Amid supply chain realignment, CH Global disrupts electronics distribution

In recent years, we've witnessed significant disruptions in the supply chain due to the COVID-19 pandemic, leading to chip shortages. More recently, we've observed geopolitical tensions, particularly between China and the U.S. Consequently, major corporate groups and manufacturing enterprises are restructuring their supply chains, moving away from dependence on a single country and exploring localization across specific regions. In this evolving landscape, what do you perceive as the opportunity for companies like yours, and how can you assist your international customers in their supply chain realignments?

CEO Kevin Kim:

I consider three key elements crucial in this industry. Firstly, flexibility is paramount. Secondly, possessing the capability to identify imbalances between supply and demand faster than competitors. Thirdly, establishing credibility. Currently, with the ongoing supply chain realignment, we see a significant opportunity. The U.S. is pushing forward with IPA right now. However, I hold reservations about its impact on Korea, as the U.S. is currently attempting to assert control over Taiwan and Korea. Hence, I believe it's imperative for us to shift our focus towards the Chinese market.

Despite recently opening our U.S. office, I propose that, once settled, we should consider establishing another office in Hong Kong. This strategic move would ensure a balanced approach and a more adaptable response to various situations. While the U.S. and China are currently entangled in a hegemony war, I anticipate that, over time, they cannot sever ties due to China's sheer market size. Consequently, it is crucial for us to be proactive in laying the groundwork for a supply chain partnership when the reconciliation happens.

CEO Carol Cho:

I see this year as a substantial opportunity for us. Despite a 40% YoY decrease in the semiconductor market's revenue, we have transformed this crisis into an opportunity by meeting the diverse needs of our clientele. This achievement was possible through an expansion of our vendor base. Starting with a limited number of vendors, we have now diversified our base significantly. Given the challenging economic situation, vendors are increasingly eager to collaborate with us as they seek to deplete their inventories. This expansion has allowed us to widen our vendor pool and establish a robust foundation for future growth.

Due to increased inventories and reduced demand from monetary policy tightening, the semiconductor industry faced a significant 12-month downturn. However, it now appears poised for a comeback, driven by Samsung Electronics, forecasting higher semiconductor prices and rapid inventory depletion in the fourth quarter. The semiconductor industry is projected to reach $1,380.79 by 2029, with a 12.2% CAGR during the forecast period. How do you see the evolution of the semiconductor sector over the next 12 months, and how do you anticipate this benefiting the growth of CH Global?

CEO Kevin Kim:

As you mentioned, the industry is anticipating a rebound starting from the third quarter. One reason for this is that Samsung Electronics and SK Hynix deliberately reduced their production to control prices, and we are currently witnessing the positive effects of this strategy. The second contributing factor is the smartphone replacement cycle. Over the past four years, the replacement cycle for smartphones was extended, resulting in sluggish demand. However, despite the absence of significant innovations in smartphone development, there is a pressing need for phone replacements due to the declining performance of batteries, which typically have a four-year replacement cycle. The convergence of these two factors is why we anticipate a market rebound next year. However, our strategic focus extends beyond smartphones to encompass the EV and automotive markets. While this strategy may not yield immediate results in the short term (one to two years), we firmly believe that it will prove highly beneficial in the long term, possibly by 2029.

I would like to highlight the current market share in the semiconductor industry. Communication devices constitute 36%, while the automotive sector comprises only 8%. Despite communication devices requiring approximately 700 to 1000 parts, the automotive industry demands a staggering 10,000 parts, excluding drives, making it ten times more significant than communication devices. This rationale underpins our strategic emphasis on the automotive market, considering its potentially profound long-term impact.

Over the last decade, demand growth in the electronics and semiconductor industry was mainly driven by applications such as smartphones, consumer electronics and automotives. However, I think this year has been kind of a turning point when you look at that utilization. As new technologies, including AI, 5G and the Metaverse become mainstream, observers expect major changes in revenue streams. Looking at the next 3 to 5 years, what main technologies will be the new sectors for growth?

CEO Carol Cho:

Initially, our focus wasn't on memory or logic chips, but currently, they stand as our main products. Within the memory and logic chip sector, our long-term emphasis is particularly on automotive memory and logic chips. Our strategic plan involves expanding our portfolio to cover diverse markets, including self-driving cars, aerospace, communications, medical devices, and railroads. Given the limited size of the Korean market, we cannot afford to be selective. Consequently, we are actively seeking international clients based on the components we handle in Korea.

CEO Kevin Kim:

Regarding your question about the most significant application in the next 12 months, I believe that 3D NAND SSD for high-performance server chips will be the most promising application due to its rapid development pace.

The concept of a trader is quite prevalent in the economy. However, specialized traders have encountered numerous challenges over the past decade. A significant factor contributing to this is that, traditionally, a trader serves as a middleman connecting buyers with sellers. With the rise of digital platforms, many markets are witnessing the elimination of the middleman. How do you envision the evolution of your company and its role in such a distinctive market?

CEO Carol Cho:

While we primarily operate as a components company, we are concurrently placing significant emphasis on platform and online sales. For the past decade, we have been developing our own platform, aligning with other platform companies like TTI, Mouser Electronics, or Digikey. We perceive the market moving in this direction, and our intention is to follow suit, with a particular focus on online sales, which we believe will drive our future growth. The final stages of developing our platform, based in the U.S. and accessible in multiple languages, are almost complete. Many companies are making similar efforts, and we aim to expand our market through online marketing and sales via the platform.

CEO Kevin Kim:

Additionally, we recognize the paramount importance of flexibility because predicting market evolution can be challenging. Today, the U.S. may dominate, but tomorrow, the core market could shift elsewhere. Similarly, our role may vary; we could be an importer today and an exporter tomorrow. Hence, we aspire to maintain the flexibility to assume multiple roles as the need arises.

CEO Carol Cho:

Our platform development is nearing completion, and we are on the verge of its launch. As mentioned earlier, we have expanded our vendor base to meet customer needs. Notably, one of our vendors is 3M. With partnerships established with all five domestic official agencies of 3M, we are registered within these agencies, enabling them to supply their products to us. CH Global is now registered with all the vendors in our diverse pool, showcasing our commitment to a comprehensive and responsive supply network.

Traditionally, medium-sized distributors, find themselves sandwiched between major players—such as Mouser and TTI—with extensive inventory capabilities offering short lead times, and more localized distributors that often concentrate on a single country or region, catering to specific applications and providing highly tailored packages to customers. In the context of your platform, how do you plan to extricate yourself from this predicament? What strategies do you believe are necessary to break through this sandwiched position and gain recognition as a key distributor?

CEO Kevin Kim:

I fully concur with your assessment of Mouser and TTI. However, having a large inventory entails significant risk due to increased fixed costs. Our approach involves establishing a virtual logistics center in the cloud, compiling a comprehensive database of all trades conducted over the past 18 years. This database enables us to respond swiftly to any supply and demand imbalances by analyzing and processing the data promptly, facilitating seamless communication with vendors. Moreover, even with existing inventories, the virtual logistics center will provide visibility into inventory status, pinpointing areas with excessive inventory and sluggish turnover. This insight will allow us to address issues effectively. I believe this digitalization approach is more cost-effective than that of TTI or Mouser. As they continue to invest in their operations, our costs will decrease since we already have all the necessary data integrated into our system. Additionally, our flexibility in key countries provides us with a competitive advantage, as major companies like Mouser lack a highly tailored service for customers.

When can we expect the platform to be officially launched and operational?

CEO Carol Cho:

While we are currently in operation, the first phase of the official launch is anticipated in March next year.

Additionally, within the rankings of top distributors from a U.S.-based company, top distributors like Digikey and Mouser operate as official agencies based on their accumulated inventories. On the other hand, companies like Smith focus solely on distribution without maintaining their own inventories. Despite this, these distribution-focused companies experienced significant growth post-pandemic. Our analysis revealed that while official agencies may sell products at higher prices, distributors like us boast superior cost competitiveness despite lacking inventories. Furthermore, we can more promptly meet customer needs, contributing to the substantial growth of distributors following this cost-effective model. In the case of CH Global, we procure products from official agencies in Korea and distribute them to clients in Europe and the U.S., positioning us competitively in terms of price. This rationale prompted the establishment of our U.S. office.

CEO Kevin Kim:

For companies with their own inventories, they are constrained to sell their specific products. However, even for identical products, prices vary across different countries. This inflexibility poses a challenge. In contrast, if Company A seeks Product B, although we lack our own inventories, we possess data indicating the country with the lowest price. This flexibility grants us significant price competitiveness compared to larger companies in the industry.

For a new platform, they initially face some challenges. The first was attracting suppliers, the second involved attracting clients, and the third emerged as when expanding—managing quality control amid a vast array of available parts. How do you plan to tackle these three pivotal challenges?

CEO Kevin Kim:

To address these challenges, we have implemented a supplier classification system with three grades. Grade A comprises authorized agencies in direct relationships with manufacturers, accounting for 90% of our total suppliers, given the paramount importance of credibility. When clients search for products, our priority is to present offerings from Grade A suppliers. The second tier includes stores that source supplies from these authorized agencies. Grade C encompasses general distributors. Recognizing that most clients prefer components from authorized agencies, we utilize our program to match this information and efficiently supply the required components. Additionally, we obtain data on leftover inventories directly from manufacturers, integrating it into our system. This allows us to offer these manufacturer inventories to our clients if they express interest. Our structured approach ensures a balance between credibility, quality, and client preferences.

Established in 2005, CH Global has evolved into a comprehensive electronic components services company through strategic partnerships with prominent domestic and international firms. The company has gained significant expertise and customer trust, particularly in the global automotive sector, where CH Global provides MCU and CPU, along with integrated circuits and passive devices. This strength was acknowledged in 2021 with the receipt of the 10 million USD Export Tower. How do you envision the growth of your company in the upcoming years, especially considering the substantial shift in your business?

CEO Carol Cho:

Being named one of the top distributors in Asia for two consecutive years, a first for Korea, has generated significant positive publicity for us. With the establishment of our U.S. office, notable manufacturers, have shown considerable interest in collaboration. We have been actively processing and updating data on the U.S. platform, attracting American customers.

Venturing into the U.S. market is a significant leap for us, and starting from next year, we are channeling our efforts into attracting U.S. customers. One of our unique selling points is that we provide cost-effective products with customized service. The product costs from TTI and Digikey are considerably high, and despite their large stock availability, their platform-oriented service lacks personalized quality. Person-to-person communication is almost nonexistent. In contrast, we assign a designated person-in-charge to deal with our customers at all times. If inventory is unavailable, we proactively check for upcoming stock, providing customized and detailed services.

While our office is in Connecticut, we are actively recruiting a remote worker to cover the eastern and western sides of the U.S. Our plan involves having a dedicated person for each client, ensuring that even if we don't have immediate inventory, we can provide a quotation based on delivery date or inform them of when the inventory can be secured. Customer convenience is our top priority, and this approach has earned us the trust of our clients. We believe this strategy will be effective for U.S. customers as well.

Furthermore, in the past, we only purchased from agencies and then exported to the U.S. for our customers. This setup proved inconvenient as customers had to contend with tariffs and taxes. With our U.S. office now in operation, customers in the U.S. face reduced financial implications. This not only facilitates spot transactions but also enables transactions based on future delivery, supported by continuous real-time communication. We are confident that this approach will garner more orders in the future. Simultaneously, we are diversifying our manufacturing clientele, receiving interest from numerous companies. The presence of our American office is proving to be a game-changer in this regard.

You mentioned your interest in entering the aerospace markets. After a slow market development period in 2021-2022, the aerospace sector is regaining momentum, witnessing growth in demand. What is your strategy for accessing the aerospace industry?

CEO Carol Cho:

Indeed, we view the aerospace sector as our future growth engine, and we are currently in the early stages of exploration. To delve deeper, our initial focus will be on distribution, specifically within the maintenance aspect rather than manufacturing. There are two primary reasons for this approach. Firstly, we recognize that many components in the aerospace sector are intricate and challenging, similar to the defense industry. Secondly, having a U.S. office is a substantial advantage for us, considering the U.S.'s leadership in the aerospace market and its vibrant industry. This positioning allows us greater access to components by sourcing them in the U.S. and selling them in the Korean market.

Additionally, our concerted efforts stem from the observation that while there are numerous global distributors, there are relatively few Korea-based distributors in this space. Our mission is to become a global distributor as a Korean company, and we are committed to realizing this goal.

Please envision that we return for another interview with you in five years. What goals, ambitions, or dreams would you like to have achieved?

CEO Carol Cho:

I perceive that we are among the few Korean companies that have established a U.S. office to distribute various components sourced from Korea, marking us as pioneers in this field. If we achieve significant success in the U.S., I aspire to inspire other domestic companies to follow our path. Our aim is to act as a bridge between domestic companies and the overseas market. While this may introduce more competitors, the market is substantial, making the increased competition inconsequential. Our primary objective is to lay the groundwork for others to venture into overseas markets. I hope other companies observe our journey, recognize the potential in international markets, and muster the courage to leap into these markets.

For more details, explore their website at https://chgco.com/