Five Top IC Makers
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BY HAILEY LYNNE MCKEEFRY

ntel Corp. has its roots in the distribution market. The first order the semiconductor giant took was from distributor Hamilton Avnet. "Tony Hamilton gave us that first order," said George Smith, director of North American channels at Intel Corp., (Santa Clara, Calif.) "We’ve used distributors right from the start."

Intel Corp. — Leveraging market opportunities with strong limited partnerships "We’ve been fairly straightforward and consistent in the belief that limited distribution can do design creation and fulfillment," said George W. Smith, director of North American channels, Intel Corp. (Santa Clara, Calif.)

In many ways, Intel has maintained a fairly consistent approach to distribution ever since it took its first order in 1968. Today, the com pany partners with the same four distributors it has worked with over the past thirty years: Arrow Electronics Inc., Avnet Inc., Wyle Electronics, and Pioneer-Standard Electronics Inc. "In the beginning, the Intel name was not well known, nor were semiconductors, so we brought on distributors to introduce this brand new technology to the emerging customer base," Smith said. "We’ve been fairly straightforward and consistent [over the years] in the belief that limited distribution can do both design creation and fulfillment."

This focused strategy has allowed Intel to leverage its distribution relationships to make the most of market opportunities, Smith said. "We can focus our resources on a finite number of channels, and drive our revenues through a smaller number of distributors to gain economies of scale in resources and greater mind share," he added.

The importance of distribution has grown over the years. In North America, distribution represents over half of the company’s sales, Smith said, estimating the figure at 55 percent.

"Ironically, the shift has been toward more large customers going through distribution than in the past," Smith said. These large OEMs are looking for a long list of value-added services that include everything from to .

Another major shift in the marketplace has been that OEMs and semiconductor suppliers alike are relying more heavily on distributors for design creation tasks over and above the standard role of information provider. "Traditionally, the role of distribution in design creation has been straightforward - deliver information to the customer, discover design opportunities, and highlight the opportunity to the supplier," Smith said.

This, however, provides a number of challenges around how to compensate the distributor. In the new world, distributors are often supporting more lines and suppliers than they ever have in the past - which makes training of sales personnel a critical component. In addition, the advent of contract manufacturers has made it increasingly difficult to track which designs originated from a particular distributor. In response, semiconductor manufacturers are rethinking how they work with the channel.

"We are in the process of changing our compensation model," Smith said. "The Web has changed the value proposition in terms of the value of information, and industry consolidation has resulted in every distributor supporting more lines which puts pressure on training and resources. And contract manufacturers have thrown another level of complexity into the compensation of design work."

Intel has made a number of changes. First, the company is launching a new set of training tools for distributors that leverage the Internet and other technologies to make training more efficient. For example, Intel is now training distributors via closed-circuit satellite television. Intel is also changing its compensation model to focus less on paying distributors for the design transactions they are involved in. Instead, Intel is helping with back-end support and is creating programs that compensate value-added resellers based on infrastructure, rather than design wins.

These efforts, in turn, will allow distributors to fund development labs, training efforts and other programs that will further enhance design creation. For example, the semiconductor maker is underwriting the cost of supporting trained field-application engineers at the distribution level.

"This gives us the critical mass of engineers in the channel that are well trained and well versed in product," Smith said. "In addition, we need to find ways to pay distributors for design creation efforts independently of where that order ends up," he added.

On July 1, Intel implemented a revamped compensation program that lowers margins on sales volumes, but raises the level of payment for design wins. "Transaction margins will be substantially lower than our competition, but the total level we pay will be the same," Smith said.

"We are redirecting the funds to the corporate level rather than to the branch level, which is wildly different than any other supplier. The distributors that are serious about doing design creation can substantially increase their return on investment - so they are enthusiastic about it at the corporate level," Smith said.

At the branch level, sales people are taking a wait-and-see attitude. "They are skeptical because traditionally distributors have paid their employees on gross profit margin dollars," Smith said. "Unless the distributors change their own compensation models, people at the branch level will make less. Our distributors have made those changes, but it will take a quarter or two before they see it working."