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Arrow’s Bullseye

Perhaps it’s Steve Kaufman’s experience navigating the choppy waters of Long Island Sound that has contributed to his successful captaining …

Perhaps it’s Steve Kaufman’s experience navigating the choppy waters of Long Island Sound that has contributed to his successful captaining of Arrow Electronics. An avid boater, Kaufman has navigated Arrow away from many a shoal since taking the helm as CEO of the $7.8 billion global distributor in 1986.

When he began running the Melville, NY-based company, he faced a particularly difficult situation; he was coming from the outside to an industry known for eating intruders alive. “I am the sole example in the last 25 years of an outsider who entered a senior management position in this industry and survived,” says Kaufman.

Not only did he survive, he transformed the company from a cash-and-carry electronics supermarket to a supplier of value-added and supply-chain services. Now he must weather a semiconductor glut and an Asian economic crisis, which have tightened margins already measured in pennies.

When Kaufman was appointed president of Arrow’s electronics distribution division in 1982, the company was in disarray. In 1980, 13 of Arrow’s top executives were killed in a fire at a corporate retreat. After that, Arrow foundered almost leaderless for 18 months.

“Everyone in the company did whatever they could to help me succeed,” he says. “This was the last chance to bring the company along. They couldn’t afford to break the new guy in.”

Kaufman attributes his success, at least in part, to his experience as a consultant. “The ability to listen is the consultant’s stock in trade,” says the CEO, who was a partner at McKinsey and Co. from 1975 to 1980.

Electronics distributors are the middlemen between fabricators of electronic componentry and manufacturers of equipment that incorporates those components. Arrow’s products range from generic semiconductors to configured devices for specific applications in wireless telecommunications, networking, or linear technology.

The electronics distribution business is a change for Kaufman. “You can’t beat up on your suppliers,” he says. “Your suppliers are your customers. They buy our sales force and engineering staff and grant us a franchise. Suppliers get fed up very quickly with people who fail to grasp these facts of life.”

Kaufman’s strategy for distinguishing Arrow as a retailer—in an age when retailers are constantly reinventing themselves on-and off-line—began with a change in perspective. “This has meant viewing ourselves more as a supply-chain company,” says Kaufman. “In the old days the business involved purchasing parts for dollars.” Now Arrow is involved in running its customers’ stockrooms; managing their inventory; sub-assembling their products; assuring just-in-time deliveries; and configuring components to engineering specifications. In an effort to widen its customer base more quickly, Arrow recently acquired two electronic components distributors, Bell Industries and Richey Electronics.

Arrow has been prodigious in its efforts at globalization. “We were the first to go offshore in 1985,” says Kaufman. “Now we’re 35 to 40 percent outside of North America. Our emphasis is on Asia-Pacific, and particularly China. We expect $700 million in revenue from Asia this year.”

As expected, the crisis in Asia has had the effect of deepening and prolonging a slowdown in the market. “This industry has historically been cyclical,” says Kaufman. An oversupply of semiconductors has posed another challenge to Arrow’s business. “There has been unit growth but price decline,” says Kaufman. “The result has been more work but less profit.” Arrow’s revenues grew 31 percent between ’95 and ’97—from $5.9 billion to $7.8 billion. But operating income declined 19 percent from $202.5 million in ’95 to $163.7 million last year.

Along with falling prices and margins has come a decline in the price of Arrow shares, falling from a 52-week high of 36 in March to a low of 14 by late summer. “A good portion of Arrow’s revenues come from the sale of commodity semi-conductors,” says Morgan Stanley VP Shelby Fleck. “No matter how much value you add to the product, you cannot earn margin well in excess of the market in an oversupply situation.”

The question is, when will supply and demand approach equilibrium? “At this time we are in the third year of a down cycle,” says Rob Damron, an equity analyst with Cleary Gull in Milwaukee. “Usually down cycles do not last more than three years, but this one may last longer because the previous up cycle lasted over four years.”

Both Damron and Fleck agree that the industry may rebound within the next 12 months. “I see margins and earnings bottoming out and a gradual, sequential improvement over the next year,” says Fleck.

Damron is also sanguine about Arrow’s long-term future. “Over the long term, electronics distribution is a growth industry,” he says. “Distribution has been proven to be the most efficient means of getting components to manufacturers. Arrow is the largest and best-run company of its kind in the world.”

As far as Kaufman is concerned, while it hasn’t all been smooth sailing, the current slowdown challenges him to “keep plowing ahead.” Right now, the company’s biggest challenge, he says, is to find talented people to grow the business. “We have more opportunities and capital than good people to carry them out.” 


PROFILE

STEVE P. KAUFMAN

Chairman, President, and CEO

Arrow Electronics

Age: 56

Birthplace: Boston, MA

Family: Wife, Sharon; son, Jeremy, 25.

Education: M.B.A., Harvard, 1965.

Pastimes: Tennis, reading, boating.

Boat: 35-foot Tiara cruiser, docked at Huntington, LI,  that sleeps four.

Car: 5-year-old Acura. “I see a car as a means of transportation, without any intrinsic or emotional value. Sometimes my staffers are embarassed.”

Personal Cause: Sponsoring, with his wife, an “I Have A Dream” project in Melrose Park housing development in the Bronx.

Last book read: Plum Island, by Robert Parker 

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