Electrocomponents is targeting China’s burgeoning second tier cities in a bid to double the growth rate of its Asia Pacific business over the next five years.
The self-styled “Amazon for engineers”, which promises next-day delivery to its customers around the globe, has added 80,000 new products to its warehouses across Asia in response to demand from suppliers for access to the region’s £8bn market.
“When you talk to suppliers the thing they want more than anything is Asia. They want access to design engineers in Asia, in particular in China,” said Ian Mason, chief executive, adding that the country was “churning out a half million design engineers.”
Faced with a weaker growth outlook for its European and British markets, the company is seeking to increase its exposure to China’s tier-two cities, such as Chongqing, Dalian and Chengdu, where growth outpaces the national average.
Europe and the UK have provided 64 per cent of revenues this year, against 13 per cent from the Asia Pacific region. Yet UK sales grew at just 1 per cent between October and January, while those in the Asia Pacific region grew 7 per cent.
The FTSE 250 company is also aiming to exploit China’s 12th five-year-plan, which runs from 2011 to 2015, and outlines key sectors for government funding, including high-end manufacturing, new energy, medical equipment and alternative-fuel vehicles.
Some economists are warning of a slowdown in China. However, Robin Speakman, an analyst at Shore Capital, said: “There is such a large opportunity in Asia that even if growth does stall in short term it is not going to knock them off course.”
The biggest challenge for the company, he said, would be to increase profitability in Asia, where margins are about 9 per cent. This, he said, compared with margins of more than 20 per cent in the UK and Europe, where the company has high volumes of stock that it can deliver to its clients immediately.
Henry Carver, of Peel Hunt, said that such concerns should not be overplayed. “Distributors have relatively high fixed costs, so margins will improve with scale and turnover growth,” he said, adding that Electrocomponents “should also be helped by the push towards ecommerce”.
Electrocomponents traditionally sold its products through catalogues but over the past decade a growing percentage of its sales have come through its website. The company says that ecommerce accounts for 42 per cent of its sales in China.
Richard Huxley, regional manager for Asia Pacific, said that increasing this share would be key to its success. “If we could achieve the same penetration rate as our UK business…we’d be 20 times bigger than we currently are. And the big prize is China.”
However, Mr Carver said that while this might give the company an advantage over smaller players in the sector, it would not necessarily give it an edge over its main rivals, such as Mouser, Premier Farnell and DigiKey.
“It’s hard to see what they can do to make themselves meaningfully stand out from the competition. Choosing between them would be like choosing between Google and Yahoo,“ Mr Carver said.
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