms of our ability to serve our customers. But for the broader market, our industry, I just see this as short-term issues as part of a far bigger, longer-term strategy that is very, very good for us domestically.
Fussner 14:38
It's exciting and there's certainly a ton of investment behind this, including things like the CHIPS Act, and the support behind it makes you very optimistic of how this is going to turn out.
Strother 14:49
Absolutely.
Fussner 14:50
Colin, I want to ask you to take a forward-looking perspective here for my next question. What does the next six to 12 months look like for certain verticals that maybe could have some potential growth? Do you see any potential growth markets in the near future?
Strother 15:07
I was in Taiwan recently, and I was able to talk to some analysts. And while they were more focused on the memory market and certainly AI and Nvidia, TSMC, for example, I think if we were to chronologically look at all of the information, predictions, and lay them all out on paper, we saw the peak of the market in February 2022. To me, it's been coming down from there. That's pretty similar to, certainly, the memory guys who are maybe a little bit earlier. I think we're always looking to be optimistic. We probably, as an industry, said we will recover in this quarter; no, it will be this quarter; this quarter; then this quarter.
From my perspective, no one really talks about the book-to-bill ratio. I was in Japan, and I was talking to distribution peer, a publicly traded company, so they were able to share numbers (this was only, maybe, six months ago) and their numbers were fantastic. And I was like, “You guys are defying gravity from an industry perspective.” And then I said, “What's your book-to-bill?” They said, “0.4.” Ouch. I think you can hold the revenue number up higher in certain instances if you're certain types of companies, whether that's shipping your backlog, your NCNR orders, pushing inventory into the channel, but at one point, it has to be paid. And I think that's what we're seeing now.
You can see with certain companies that Quarter One was very, very difficult. I read an article about the German distribution market, which was really tough in Quarter One. A lot of the chip companies and the major distributors, their forward guidance for their calendar, Quarter Two is down again. But then yesterday, I read about a broad market analog manufacturer who came in in line with expectations and the next quarter is flat to growth.
Personally, I think we're towards the final phases of the cycle. And even though it might look really, really painful, when you see the actual numbers, I think this is a bit like the stock market where future earnings are baked in. Whether you're a broadline distributor or a demand creation distributor, a semiconductor manufacturer, you've had some visibility of this happening at this point based on your book-to-bill ratio. And until book-to-bill starts to return to positivity, you can't really get growth. I think we're getting to that point now.
I've talked to a couple of manufacturers at EDS who've said to me that they're already talking to their customers about lead times starting to go out on certain products. But clearly, from a customer perspective, after a couple of years of surplus, that's a message that they're struggling to get through. So, based on the cyclical nature of our industry and the fragments that bring it all together, we'll probably see an upturn, and it'll probably be when we least expect it. I'm not an optimist, but I am a realist. I think we'll start to see a broader market recovery as we go into the second half of the year.
But it's variable, because if you look at, say, automotive—that was doing well and then became under pressure. If you look at EVs, that probably has not been adopted as well in the U.S. as we expected. I think what we'll end up with is more of a broad market recovery. I think that the data centers that are required to drive the AI, that's going to be an area where not only you're Nvidias and your high bandwidth memory suppliers will benefit, but there’s also a range of other components that are going to go into that as well. I think that is a genuine catalyst and once we start to see that, I think we'll see more of a broad market recovery.
Fussner 18:48
Colin, I'm going to ask you my hardest question. I saved it for last. What does the future look like? Now, I know we wish we could all answer that, but I'm curious, if we had to boil it down to one thing: Stakeholders in the electronics market, what do they need to be prepared for come 2025?
Strother 19:07
Cyclically, it might sound unusual as we're coming into being in a surplus market, but I think it is inevitable that there will become some level of shortages and constraints. It's inevitable. What we've been doing at Rochester is, in this downturn, working with our suppliers and making sure that we are able to take over that excess inventory into the authorized channel, Rochester. And also, we've made significant investments in mature products as suppliers have rationalized their product lines to allow us to continue to support those customers without any delay. We are holding more inventory today than we were pre-pandemic.
But if you actually took out the peaks and troughs, in the shortages, the markets oversold, and we're all trying to understand, “Is there any double-ordering happening here?” And of course, no one's saying there is. But there was. And it's human behavior, because maybe the Port of Long Beach was closed due to COVID. Maybe the FTZ in another location was closed because of COVID. Individual customers panic. They need to make sure their production is secured. The same when there is a surplus. The actual market I don't think deviates hugely. Yes, there are geopolitical events; there are maybe certain segments that do better than others. But I think the good news for our industry is if you're able to work through these cycles, keep your eyes firmly focused on your customer, we're fortunate. We are in a growth industry.
I remember working in distribution nearly 25 years ago, and people were calling the end of distribution, for example, then. But we're not selling fossil fuels. We are selling semiconductor products, electronic components. And I think the prevalence is just getting more and more and more. So yes, there's going to be the cycles, Tyler. But it's a very, very, very exciting industry to be in. And I believe it's a continuous growth industry. But we have to be able to navigate the peaks and troughs.
Fussner 21:05
Colin, I want to thank you again for joining us today. I really appreciate the insight and expertise that you were able to share with our audience.
Strother 21:12
Well, thank you, Tyler, I really appreciate it. I have a lot of passion for this industry. It's the only one I've ever worked in. A little personal note, my daughter graduated last week from the University of New Hampshire with her MBA, and she's going to join Rochester Electronics as well. It's nice to bring the new generation into our industry. I'm a big advocate as well of women in electronics and this getting people into STEM. I'm passionate about our industry. We are passionate about our industry. And let's keep that going and I'm delighted to talk about it.
