Interview: Franked dividends

Interview: Franked dividends

Just over 10 years ago, Frank Sheu moved to Australia from Taiwan to start the local arm of Synnex. The company has enjoyed a remarkable rise to prominence in servicing the flourishing Australian white-box industry. Gerard Norsa spoke to Sheu to uncover the secret of the company's success.

Just how big is Synnex in terms of staff and turnover?We have over 140 staff nationally. There are about 90 here in Melbourne and 50 interstate. In terms of revenue, this year we should top $300 million, going by the rate at which we are currently performing. I think that will make us the third largest distributor in the country after Tech Pacific and Ingram Micro.

Why has Synnex been so successful in Australia?We are specialists in the white-box segment and that is a very strong market in Australia. We provide white-box assemblers and resellers with an almost complete product offering and logistics service. We operate four warehouses, so all our orders can be supplied on a just-in-time basis. If they order in the morning we can get it to most of them in the afternoon. We are very good on the supply-chain management for this industry.

Will you be able to sustain the growth of the last five years?Yes. A lot of resellers and wholesalers went down last year. It was a year of channel consolidation and a lot of second-tier distributors disappeared, so that has created some space for us. Meanwhile, I think the market will recover later this year. We saw a lot of good year-on-year revenue growth in January.

The reason why most companies have a bottleneck that blocks growth is because firstly they don't know how, and secondly they don't have the finance. Fortunately, at Synnex Australia we are part of the global Synnex network and we don't have those issues. Last year, Synnex's global distribution revenues were in excess of $A15 billion. We have a proven business model and we can grow substantially. Knowing how to grow and distribute is not an issue for us. Financing is not an issue, either. We are a publicly listed company with enormous financial strength. Our head office operation works on a price-to-earnings ratio of around 20 to 22 and sometimes as high as 25. Access to funding to support future growth is not an issue.

How will you grow in the future?We always look at two areas of growth. One is the diversification of our customer base and the other is in the introduction of more vendors and products. Last year we had 4,477 resellers purchase from us. Our long-term goal is to continue recruiting resellers but we will also introduce more systems, components and peripherals into our product line-up.

That is in our existing business. Growth will also come from a more determined effort in services such as built-to-order systems, assembly services to resellers and warranty services for PCs, notebooks and servers.

We will be able to configure products online for resellers and ship them with a Mitac brand, as a plain white box or with their own brand name on it. We will then carry the warranty for them as well. We will handle materials, assembly, quality control and end-user service for the resellers.

We also want to move into complementary types of business such as logistics and vendor inventory management. It is a model that is successful for Synnex in other countries, so we already know how to do that.

In our current premises in Melbourne, we have enormous space at our disposal. Some of our vendor partners have indicated they want to outsource their warehousing or add a Melbourne centre and we will be able to do that for them. We have one large vendor in our portfolio that wants us to start doing this for them in June.

What about growth through acquisition?That is also a possibility. The problem with that is that we want to buy good businesses. Good businesses are usually not for sale. It is only the businesses that are going bad who want to sell themselves. All the same, there are some small and mid-range distribution businesses that we are interested in that would complement what we already do and that we are talking to, but the price has to be right.

How has the new warehouse improved business?We no longer have a capacity issue. Currently our growth is only limited by how many orders we can get from customers. We have a tremendous capacity to fulfil orders. The new warehouse allows us to hold much more stock and we are able to fulfil 95 per cent of our orders on the same day.

With such large inventory and rapid changes in demand, doesn't that increase the risk of being stuck with dead stock?We have a section on our Web site called Clearance Depot and what we are constantly doing on a month-by-month basis is making decisions on what needs to be moved very quickly. When demand slows we can immediately mark down the value and allocate it for clearance. Everything has a price at which it will sell and we are very clever at doing that early and making quick decisions on when inventory should be cleared out.

Our average ratio for dead stock is under 1 per cent and we can make provisions in the financial planning for that. We make decisions to clear stuff out every week. A lot of resellers are very happy to pick up the bargain.

We have no hesitation whenever we have to mark down our value, sacrifice some profit and clear out the stock because we know if we delay it further, we will lose even more.

How do you assess the ongoing relevance of distributors?Distribution is still essential for most vendors because of the efficiencies and economies of scale that can be achieved by working for many different suppliers. One single vendor cannot do things as cost-effectively and achieve the levels of customer satisfaction that a good distributor can. In reality, I don't see that changing in the near future - or ever for that matter.

A good distributor is by far the most cost-effective vehicle for vendors to achieve high levels of customer satisfaction in supplying their products.

The big PC vendors have all been targeting the white-box market. Are they making any inroads?Our research shows that white-box sales represent 50 per cent of the Australian marketplace. White-box sellers are successful because they are very close to their customers. With most of the tier-one brand names, their supply chain is too long. They are better at servicing large customers but the small and medium ones are much harder and Australia has a large base of small and medium-sized customers.

I think that at the moment just about all the tier-one companies would be losing money on desktop PCs. The PC market is still growing in Australia and it is a great opportunity for resellers to push the customised white box.

Is there a conflict in selling your own brand of Mitac PCs and also trying to sell components to white-box assemblers?We only sell Mitac through resellers. We actually allow our resellers to choose whether they want to sell Mitac or their own brand name but many perceive there to be some value in the Mitac brand, so we are happy to service them. To us, Mitac is just one of the brands we sell.

What is the difference between a company such as Synnex with an Asian paret and say Tech Pacific, which is European, or Ingram, which is American?I don't know if there is a cultural difference but there are some differences in the business model. Don't forget Ingram launched in this country by merging two businesses, one of which was ERA, which had a strong Asian culture.

The three companies have different business models. Vendors always want distributors to sell into the gold accounts or large resellers and I think Tech Pacific and Ingram Micro do too. We have a very clear goal of servicing the small and medium resellers because we believe that in the long-term they will be our bread and butter.

Therefore, we have set our operation up to be easy to deal with for the small and medium resellers. There are no size limitations on resellers dealing with us. About 50 per cent of the 4,477 resellers that dealt with us last year bought less that $50,000 off us in the year but we still treat each of them as a valued customer.

Who do you see as your main competitors?In our segments of the market, I don't believe our competitors are in the first tier. They are probably more the very niche vertical players and some of the distributors at a local level. Some of those companies have some strengths but financially they are weak, so their inventory levels are low and they don't have the full range of products their customers require. We have everything.

I don't think there is any single company that is a threat to Synnex on the complete product platform that we offer, and that is why we have been so successful.

You have said your sales are up 30 to 40 per cent early in 2002 over the same time last year. Is that because last year was very bad?Last year was very tough for everyone. Our growth rate last year was the lowest for five years, but I think it was just a down cycle in the market. We saw 13 per cent growth year-on-year in 2001 and this year we definitely want to see more than 30 per cent growth on that, even though the whole market will probably only grow 10 per cent. I am sure we have room to do much better.

What lessons did you learn from last year?We have always tried not to deal with too many of the high-flyers in the reseller world and this proved to be a very successful strategy. A lot of the high-flyers went under in the last two years.

What is your forecast for the industry?Mostly the feeling is that the market will start to recover from the middle of the year. That will be driven by the upgrade cycle and Windows XP will have been out long enough to be accepted by most users. There is also the hope that broadband services will be available at a much more reasonable price.

White-box servers have not penetrated nearly as much as in PCs. Is the white-box server market just as viable in Australia as the white-box PC market?That market is still very embryonic and I think it is a services issue more than anything.

Users want to have more solid warranty support. In terms of price/performance rating and quality control, white-box servers are very good but the service issues are a concern for customers.

I think there is great potential for that market to expand dramatically in Australia and Synnex is making plans to be at the forefront.

Will it be the same assemblers currently building white-box PCs that move into white-box servers?Yes, but the challenge for local assemblers is in how to convince users their service will be as good as that of the multinationals. Component vendors and distributors such as Synnex have to take on part of that responsibility.

Servers tend to be used in a far more mission-critical way by businesses, so the traditional way of taking a PC away and fixing it will not work with this category of product. Service has to be done onsite and very quickly.

That is part of the new services we want to offer as a distributor. We can be the support arm of the white-box server builder.

What other opportunities are there for the traditional white-box PC builder?This year we will try to assist them to move into the white-box notebook market. Intel is almost ready to release a new Pentium 4 mobile processor for the channel and we are hoping to launch a program in about two months to help the local white-box assemblers build their own brand name notebooks.

Are you aiming to continue building up the number of vendors that you distribute for?Yes. We have just signed up Logitech and Kingston Memory, so we are always looking for new partners that complement our existing product range and customer base.

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