2015 MDM Market Leader Profile
Moving from a multiregional to a truly global company is a key initiative for electronic component distributor TTI Inc., Fort Worth, TX, a wholly owned subsidiary of Berkshire Hathaway. Associate Editor Eric Smith spoke with Michael Knight, senior vice president, TTI Americas, about how the company is approaching global growth, the importance of culture to successful acquisitions and what's in store for the rest of 2015 and beyond.
MDM: How’s business going?
Michael Knight: Some years it’s easier to answer that question than others. This one has been a bit confusing. The punchline is we had a pretty good first quarter. We were a little behind expectations in the first quarter in North America but ahead of expectations in Europe and Asia.
There was a lot of noise in the first quarter and in North America, in particular. Some of it was, of course, related to the weather. Some of it related to the FX (currency exchange) thing that’s going on with the strong dollar. But when it was all said and done, it was a pretty decent first quarter, and I think that’s for the most part true of the electronic component industry.
The second quarter, though, is going to be a bit of a different story. We’ve had much more of a stutter step coming into this quarter, especially on new incoming orders. The new order rate has dropped off dramatically. We’re seeing some cooling off, which is probably in keeping with what’s expected in the overall global and North America economy. It’s going to be a growth year, but it’s not going to be as strong a growth year as ’14 was.
MDM: Any especially strong growth opportunities that have been interesting for the company of late?
Knight: One of my fears when you become so dominant in a particular product center, geography or an industry is that growing ahead of market becomes all but impossible. I choose to look at that as the silver lining in the TTI cloud. We’re pretty dominant in the things we do, but we’re not so dominant that it’s impossible for us to outperform, especially in things like connectors where we still, for the most part, have non-dominant shares.
That product space is highly fragmented. And there’s a growing need for our type of distribution by customers who consume connectors – and that’s globally. That's driving a big piece of our growth here in North America, as well as Europe and Asia. And it’s driving us into market segments that historically we haven’t had much of a presence in, first and foremost transportation, in particular non-automotive transportation. So commercial vehicles, which would be light and heavy duty trucks, construction, agriculture, recreational vehicles, along with rail and electric vehicles of all types.
These are very connector-rich environments, and it’s an industry that hasn’t historically used distribution. And for a variety of reasons it has more complicated supply chains, more rapid turnover in terms of models so that they’ve got a higher variety than they historically have had.
MDM: One trend that we hear about from distributors all of the time is an increasing emphasis on e-commerce. How big of a priority is online sales for TTI? And how is the company is staying at the forefront of this ever-changing digital world?
Knight: It’s a massive priority for TTI the corporation. And for TTI the corporation, Mouser is our beachhead. The vast majority of everything Mouser does is Internet based. They don’t have a sales force. The marketing that they do through their website and brand – and all of the different services they offer their community are Internet based – it’s their path to market. And they do it, I would argue, better than anybody in the business.
For our type of business – industrial distribution, which is what my respective area of TTI does and what Sager does – the role of the Internet is much different. It’s a source of information. It’s a means for communication and information exchange. And there, it’s definitely pervasive and it’s critical, but what it is not is a mechanism for commerce. While we all have websites that show parts, quantities, prices and availability, very little is actually bought through a search-and-click thing.
Our website is generally used for sourcing purposes to see if we have inventory and get a feel for what the price might be.
Generally speaking, we have a personal relationship with virtually all of our customers. Lots of inside salespeople, lots of outside salespeople and local offices. That’s really how the vast majority of our commerce is transacted today. The actual selling, service and commitment happens through a personal exchange.
MDM: For the first 30 years of TTI’s existence, the company focused on organic growth, but that appears to have shifted. What has been the role of acquisitions at TTI in the past decade?
Knight: Our very first acquisition was in 2000, and that was a real simple buy-versus-build equation. We were in the process of building out our own catalog distributor when a small catalog distributor in the neighborhood, by the name of Mouser, became available. When we acquired Mouser in 2000 it was a $50 million business. This year they should break $1 billion.
If pressed to answer whether that was by design and strategic I’m, of course, going to say absolutely it was. But the reality is it was pretty easy math for us, and we were extremely fortunate in that we got a group of people that became a leader in their space.
The rest of the 2000s I would characterize as opportunistic, and there were two more. One was a small passive electronic component distributor by the name of Capsco on the West Coast and what that did was give us a little bigger footprint on the West Coast. And then we acquired NTI. A company specialized in the automotive market sector, which was not a place that TTI played, and it really became the kernel of our transportation business unit.
Then in the 2010s, that’s where you see things start to change here for us. Our acquisitions become a strategic way of adding some incremental growth, so it’s not all green field. This is post-getting acquired by Berkshire Hathaway. We have started to look at acquisitions as a strategic way to grow in either a particular market segment where we have low presence or share, a product set that we have low presence or share or a geography where we have low presence or share. In the past 14 years, you see us buying our way into Israel as an example of geography. Or buying our way into the European power supply business through Campbell Collins. Or buying our way into France, which was extremely nationalistic, through the acquisition of Mateleco, a leading french connector distributor.
More recently, we’ve done some things to get better positioned in the indigenous mobile handset market in China through the acquisition of HuaTong. And to get better positioned in the transportation market segment in greater Asia through an acquisition of NPC Autotronics.
It’s not, and I don’t think it ever will be, our primary growth engine, which is the case for other distributors that we compete with. For us, it’s an add-on to our principle method of growth, which is organic. And it just is an accelerator for something that we would otherwise do organically .
MDM: Alignment of corporate cultures when an acquisition occurs is critical. How does TTI promote that during and after a deal gets done?
Knight: I love this question. And it really is the heart of any acquisition. One that works exceedingly well has a really good handle on this question and an answer to it; one that doesn’t, doesn’t. And in my experience as it relates to acquisitions – the majority of which precedes TTI – culture match is the origin of success. Full stop.
When the two teams that are coming together see things, react to things, approach the world in a similar fashion and the acquired team has a desire to actively participate in the integration, in fact they see being acquired as kind of a springboard to bigger and better things for themselves, it’s magic. The hope for synergies occur. The hoped for value proposition for suppliers and customers occurs. The hoped for upside for the employees occurs.
We have a saying around here: Culture beats strategy. I would never claim that we are the most strategic electronic component distributor on the planet, but
I will always claim we have the best culture. We have a really strong, well-defined, well-understood culture here. When we acquire companies, without fail it’s a very good cultural match. We have had a lot of luck getting one and one to equal more than two, whether it’s Sager or any of the others that I wrote about in my blog.
MDM: What sets TTI apart from your competitors?
Knight: It is our culture. The founder of the company, Paul Andrews, is the root of the culture. And he’s still here every day, even after selling the company to Berkshire Hathaway. And even there this place was a really good fit with the Berkshire portfolio. Who TTI is, the management team and how we conduct ourselves is a very good match for what Warren Buffett gravitates toward.
The tenure of our people is unmatched. We’ve got people at all levels of the company, including the warehouse, who have worked with this place for 30-plus years. With that level of tenure and commitment there comes a consistency in everything we do because, ultimately, it’s my belief that the source of all competitive differentiation is the people in a company. Being able to attract and retain people is extremely important.
We’re such a small piece of Berkshire Hathaway that we don’t get reported out separately, but Warren Buffett takes a long view on everything, which is more of a private approach as opposed to a public approach, which is a quarter-to-quarter approach to business. And so we’re very blessed to not have to kneejerk to all of the twists and turns of the market. We know what we are; we know what we aren’t. And we put a lot of time and energy into getting better and better at what we are.
MDM: What's in store for TTI to maintain its value proposition and that competitive advantage?
Knight: We’re going to continue adding to our team in all regions. We are a net hirer even in downturns. Not being a manufacturer, if we want to sell more we have to have more people to do that.
This is a year too that’s pretty interesting for us in that we’re starting to truly globalize. Though we have a big footprint in all regions of the world, we have not been global. I would call us multiregional. Each region runs largely independently, so we're not really taking advantage of synergies or best practices. We’ve created some global positions this year to help us change that – mainly help us keep up with our largest customers who got there ahead of us. They’re already globalizing, and that's one of the things you see in our biggest customer engagements in any market segment.
We haven’t had a comparable way to engage or respond, so we’re putting that in place to better service our customers and, ultimately, to be more successful in a global environment. The Internet piece of this thing is already global. But the business-to-business, the in-person piece of it is also globalizing pretty quickly. And we tend to keep pace.
The other thing we started a couple of years ago that we’re deliberately putting more energy into is a focus on market segment and customer attribute as a way to sell. I talked a little bit about our transportation business unit and having dedicated resources in our area of specialization to look even more like specialists in terms of how we engage and how we talk to those customers. We’re expanding that and putting a lot of resources into becoming an IP&E specialist specific to the industrial marketplace, places like building automation, energy, and the other typical subsegments of the industrial market.
Beyond that, we're segmenting based on customer attributes – how a customer buys and what they’re looking for above and beyond parts. That’s new to us. All of this stuff I would call "real marketing” versus “marketing communications," which is by and large what our industry has historically done. This type of segmentation is actually getting out in front of the sales team and understanding by a type of customer, a type of end market, or even by a geography, what’s needed and then matching up our offering to that need. Then we send the salesperson in behind that front-end work.
There’s nothing new or magic about it other than it hasn’t been that widespread in electronic component distribution. And so I guess you could say we’re working on getting a little bit more sophisticated and deliberate in our old age, and I think that’s going to keep us pretty busy for 2015.