Stung by TI’s loss, Serial System diversifies beyond semicon distribution
As a 12- year- old boy, Derek Goh helped out at his parents’ hawker stall, taking on gruelling tasks of cooking and washing dishes. When he saw some famous hawkers wearing gold chains and fancy watches, he was inspired to enter the trade with the skills he learned from his parents.
However, after graduating with an Electrical Engineering Technician’s Certificate from the City & Guilds of London Institute, he managed to secure a job as a navy mechanic. After eight long years in uniform, he figured it was time to strike out on his own. As he revisited his original plan of setting up a hawker business, he noticed that technology was advancing at a rapid rate, and hence, he got the idea to go into the business of semiconductors.
As executive chairman of Serial System, Goh grew the company from a small set-up to become one of the leading authorised distributors of electronic components in the Asia Pacific region, with 700 people on its payroll and 53 offices.
Serial System listed on the Singapore Exchange (SGX) in 1997 and in 1999 was included as an index stock in the Straits Times Industrial Index for a while. Overall, Serial System enjoyed a rather consistent growth over the next few years. That changed in 2018 when Goh fell out with his largest supplier, Texas Instruments (TI).
“In FY2018 (before TI pulled out), we recorded our highest ever turnover of US$1.5 billion but unfortunately, TI wanted to consolidate their distributorship — from five distributors to just one,” explains Goh in an interview with The Edge Singapore.
The loss of TI, a mere month before Serial System’s planned listing in Hong Kong, was felt right away. Without TI, the company’s revenue would have halved. Goh’s plan was to use funds from the Hong Kong listing to acquire new businesses, after which he could then be less reliant on TI and thereby hive off the business.
True enough, FY2019 ended December 2019 saw revenue dip by 48% y-o-y to US$791.7 million. Earnings for the same year was 55% lower y-o-y at US$8.03 million.
As the contract with TI ended rather suddenly, Goh was unable to come up with new plans in time to make good the foregone earnings. He had to tell the Hong Kong stock exchange to kill the listing. “Everything just fell apart,” he says.
Emerging stronger
Before news broke that TI was breaking up with Serial System, it was trading at around 14 cents. It plunged to nine cents as investors fled the counter. As at April 20, shares of Serial System are trading 11.2% higher year-to-date at 8.9 cents, which is a discount off its book value of 15.81 cents per share as at Dec 30, 2020
Unfortunately, there were casualties. In 2019, Goh had to retrench 300 people. With the major hole caused by TI, Goh used the chance to start an internal restructuring. Before that could be completed, the pandemic struck.
In its latest FY2020 ended December, Se
rial System saw earnings declined by 97% to US$261,000 ($349,930) from US$8 million in the same period a year ago. This was mainly due to lower gross profit earned as a result of lower sales and gross profit margin, but the decline was partially offset by lower overall expenses. Revenue for the FY2020 period was 8% lower y-o-y at US$731.4 million. The earnings for FY2019 also included a US$25.4 million received/receivable in relation to the transfer of TI distribution business.
However, on a half-yearly basis, 2HFY2020 saw significant improvement compared to 2HFY2019, as earnings surged by 82% y-o-y to US$4.7 million, while revenue also saw a 16% y-o-y increment to US$417.1 million.
“Our business recovery efforts have started to pay off amid volatility in the global semiconductor sector. The Chinese manufacturing activity is recovering well from the pandemic. With leaner operations and a widened base of suppliers and products, we expect a stronger performance in 2021,” says Goh. He is confident that the semiconductor industry will see a recovery and pick up this year.
According to data from Finaria, the global market for notebook computers — a major consumer of the semiconductor chips Serial System distributes — is expected to grow to US$150 billion in revenue by 2025. Even before the pandemic, the laptop market segment was on a steady upward trajectory in revenue, growing from US$132 billion in 2018 to US$140 billion in 2020, according to data from Statista.
The demand, as is well-known by now, is driven by widespread work-from-home arrangements. Besides notebook computers, semiconductors are found in all manners of electrical and electronics devices such as modems and smartphones. As 5G deployment becomes more prevalent, a wave of upgrades into 5G-compatible handsets might manifest.
Nevertheless, Goh is upbeat on the real big growth potential elsewhere. “The market is now all about electric vehicles, 5G and IoT. And you have to be there, or risk being left behind. Now that we’re in the business
of these, the next step is to expand and get more suppliers ” he says.
Supercharging forward
For now, the blow dealt by TI is still felt. Goh concedes it is difficult to find another marquee supplier like TI of its size, as most of them would have entered long-term agreements with their respective distributors. Furthermore, despite Serial System’s positive reputation within the region, Goh notes that large suppliers would not usually budge.
Instead, he plans to take advantage of the US-China trade war to acquire suppliers from China, which is actively building its domestic semiconductor industry. To date, he has signed up around 10 China suppliers. Unfortunately, given the headstart enjoyed by the developed markets, time is needed to grow.
With the TI episode still fresh, Goh is careful not to be over-reliant on one large party like TI. He is actively looking for new suppliers from Japan and Europe. In Japan, he has teamed up with “a few Japanese suppliers” to secure the master distributorship for AMD chipsets in Japan, including its Ryzen series of chipsets.
But this will also take some time. He observes that the Japanese companies traditionally do not change distributors very often, and adopt a “slow and steady” approach to selecting distributors. In contrast, similar arrangements in the Western countries take a lot less time to finalise. The flipside is that termination, when it happens, is quick as well.
As such, Goh is looking at securing more distributorships in its existing regions, along with Taiwan and Europe so as to reduce concentration risk. However, Goh is aware that it is dealing with “smaller suppliers”. After all, the semiconductor powerhouses are still largely in the US, along with a few big names like Samsung in Korea.
The issue with smaller suppliers, according to him, is that there are concerns over quality. “Their quality, their product is not mature; it’s very difficult for a distributor to just push the product. If there is a quality issue it becomes a nightmare because the customer won’t pay,” he notes.
The uptick in demand for semiconductors around the world has risen so much so that consumers and companies are feeling the crunch, as automobile factories get delayed and computer enthusiasts face a shortage of high-end graphics cards for their gaming rigs.
Goh says while this pushes prices up as demand squeezes the supply chain, this also causes problems for distributors as shipping costs go up. “If I have an order of 100,000 units to be shipped to me at one go, and the supplier instead ships five batches of 20,000 each, shipping costs go up for me because I have to quickly supply my customer,” he says.
The company is also heading into new areas to diversify its income streams. Goh reveals while the company still gets 85–90% of its revenue from the semiconductor business, it is also in managed 3D printing services, as well as distribution of medical equipment.
The company has secured the Asian distributorship with Utimaker, a leading 3D printing company based out of the Netherlands. Goh said the company will distribute machines, as well as supply the raw materials needed to print an object, be it a watch, or a glass, etc.
Serial’s 3QFY2020 update has described this as “one of the fastest-growing printing trends in the world”. It has also entered the Thailand managed print services market, in addition to current activities in Singapore and Indonesia. “We have experienced good traction in both these print service categories and expect further growth in the coming years,” it highlights.
Goh is actively eyeing new opportunities in the medical sector because margins there tend to be higher, though he admits that the products are hard to find. Referring to Contract Sterilization Services, a subsidiary of Serial System that assembles and distributes medical devices, he notes that its turnover is about US$6 million a year, but profit is about US$0.5 million, as compared to the 1% profit margin for semiconductors.
True to his entrepreneurial nature, Goh, sensing opportunities with Covid-19 still an overhang, intends to also distribute masks as well. He declines to give specifics, except that they will be “special masks that are different from the usual disposable surgical ones”.
Currently, the company is working with the supplier to procure the raw materials for the masks, and once they get a company to produce the masks, Serial System will hold the Asia distributorship. “The medical sector, due to the need for HSA [Health Science Authorities] approval, is very difficult to penetrate, but ‘difficult to go in, also difficult to go out’,” says Goh.