Factors like the pandemic, inflation, supply-chain disruptions, and geopolitical events like the war in Ukraine have caused prices for some goods to swing wildly over the past few years. And the market for semiconductors and other electronic components has been especially volatile.
“The world is so finely tuned in what it produces relative to what it needs that if you have the slightest imbalances,” companies can start to experience shortages or overstocks, Karl Pichler, EVP, CFO, and board member at Sourceability, a global distributor of electronic components, told CFO Brew. “We need to be able to provide our services both in an up market and a down market.”
Sourceability, founded in 2015, has developed a multifaceted business model that enables it to weather swings in supply and demand. In 2018, it rolled out a platform called Sourcengine that enabled companies to sell unneeded parts, and saw its sales grow by 50%. In 2022, it saw its highest-ever revenue, reaching $1 billion in sales, and was named one of the world’s top 50 electronics distributors by Supply Chain Connect.
While Sourceability’s revenues may vary depending on whether the components market is on an upswing or a downswing, it is able to remain profitable because it has strategies for both up and down markets. Its costs are variable, but it is able to run lean, Pichler said.
“The level of revenue we need to support our business is fairly low,” he said. Its brokers receive largely commission-based compensation, and the digital solutions it provides have a fixed “but very low marginal cost.”
Pichler spoke with CFO Brew about how Sourceability achieved these results. Its insights might apply to companies outside the electronics market that are facing similar issues with supply-chain disruptions or imbalances in supply and demand as well.
Complex and volatile. The electronic components market is generally very cyclical, Pichler said. However, it saw especially dramatic swings over the past three years. During the pandemic, the world experienced shortages of chips and other electronic components as manufacturers, most of which are located in Asia, shut down due to lockdowns. At the same time, demand for electronics spiked as many people began working remotely. Buyers scrambled to secure the parts they needed, and prices rose.
As the pandemic abated, though, companies found themselves with excess inventory. “We went from a shortage market in the second half of ’21 and all of ’22, to an excess market within literally three to six months,” Pichler said.
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This volatility came layered atop the typical obstacles the components market faces: its complexity, and the fact that its goods become obsolete.
There are more than a billion types of semiconductors, around 10%–15% of which are “actively traded,” Pichler said. Even products like refrigerators and LED light bulbs contain semiconductors. A smartphone may use 25 semiconductors, all of which “can be designed by multiple manufacturers to certain specs,” he said. He describes the electronic components market as “a very, very, very big universe of parts,” all orchestrated by “thousands of players” around the world.
Compounding the challenge is the fact that electronic components become obsolete. Manufacturers guarantee that they will make a product in a certain uniform way for a specified amount of time, Pichler said. After that date, they reserve the right to make changes or discontinue the product. Companies making sophisticated electronic products often require uniform components, and may not want to buy parts that are past their “expiration date,” he said. Suppliers, therefore, only have a limited amount of time to unload their inventory.
Imbalanced supply and demand. Sourceability began as a traditional brokerage, employing brokers who built relationships with “thousands” of buyers and sellers in 13 countries and who could help get parts to the companies that needed them, Pichler said. It also became a franchised distributor for companies including 3M, Nvidia, and Nexperia, meaning it has been authorized to sell certain products these companies make.
However, it saw additional opportunity in connecting sellers who had excess inventory with buyers who needed parts. In 2018, it developed Sourcengine, its online marketplace for buyers and sellers of electronic components. Pichler likens it to an “Amazon for semiconductors.” Sourceability takes a percentage of sales that happen on the platform, which acts as an additional revenue source in times of either boom or bust.
The company also monetized two other digital products it developed: Quotengine, a quote and bill of materials management tool, and Datalynq, an analytics tool that gives companies more insight into their inventory and supply chains.
Though Pichler is cautious about making predictions as to the state of the components market, he observed that CFOs at suppliers “are getting antsy about high inventory levels and rising interest rates and tying up capital that may become obsolete” and expected that “excess supply will hit the market fairly soon.”
“And,” he added, “we feel we’re well positioned to capitalize on that opportunity.”