Thank you for joining us for Avnet's 2013 Analyst Day. I know most of you in the room know who I am, but for those joining us from the webcast today, I am Vince Keenan, Vice President and Director of Investor Relations. As Avnet has grown and expanded the percent of revenue from outside the Americas, I know many of you have a keen interest in understanding our international operations and the role they play in Avnet's pursuit of profitable growth. The EMEA region, which represents approximately 30% of Avnet's revenue, is an important part of our growth strategy, as both customers and suppliers value the unique blend of products, solutions, and services that Avnet brings to the technology markets.
In an effort to help you better understand the role Avnet plays in the region, we broke with tradition this year and expanded our Analyst Day format to include our European leaders from EM and TS. I'd like to thank Patrick Zammit, President of Electronics Marketing EMEA, and Graeme Watt, President of Technology Solutions EMEA, for taking time from their busy schedules to join us today. I'd also like to introduce Mary Ann Miller, our Chief Human Resources Officer, who is also here. No. There we go. I've got the right slide. As you can see from the first slide, we have a full, full agenda, starting with a presentation from our CEO, Rick Hamada, followed by a financial update from our CFO, Kevin Moriarty. These presentations will be followed by a Q&A session and then a break at 10 A.M.
In order to accommodate everybody's chance to ask Q&A, we're gonna then break the group into two groups, and I would ask anybody with a blue dot on their name tag to please go to the room next door, Act II, where we will start with a presentation from Harley Feldberg, President of EM, and Patrick Zammit. Concurrently, I would ask that everybody with a red dot return to this room, where we will start with a presentation from Phil Gallagher, President of Technology Solutions, and Graeme Watt from Europe. At 11 A.M., the executives will then switch rooms, and we will repeat the presentation, and at the end, another Q&A. So by using smaller groups, you'll get more time to ask Q&A and hopefully come away with a better understanding of our strategies and especially our European operations.
To those of you joining us via the webcast, you will be able to click on the icon for each session, and all sessions will be available for replay on our website after the Analyst Day. In addition, I'd also ask that you wait for a microphone to be brought to you during the Q&A so that everybody can hear, on the webcast can hear the question. And of course, if you could please limit yourself to one question and a follow-up, that will give everybody a chance to ask their questions. After the group presentations, we will all return to this room for a wrap-up and some closing remarks from Rick, followed by a lunch in the Act Room One, just out the door and to the right. Before we get started.
Before we get started with the presentation from Avnet Management, I will also quickly review our safe harbor statement. This presentation contains certain forward-looking statements, which are statements addressing future financial and operating results of Avnet. Listed on this slide are several factors that could cause actual results to differ materially from those described in the forward-looking statements. More detailed information about these and other factors is set forth in Avnet's filings with the SEC. With that, let me introduce Mr. Rick Hamada.
Thank you, Vince. Good morning, everybody. Good to see you. Appreciate your time and your interest in Avnet. I'll get things kicked off for the team today, but I want to start, perhaps from the same place I will end, with the very clear theme for the entire presentation today, that we're about value creation for the long run. One of the big themes that I've been using with our team internally as well, for now coming up on my second year in the CEO role, is that a lot of the story you will see from Avnet here, those who have been following us for a while, you'll see a lot of continuity, a lot of familiarity of some of the foundational strategies and objectives, but it's certainly not business as usual, particularly as we deal with today's environment.
So I'm gonna start with value creation for the long run. If I drill down just a little bit more as to our purpose and vision, what I would share is that we really believe our role in the world, the reason we exist, is to help technology make the world a better place. And we do that by balancing our pursuit of profitable growth and the long-term creation of shareholder value, by balancing the multiple constituencies of customers, suppliers, employees, and shareholders. And the real key to making it all happen is finding ways for all those constituencies, what can we do with our total resources, services, and culture to help accelerate their success?
If I try to really simplify at the very highest level, where I try to spend the majority of my time and attention, I would tell you, I, I think of three Gs: profitable growth, globalization, and great people for Avnet. Profitable growth is a matter of leveraging, the indispensable role that we have and the tremendous, scope and scale of our resources for the benefit of those constituencies I mentioned earlier. Value-based management, and we'll talk more about this today throughout the presentation. Our total approach to managing the business defines what is profitable growth for Avnet, and we will, as I said, we'll be very clear to help articulate what we mean by that throughout the day. When we think of globalization, we think of a simple premise of looking to globalize all that we can, but localize what we must.
We remain a market-led organization. The growth strategies come bottoms up. The enterprise strategies, which are very select, will work across the organization. But it's folly for us to think that we're going to sit there in Phoenix and call out to our regional leaders, like Patrick and Graeme, their counterparts in Asia, and dream up and come up with the ways we're going to win in those marketplaces. That really comes from the teams that are out in the field, dealing with the customers, suppliers, competitors, and conditions every day in those markets to help figure out the ways we're going to win. What we try to do is hold them all accountable for a consistent set of performance metrics and returns that make the whole Avnet story work together.
And the great people, it's a, as a services business, you cannot possibly achieve your goals or wildest dreams without a great team of people overall. And that necessitates investments not only in the people themselves, but in the tools and resources they have to do their jobs, the development they need for their futures, and staying very close to their overall engagement, what's important to them, what's working, what's not, and integrating the voice of the employee, just as we integrate the voice of the customer into our strategic planning, management, and review processes. Quick snapshot of our overall leadership team today. Those that are long-term Avnet watchers may know, notice a few new faces on the group, not to mention at the CEO level. But, quite a talented team and a mix of backgrounds and skills.
Kevin Moriarty, who will be up next, new CFO, just joined us on January 1st. I'm sure you're looking forward to hearing more from Kevin. If you take a look at Gerry Fay and Steve Phillips, these are two executives who actually joined us via one of our acquisitions in 2005, a company called Memec. Erin Lewin, General Counsel, Mary Ann Miller, Chief HR Officer, who's with us today, celebrating their sixth and seventh anniversaries with Avnet, respectively. And then, still got a dose of the 30-year-plus veterans. I won't go into all the details, but four names up there, including myself with Phil Gallagher, Harley Feldberg, and Ray Sadowski.
So I think it's an excellent blend of long-term, experienced, industry executives with, a good complement of, fresh ideas, new energy, and new ways of looking at business from outside Avnet's four walls, being integrated into the most senior-level decision-making of the company. I'll now turn our attention a little bit to, to share what we're seeing in the marketplace. And by the way, really sharing. We're not forecasters. We're sharing what the forecasters we respect are seeing and, and looking at right now, and it does have an influence on our planning process and the types of assumptions we build into some of our longer-term plans. Last time we were here, which was December of 2011, this was the outlook and the forecast. That's why 11 and 12 are still shown as estimated here.
And that particular time, looked like the global outlook for GDP was drifting maybe between that 4%-5%. We had just come off the Great Recession, and those that remember our years of fiscal 2010 and 2011, a couple of very exciting V-shaped recovery years. Now, I'll keep the old chart up there in the yellow dotted lines, and then looking at what's happening today, certainly different, little bit of a different picture overall. There's been a step down on the overall expectation for global GDP. For 2012, which was estimated at the time with 4% growth, came in at about 3.2%.
As I said, we're not forecasters per se, but as far as a planning assumption to where things are going forward and what to expect, it's very clear that in general, there are slower expectations or a slower recovery impacting overall technology spending. If we take a look at GDP in a little different cut, by the way, all of these numbers and data are sourced from the IMF. We now work with their definition of taking a look at the differential in GDP growth opportunities between advanced economies and emerging economies. Again, their definition overall, both in terms of absolute size and GDP in the U.S. dollar trillions, scoped against also the GDP and year-to-year growth rates overall.
If you take a look from 12 to 17 now in a five-year CAGR, the total GDP expectation for the quote, unquote, "advanced economies" is projected at a five-year CAGR of 2.3% and emerging at 5.8%. So in addition to having an overall slower global GDP growth as part of our assumptions, there's also, if you just one click down and take a look and cut the world into two pieces here, you can obviously see that there's a two-speed GDP expectation going forward. Of course, this same trend, which is not completely unfamiliar, as we've been working in or, you know, into our first decade and past for the 2000s, it's not a surprise that the emerging markets are offering a little bit higher growth.
But obviously, this has been a strategic influencer on the nature of some of our M&A, which has been a high contribution of geographic expansion over those last 10-15 years as well. Drilling down now from just strictly at high-level GDP, we'll take one snapshot here at what's going on with semiconductors. This once again, I hope you can see there, the yellow may be tough to read here in the audience on this particular chart, but worldwide total semiconductor revenue with five-year CAGRs, and we take a look again at what we expected last time we were here. We thought that 2012 was gonna be a growth year. The projection at that time was for a positive 4.2%.
Actual 2012, as you see noted by the red bar, came in at -2.7% overall. Just another example of how some of those, you know, expectations can change along the way, and of course, we've got to learn to adapt and expand with it. Even if we just take a look at today's projections going forward, however, if you look at it in terms of absolute dollars of growth opportunity, there is, in excess of $100 billion of growth forecasted for the semi industry in the aggregate 2013-2017 timeframe. The other important world for Avnet, of course, is what's going on with IT spending. Same type of look here, broken out by the commodities of hardware, software, and services. Worldwide IT spend five-year CAGR.
We expected 6.5% in 2012, came in at just over 5%, 5.1%. The overall five-year CAGR rate, you can see, is a little less volatile, a little less up and down, and then the semiconductor rates. So generally speaking, IT spending trends are generally less volatile than the semiconductor world. And if you take a look at the absolute dollars of growth opportunity, 2013 to 2017, it's in excess of $500 billion in revenues. You add all that up, and we, we do take a look at trying to quantify what we consider to be our served available market. The two stacks on the bar chart here, the bottom representing the roughly $300 billion of served market for our components business.
On top of that, roughly $1.1 trillion in addressable served market for our IT business. There you see the totals accordingly. Then going forward, this roughly 5% CAGR for at least the next three years. Once again, this is. We're reporting what the professional forecasters are currently thinking at this particular time. The takeaway we have from all of this is that certainly playing in a very large sandbox, very large served market opportunity, and it is forecasted to be growing better than global GDP for at least the next three years. In addition to the high-level details and some of the raw numbers and the hundreds of billions of dollars of growth that are coming, we think about technology in different ways as well and how it plays in for Avnet.
First is the ongoing conversation regarding the Internet of Things, and I think many of you are familiar, many of our suppliers talk about these particular trends and statistics. Some put it in terms of dollars, some put it in terms of units, et cetera. I know there are some forecasters talking about from today's 10 billion devices on the internet to 50 billion devices by 2020, the impacts of not only machine to machine, but machine to person and vice versa, technology continuing to be woven into the absolute fabric of our lives overall. It is amazing to me, just as a citizen of the world, that there are more internet connections today than there are people, and the projection for that continues to go up as well.
So you think about all the devices we touch and all the controls that we have in our homes and workplaces, and whether it's security, whether it's gaming, whether it's consumer goods, whether it's our cars, transportation, it's just the permeation is really all around us at this particular point, and do not see any way that that trend is slowing down as we go forward. In addition, what's going on with smarter grids, new alternatives in energy, developments in healthcare. Constant connectivity, mobility, creating huge new demands for not only content, but also security and a key demand driver for continued storage. Adaptive and predictive systems, big data, another big hot topic in the IT world today, certainly driving more investment in systems, more storage in particular.
Think about the combination, and we'll hear more from Phil later about what's going on in the cloud services area, the combination of physical and virtual assets and resources in the data centers of the future. And all of this is just a short list of what we can think of. There's also that great wild card out there of devices we don't even know we need yet. And again, I think we see examples of that every year in our lives and workplaces. So take that environment, take the team, take that purpose and vision, take that environment, and how does it look from an overall scorecard and results point of view? We talked about, and we'll continue to talk about, our Value-Based Management journey.
This really describes the commitments we made to focus on return on capital and economic profit dollar growth as our fundamental financial metrics, particularly as we came out of the really tough times in technology in the 2001, 2002 timeframe. This chart starts, I believe, from our fiscal 2004, and as we adopted this philosophy of focus on return on capital, we were able to string together a successive number of years here, where we were both driving increased returns while continuing to pursue profitable growth. See the track record from FY 2004 to FY 2007. At the time, we had set our original goals to be able to sustain investments at a 12.5% return on total capital through cycles.
Our philosophy here was that we were looking to maintain a 250-300 basis point gap over our cost of capital, noted there by the 10% WACC line, through cycles as the sustained commitment to the creation of shareholder value. We then hit the recession, years of 2008, 2009. There was as we caught up on our fiscal calendars overall, initially in 2008, there was a jump forward on revenues, but in 2009, we took a step down both in revenues and returns. And I'll tell you, thinking back to that particular time, I believe our expectations for what came ahead in 2010 and 2011 was gonna be very much like what we're seeing today.
We really thought it was gonna be more of a slower, steady, you know, work our way out of this recovery as we came out of this particular perturbation in our results. Which, oh, by the way, was much more, macro environment and financial markets driven, as opposed to what had happened in 2001 and 2002, which was much more a tech market-specific implosion due to the converging factors of post-Y2K, post-telecom deregulation, post-dot-com bubble, etc . So we were expecting to be slow and steady, but lo and behold, here came 2010 and 2011 with a very strong V-shaped recovery. We also moved our target goal range on return on capital employed at that time to 14%-16% because during the recession as well, we did take a significant impairment charge, which did alter the amount of goodwill on the balance sheet going forward.
We decided we wanted to hold steady to that original 12.5% return, and therefore, we handicapped our new target range on return on capital up to 14%-16%, to not give ourselves the benefit of that impairment charge as part of the equation. But now it creates an interesting management challenge because you can calculate what return on capital you need at any point in time, but as we make incremental investments, the 12.5% hurdle still remains the primary or minimum goal for incremental investments. The higher level, say, 15%-16% range, is what the calculated return is necessary to maintain that original commitment to 12.5%. So I hope you followed me there, and any questions you have afterwards, I'd be happy to clarify.
But it was noted on the chart here that we did move to that 14%-16% range. 2012 and 2013, we've actually had a tougher time recovering from the post-V-shaped recovery, and we'll drill down a little bit more on these particular details, but many of you have followed us for the last couple of years, heavily influenced by the geographic mix shift, particularly two years of negative growth in the West, as on both sides of our business, both components and computers, we have experienced negative year-on-year organic growth rates now for at least the last five quarters in a row. However, going forward, our mission remains clear, which is going back to driving and working on both returns and growth under the definition of profitable growth.
I'll even get more specific about some ideas we have for improving our foundational commitment to the VBM journey, as you see here, with some new ideas, and again, not business as usual attitude going forward. If we spend more time just taking a little bit of a look at what Avnet has experienced for these past two years, so many of those charts are on a multi-year basis. This particular representation now runs from our Q1 of fiscal 2012 through the most recent quarter that we reported out for you last week. Here at the Avnet Inc. level is what's been happening on year-over-year reported revenue growth. So this is not pro forma. This is just pure reported revenue growth. Very, very flattish year-on-year for the last two quarters.
If you take a look at EMEA, this is the combination now of both our businesses, just looking at EMEA as a region. If you look at components and computers together, you can see that the dip in year-on-year growth rate there, just starting to get back and crossing over into year-on-year growth. If you take a look at the Americas, they were holding in a little better than EMEA, but most recently now have crossed to be under the year-on-year growth rates. Both regions, though, very, very important to us, not only from a revenues, but also from a operating profit point of view. Meanwhile, Asia certainly had its own response to the V-shaped recovery, and there was a little bit of a giveback there, particularly in that Q3 and Q4 time frame.
But they've been steady year-on-year growth achievers since the beginning of our fiscal 2013. And the resulting mix here looks like Avnet revenues are flat, but that geographic mix shift has certainly had an impact on some of our other key metrics, and I know Kevin later this morning will dive into a few of those specifically. Also, look at our more recent history, what's going on with acquisition trends.
There's a lot of statistics on this particular slide, but the real takeaways and the points I think we're trying to make is that, and over the long run, one of the key drivers or two of the key drivers for our M&A strategy has been consolidation, particularly in the Western or mature markets, and expanding our geographic footprint as part of our overall strategy of being, being in the right place at the right time with those faster growth rates. That has played out to a certain extent, and we show some statistics from the 2009 - 2011 time frame. And when you look at 2012 and 2013, there's still been an active number of transactions, but overall, less top-line impact and a little more focus on expanding our served markets, particularly in the more mature markets, with a focus on value-added products and new services.
So, we're not doing student body right, student body left here, but you can see a little bit of the flavor of where we're trying to direct some of our capital allocation in the pursuit of profitable growth going forward, as some of the plays of consolidating and building out that geographic footprint now have just less opportunities in the total pipeline. Coupled with that, now, here's where we're talking about not exactly business as usual. So for our, for our VBM approach, we've got ROCE and EP dollar growth as our—still foundational as our key metrics. They have been our North Star for over 10 years, and now what we're looking to do is say: How can we raise the bar on this a little bit?
If you look at our key priority and consistent priorities for capital allocation, starting with organic growth, is there ways for us to incorporate increased sensitivity for margin expansion? Taking a look at opportunities to drive and specifically account for, manage, and reward, perhaps even with executive compensation programs, a little more sensitivity on a regional basis to what's happening in the operating margin area. For mergers and acquisitions, we still have a very tried and true and very robust process that always takes a look at all three dimensions of culture, strategy, and economics. But now we're thinking about bringing more sensitivity into taking a look and maybe being more discriminating on the return rates in M&A, based on the margin profile of the business overall. Keep in mind that our ultimate goal remains the same.
Anytime we see an opportunity to deploy capital and earn, through cycles, the sustained return that we believe leads to the creation of shareholder value, that gap of the return over the WACC, we're going to be interested in deploying the capital to do so. However, what we're trying to say here is that not all M- all M&A is created equal. Perhaps those, opportunities with a lower margin profile deserve or need to be held accountable to a little higher return rate, and those with, more attractive margins, perhaps more towards, looking to, you know, cover the gap more in the 12.5%-13% range.
So don't wanna get too specific about tying things down, and I certainly do not wanna get out the message that we're out of anything that would dilute our margins because it's just not gonna work on a return basis. Returns still make a difference. But if we're holding lower margin profiles to higher returns and higher margin profiles, perhaps to more moderate returns, that probably has an impact going forward on where some of that allocation goes to. So think of it as building on our solid VBM foundation in place today, and no decommitment to the fundamental premises of return on capital employed and economic profit dollar growth. So if I summarize for this particular section, and I'll turn it over to Kevin to continue to drill down.
And by the way, from a format point of view, I'd like to turn it right over to Kevin, and at the end of his comments, he and I will be up here together for Q&A. So we decided not to disrupt the flow, if that's okay. As I turn it over to Kevin, if I wrap up on this section, right now, number one, talked about the macro environment. Everybody's got a comment or some illustrations to show how one's is. I wanna make sure everybody understands we're, we're not trying to, we're not trying to make any excuses for the environment overall. We're taking the position, this is pretty much the new norm for now, and we've gotta deal with it. So hopefully, you won't hear us whine about the environment or, or, or spend too much time debating or worrying about it.
The facts are, it is what it is, and whatever the market's got to throw at us, we've gotta find a way to respond and deal with, and that's the approach that we're taking. Negative growth in geo mix both have been impacting our margins and returns, as you saw in our VBM journey. We've got some gaps to fill, and we're in the current—even in the current environment, we're very focused on cranking out sequential, incremental, performances, while we're also working hard to make sure we can maintain the service levels we have with our customers and making sure we're prepared for the eventual return to more robust growth. We will continue to invest with discipline.
We'll continue to keep our priorities of organic growth M&A, and we will continue to consider and debate options for returning capital to shareholders when we find ourselves in the position of excess liquidity. As you know, and as Kevin will reinforce, we have no need to hoard cash for a rainy day, given the countercyclical nature of our balance sheet. As far as our positioning for future growth, we're actually gonna hear much more detail about that later today in the operating group presentations from both Harley, Patrick for components, Phil and Graeme on computers. As I said, we remain a market-led organization when it comes to deriving our strategies for growth.
We believe we have a very strong competitive position in some very exciting key market segments, both from a geographic as well as a technology and commodity segment point of view. We're looking to leverage that global scale and scope that we've built out with our solutions expertise to leverage not only for the benefit of the customers, but also for our supplier partners. The footprint that we have built out offers opportunities and advantages to both constituencies. Finally, think about VBM to the next level. We are going to enhance the way we do manage, measure, and make plans for the future of our business.
We're looking to just tweak the dial a little bit to incorporate a little more margin sensitivity, specifically as part of the overall value creation story, and no decommitment, no wobbling, no major shift in emphasis when it comes to the long-term commitment of shareholder value creation. All right? So that's really a setup, I think, for a lot of what you're gonna hear next. I'd like to ask our new CFO, Kevin Moriarty, to come up, and then again, once again, at the end of his comments, we will. because that's my wrap-up at the very end. Hang on. At the end of his comments, we'll both come up here to take some Q&A. Okay? Thank you. Kevin?
Thank you, Rick. Good morning, everybody.
So as Rick mentioned, been with Avnet since the beginning of January. If you think about the last 100 days, I've had a tremendous opportunity to visit our sites around the globe, meet with employees, customers, and suppliers. But imagine to my joy, when Rick told me when I first started, "Kevin, think about six days after the Q3 earnings announcement, we're gonna hold our annual Analyst Day." So obviously, been a tad busy, but enjoying the ride. What I'd like to do is kind of cover some of my early impressions, the historical results, how we're looking at the path forward, and then kind of talk through capital allocation.
So from my early impressions, obviously, I did my own due diligence before joining the company, but when I look back and I think about what I really have come to learn is how deep and extensive Avnet plays in terms of the IT ecosystem, extremely broad and deep. When we look at the engineering design capabilities, this is something that really was a key learning for me, in terms of what we do in components, as well as things we do on the solution side with our suppliers and customers. So both businesses really play a critical role linking suppliers with customers, and the design capabilities we have, the creative nature of our employees, really brings a differentiated value for our customers. When I look at the automation of our logistics and distribution capabilities, investment has gone in. It's really world-class.
The other thing I really have come to learn is the operating leverage in the model, and as I take you through it, what I've come to learn is that leverage works both ways. Now, in terms of areas for opportunities, things that, you know, Rick highlighted, the margin, margin sensitivity, how we think about things on the VBM journey. In addition, from my perspective, when we look at the cost structure, process inefficiencies, process design, we've done a lot of M&A, 29 companies in the last two to three years. So continuing to think about that ongoing evolution of integration, back office activity. In addition, if you look at how Avnet has grown, we are now a $25 billion company, so also thinking through how can we leverage more the Avnet Inc. buy in the, in the external world. Turning to guidance.
One week after our call, not a surprise, I'm reconfirming the guidance for the quarter. But clearly, there's two other things I just would like to highlight. The chart really serves as a foundation when you look at the fiscal 2013 estimates for a lot of the charts that I'm gonna be sharing with you today. But the other key thing I'd like to highlight or point out is that, to Rick's earlier point, after a couple of years of negative organic growth, we are actually getting very close to parity, organic pro forma, in Q4 of this year. I'm now gonna turn to the historical view. As Rick highlighted, recent challenges in the macro environment have really been an impact on the business.
The team has been extremely proactive in adjusting at the expense rates, but the one thing I really have learned is that when the Western economies are in a negative growth, the point about leverage working both ways, it really has been a headwind over and above the expense actions taken. But the lower right part of the chart as well, is just highlighting the strength of the cash flow from operations. Another thing I'd like to highlight is again, on the recent revenue trends, is tied to building off my earlier point, to amplify the recent impact on the Western economies declining, and then the geo-mix headwind that we've been experiencing with the growth in Asia, has really put pressure on the metrics. The team did not sit idle. Since 2011, we've acquired 29 companies, as highlighted earlier in Rick's charts.
The scale, the consolidation, geo expansion, and then obviously, what I would call adjacencies in terms of new products and services, really positioning us to take advantage of when the end markets recover. In addition, have spent approximately $525 million buying back 12% of our shares. Very proactive job on portfolio management as well. So when you look at these actions that have been taken, and you think of when the end markets recover, the operating leverage that will be showing up in our results. But again, a lot of proactive actions have been taken, to kind of position us for the long term.
The next section I call the path forward, and what I'd like to spend time on is taking you through our long-term business model, kind of the operating income landscape, but then thinking about how elements within our end markets could impact what we're experiencing today and what's the possibility. So here's our long-term business model. I'm affirming the Op income margin targets. Obviously, when you look at this chart, this chart is really based on current kind of geo mix and enterprise mix. So that's a key kind of thought looking at the chart. Obviously, things will move, if that mix changes. We are making a slight tweak to the ROWC, given the geo mix from the previously 30% down to 28%.
But as Rick highlighted earlier, ROCE is a key focus for us, and that's the key thing we're gonna be highlighting on to attain is the 14%-16% on ROCE. Now some background in terms of the operating income and percentages. There's some more history here on the operating income numbers. If you can look back to fiscal 2011 to fiscal 2012, we were very close on the income goals when the West recovered and strong growth. But I think when you look at the most recent time, based on, as everybody knows, I'm the newbie around here, but I've spent a lot of time talking to folks that have been around for quite a while.
It's many, many folks have indicated this is the first time in Avnet's very recent history, say the last 10-15 years, where we've experienced negative organic growth for the last couple of years. So obviously, a challenging global economic environment has really affected the last most recent fiscal year. Now, the path to the, to the targets. So as I've started to study the company and really look at things, I, I wanna highlight for everybody how I've been thinking about it. So the current, on the left-hand side of the chart is our recent-most recent history, but then obviously highlighting the target goals that we have for each of the respective businesses.
I would say the top four of the bullets are really key to our ability, but probably the first one, in terms of the operating leverage, is the growth in the West, as well as economic recovery in the western regions, really will drive the operating leverage in our model, and I'll show you that in a subsequent chart. Continuing to work on things that we have been working on, the portfolio management, the SG&A, and Rick highlighted earlier, the key focus in terms of M&A, and now thinking about higher margin opportunities and different hurdle rates depending on what margin opportunities we are looking at. But again, these would be the key factors here on the right-hand side that would be the bridge from where we are today to where we're going to be able to get back to the targets.
What I've now done on this chart, in the chart, is the theoretical approach. So what I'd like you to think about is a what if. It's illustrative to kind of highlight, looking at the bottom of the chart, where the businesses are today, but think about modest revenue growth in the units that have historically performed well. And when I say modest growth, that would be the developed markets around 3%, Asia, 6%, and that would yield the results there in the middle, and that really clearly highlights the operating leverage in the model. In a term I've come to learn, drop-through. It's illustrative, and then on the third column, we'd be taking the underperforming units, those at the lower base of the chart, and they would be able to then hit their targets, and we're committed to them hitting their targets.
So theoretically, this would then show everybody coming up to the targets and then the what if and our ability to get back to the operating margin targets. So it's illustrative. Recent history would suggest when operating leverage kicks in, it's possible. I'm now gonna segue into our capital allocation. No significant change here. We need to have the need to grow our business. We wanna maintain our investment grade statistics. That's key. And one of the things I am learning in meeting with our customers and suppliers is the third bullet, trading partner relationships, and how important that is that we sustain the credit statistics to our customers and suppliers. So again, no change in terms of prior charts that we've shared with you on our capital structure.
Now, here's a chart put together for as I was coming in and really trying to learn, the countercyclical nature of our balance sheet. And really, what I'm depicting here is when you look at the recession period, is we obviously were not making a lot of leverage. We have the profits from the business, not a working capital needs, and thus generating a significant amount of cash. When you look at the V-shaped recovery, generating profits, but obviously, the working capital needs are extremely high in a high-growth market. Now, in the moderating growth market, we are not only experiencing the profits, but the working capital needs are less. But in addition, the team has really been doing a very effective job on working capital velocity.
A lot of effort's been done to ensure that that becomes part of our core DNA in focusing on working capital and the dimensions of working capital. So this is a chart kind of depicting, as I mentioned earlier, just the counter-cyclical nature, but if you look at the recent past, strong cash flow and approximately $700 million for the trailing 12 months.
Highlighting this even further, from my own learning coming in and working with Vince and the team, we created a chart to kind of talk about how I look at Avnet and thinking about the scenarios, and really kind of sharing with you, if you were to look at dealing at the top part of the chart in terms of the macroeconomic climate and the pressure that then puts on from a margin standpoint, and the team's proactive approach on expense management on the left-hand side, has been something you have seen. Clearly, in a high growth environment, that's really where the operating leverage, the drop-through, will come in. You see the impact in terms of working capital management. In a low growth environment, we're decreasing our investments, and in a high growth, we're increasing the investments.
And then the countercyclical nature of the balance sheet in terms of strong cash generation and cash usage, I will be covering shortly, building off Rick's points earlier on how we allocate the capital. But clearly, we would, in the environment we've been in, share buyback is critical, and then when we look in a high growth market, investing to continue the M&A, but more importantly, investing in the organic growth and being opportunistic and disciplined on a share buyback. So this is my way of looking at in terms of a, through the cycle, a playbook of how to look at Avnet. Now, taking that and looking at how we've been performing on recent capital allocation. On the left-hand side is kind of our usage since 2011, including 2011 into today. We've bought roughly 29 companies. We initiated a share buyback.
The initial part of the buyback was $500 million. That was then subsequently increased by $250 million. We reduced our share count by 12% and roughly have invested $525 million in shares. So looking at the middle part of the chart, taking in terms of the chart I had previously shared, we've allocated 58% to value-creating M&A. We've bought back 25% of our stock and 17% in CapEx. Oh, sorry, our outstanding shares, sorry. Bought outstanding shares. So in terms of our priorities, as Rick highlighted earlier, clearly investing in organic growth, investing in value-creating M&A, and returning excess cash, cash to shareholders when appropriate. Two topics I want to cover quickly relating to fiscal 2014 and modeling changes for the teams to be thinking about, and we'll work with you after the meeting.
Today, we announced the change on the, Avnet Integrated is moving from our EM business to Technology Solutions. Phil will be covering that a little bit more later on. It's approximately $200 million in revenue. And then on pro forma changes, we're gonna be making an adjustment to include, the amortization of intangibles will be excluded from our pro forma results, and this is, to be consistent with the technology industry practice. So we'll be making that change. In terms of the targets I highlighted earlier, both of these are really insignificant to the long-range targets, but obviously, given the modeling impact, we wanted to highlight that today, that these are two decisions that we've made, to make changes to how we report. So in summary, clearly, as Rick highlighted, we are committed to the value creation for the long term.
I have really come to appreciate and learn how VBM is so core to the organization's DNA, the ROCE and economic profit. Tweaking a little bit further, this focus on margins. On capital allocation and liquidity, we will continue to follow the consistent practice of organic growth, strategic value-creating and disciplined M&A, maintaining our investment-grade statistics, but building on the legacy of the last decade to really build out on VBM and to kind of continue the proactive portfolio management, focus on ROCE, and looking to enhance margin sensitivity through return modeling in our M&A. With that, I'd like to ask Rick to come back up for Q&A. Nice job.
...Over here.
Hey, guys.
Hi, Brian.
So just, just on the ROCE, you, you've achieved your target of 14%-16%, I think, twice in the last nine or 10 years. That was really during a V-shaped recovery. So, how soon do you think you can return to that range and sustain it over a cycle, as opposed to just getting there during a strong period of economic growth? And what specifically needs to happen in terms of end market growth and mix to kind of keep you within that range?
Right.
It seems like based on your slide, almost half of that comes from fixing underperforming businesses. So how long does that take, and what's your confidence that could all occur?
Yeah. So Brian, I think your assumption is fundamentally correct. You're right. About half of it comes from getting the underperforming into their target ranges. Because we have, not only for the bubbles you saw on the chart, but you can imagine in our portfolio management, we have broken down even below those bubbles, certain earns and returns expectations on an even higher resolution basis throughout the business. So those goals were thrown up still in the spirit of being three-year goals. So at the longest, at the outer limit, I would say it's three years. But now, between here and there, there's levers that we will continue to manage and control.
For example, more on the margin focus, the cost levers, etc , things that we can do on productivity and efficiency with our own business in a slower low-growth environment. Then the assumption of when, when we get, a little bit of an uptick in the market, we're not making that call right now when that would happen. But obviously, we get there sooner rather than later with any help from the market.
Rick, just looking back at some of the acquisitions you've done over the last few years, you've highlighted $2 billion worth of business. It seems like on an average size per business, it's a lot smaller than the prior years. Can you sort of talk about where you've had successes versus maybe some businesses that have underperformed, how your acquisition process has worked out versus the business you acquired? And then secondly, just, the comment regarding how you're gonna look at acquisitions going forward. On the higher margin businesses, accepting sort of a lower return on investment sounds like admission that the market is becoming more competitive for these businesses. Is that true? What else went into that thinking, that would be helpful? Thanks.
Yeah, Steve. So good set of questions. I'll make sure I cover all the bases when the answer here. On the competitiveness, I would not tell you that there's been any major change in the market dynamics along the way there. My comment about the discrimination with, with the hurdle rates, as opposed to, if we said 12.5% is our minimum return rate, right? That's the 12.5% ROCE. Should we apply that monolithically to all M&A, whether it's low margin or high margin, or whether it's near the core or an extended adjacency? We're trying to bring some more discrimination to hurdle rates to, to adjust for some of those.
And by the way, back to the early part of your question, we have taken a look at those 22, 29 most recent acquisitions, and by the way, even gone back further in history. And we've put them on a, on a 2x2 matrix that takes a look at our assessment of how near they were to the core, whether it was geo expansion, whether it was consolidation, or whether it was new markets, new products, new customers, new services. And we've scored ourselves red, yellow, green on all of those. And I will humbly assert that in aggregate, we're not happy with the total look at that scorecard.
So we're taking a look at the lessons and saying, "Hmm, if we're more successful closer to the core and extending off of that, okay, but what can we learn about the challenges or the, the, the unknowns that came into play with some of these new adjacencies, and how do we use that knowledge to be smarter and more disciplined in the next opportunity that's of that character or of that profile?" Okay? So for, for our entire journey of acquisitions, every acquisition has taught us something that we carry forward. As we've attended to extend a little bit outside of the absolute core and look at some of these new served market opportunities, we have learned a few things that we didn't quite bake into the original calculations, the original diligence.
We've now a little bit smarter, a little bit wiser, and we apply all of that knowledge now and expertise to the estimations and the valuations going forward as we continue to pursue the expansion of served markets. That's still a solid strategic objective for our more mature, consolidated markets, where we're a bigger fish in a smaller pond. Make sense? Yeah.
Yes, sir. Mm-hmm.
The world economy in 2012 slowed, but it still grew.
That's right.
What, in your opinion, caused the semiconductor industry actually to decline, but at 2.7%? Something else must have been going on. And then, what, in your opinion, is gonna cause it to rebound, and what do you think the likely timing is?
Great question. In fact, if maybe, if you don't mind, Harley, you wanna take a shot at that one, specifically on semiconductors? I mean, I know you've, you've talked during the year about the impact of what was going on with smartphone and tablets, vis-a-vis the total semi market. Anything else you wanna add there? Harley is global leader for our components business.
Sure. Thank you, Rick.
Yeah.
You know, I was reflecting, actually, to one of you out in the hallway before we started, that I recall it was now, probably five years ago, standing up here at this same event, and it was Mr. Vallee rather than Mr. Hamada. And we suggested to the audience, based on our view of the market that was coming, that the industry had matured to a degree and supply chains had matured to a degree, that the violent cyclicality and swings in our industry were likely a thing of the past. I do wish we wouldn't have said that. Okay, so it's unfortunate you have to learn all these lessons via hindsight.
But I think a simplistic answer to your question is, we are still cyclical, and we are still driven by, overall inventory availability, i.e., lead times in the aggregate supply chain. So lead times, if you'll notice, tend to be the trailing indicator of inventory and excess inventory, specifically in the overall supply chain. So to answer your question, my opinion is that inventory, again, got ahead, especially at our supplier base. That's where the bulk of it built up, result being very short lead times, result of that being customer behavior, buying very hand-to-mouth. We saw, you know, Patrick and I saw in our, in our daily business, a real shrinkage in the, amount of weeks of inventory that our customers kept on the books. So that'll probably be my simple answer.
What about the current inventory now, compared to the next couple of quarters?
I'm not doing my presentation now. You're gonna have to wait. We are gonna address that, though, if you don't mind. Okay?
Yes, sir.
Hi. So just, putting together a couple of the different data points that you were talking about- ... in your initial presentation. If you look on, you know, the red and then the blue chart, it seems like basically, we were thinking revenues were gonna be a little bit over four—revenue growth was gonna be a little bit over four, and real GDP growth was gonna be a little bit over four, turned out to be a little bit over three. I'm not sure exactly what the previous year projection was for your served available market growth, but I would guess it would also be off, you know- ... maybe sort of a point or two. Then just the third data point that I would put together is, you actually saw negative organic growth-
Right
Sort of for the first time. So just putting together those things, the order of magnitude of, yeah, the market's weak, the weakness here seems to be worse than what the, the market was weak, just from a GDP perspective. So I'm curious what steps you've taken to evaluate, is there something more serious wrong, you know, something that's gonna more negatively impact the business for the next couple of years or, you know, or maybe longer, rather than just saying, you know, the, the markets are weak and, you know, 100 basis points there, 100 basis points here of growth not a huge deal.
No, no, it's a great set of questions. And I think many of the questions we get over the quarters and the years are constantly trying to evaluate which is cyclical, how much is structural, and then, by the way, how much is execution? How much is an internal, not just external, factors overall? One of the one of the unhighlighted areas of our recent track record in our own reported organic growth rate has been that part of our portfolio management has included the conscious deselection of product revenue streams that we do not see a clear path to sustaining the appropriate returns through cycles.
So in addition to dealing with the external factors of both the cyclical and the secular issues and the macroeconomic issues, there's been some conscious revenue deselection that has also been part of that equation, with the expectation, of course, that as we do that, we should continue to see progress on the bottom line, differentiated from what's happening on the top line, right? So that's part of—that's one of the untold stories. I don't think we quantified specifically in the data there. But as you look at our data, that's part of the equation. So now I can't, off the top of my head, try to quantify for you whether it's a third, 50/50, 60/40, along the ways. But, we can take—we can actually take a note to try to be more specific.
Kevin was very specific that we-- that revenue deselection and some of the portfolio management was, had an impact of $1 billion-
Yeah
Over that two-year period. So yep. Yeah, Shawn.
Sorry to take, I guess, a glass half empty view, but if I go back to that theoretical portfolio, you know, half of it is, you know, revenue expansion. So let's take the view that you don't get the revenue expansion. I mean, what are the levers that you would look at? Is it incremental cost cutting? Is it further deselection of business? And then within the historical underperforming, is that all internal actions that you can take to get to that $100 million of upside to EBITDA, or, you know, do you need revenue contribution there as well?
So, I would refer you back to Kevin's earlier chart, Shawn, that started with a macroeconomic recovery, particularly in the West, and everything else on that chart are the key levers that we would be using if that doesn't occur. And by the way, as I said, we're not calling it, we're not baking it into the current expectations. So therefore, our game plan is to crank out sequential improvements on a path towards those long-term goals, irrespective of what the macro has to offer. But we also want to be positioned as it comes in and not decimate our resources to the point where we're not only not ready for an upturn, but that we would actually impact current service levels and cause a spiral that would be negative overall.
So all the things you mentioned: working on gross margin expansion strategies, working with our suppliers, working on product mixes for more design -led EM, higher margin services at TS, working on the expense and the structural model, making sure we've got the right platforms in place, driving more centralization and standardization among those platforms. Many of these are in process, by the way, and we maintain these through cycles. So think about that list that Kevin had up there, and if the top part doesn't come in, we've got to rely on those other levers to make that incremental progress.
With the increased emphasis on margins within the VBM framework, is that because where you haven't hit the targets in the past and you've done that analysis, it's been more on the profitability side versus the capital usage side? Is that what's leading that change?
Yeah, that's a good question there. I'm not sure that we're making a qualitative call on the relative importance of each lever to get to, because again, at the end of the day, returns and economic profit growth was all- is what it's all about. However, we believe that as opposed to just managing, remember that whole journey, it shows you from FY 2004 through FY 2013. There's been a general trend and a tendency for up and to the right, which is always good on a chart. We feel that now there's a certain, if you want to think of it as a lull or a pause in the progress, and part of it may be managing to the mean at a higher level.
If the return is all about, you obviously can get there via both velocity or margins, right? So what we're trying to do is not completely change the focus, but bring some more sensitivity, particularly if we're gonna be in a sustained slower growth environment to driving margin expansion as part of the overall goal of driving better returns and better economic profit dollar growth, but not at the exclusion of continuing to work on working capital velocity as well. We're very, very sensitive to not overdoing this and trying to send a message, it's all about margins. That's not the case. It's just on a, once you break down one more level below return on capital, you got earns and turns, and we're just gonna try to turn the dial a little bit.
Instead of 50/50 earns turns, think of it maybe 60/40, two-thirds, one-third, just to try to bring a little, a little extra emphasis on driving margins within a regional basis. And part of this is also due to the fact that this really is an intra-region approach, because in the long run, if we have the secular headwind of having the East or the emerging markets grow faster than the West, we're gonna have- we're gonna face some overall Avnet, global margin headline headwinds. And you know what? We'll, we'll deal with that because we remain agnostic about where the revenue goes globally, because we're gonna get the equal returns all across the globe. We just happen to get it in Asia at lower margins and higher velocity.
So if that, the secular growth rate is gonna be stronger there over the long term, we're gonna face, at the global margin reporting level, a little bit of a headwind as that mix shift continues to go. Kevin showed that particular pie chart. And perhaps some of this increased margin focus, particularly when you think about deploying for new M&A, looking for margin accretive M&A, that could help be a little bit of a counterbalance to that secular trend. Yeah.
Follow-up. In your assumptions, is it that Asia, the Asian market, emerging markets, will always have lower margins than the developed markets, just structurally, just the way those markets operate? Or is there scope over time as those markets mature for them, you know, for margins around the globe to kind of normalize to a central level?
It's really interesting. Between our computers and components business, and I'll actually let Phil and Harley talk about maybe in their breakouts. In the computer business, there's, I think, there's a longer-term expectation for more, if you wanna talk about global margin parity for IT equipment. In the components world, there are some structural differences in Asia. There tend to be lower mix, higher volume type orders as an overall profile because of the wealth and concentration, particularly of manufacturing activity that takes place there. Not to mention, if you look at the semiconductor pie chart versus the way our components business is split out, I think Harley will show later, 60% of the world's semiconductors end up in Asia overall.
So there are some structural differences in that marketplace that I think will keep a differential between Eastern and Western velocities and margins on a longer term basis.
Hi, you've got these two different buckets of acquisitions that you talked about, the more, you know, the more recent block and then the older block. Can you just talk about the returns, you know, relative, between those two different groups in aggregate?
So which page you're on? Make sure I understand the,
Oh, sure. So-
Like 2009 to 2011 versus 2012 and 2013?
Yeah, the $5 billion of revenues that were acquired 2009 - 2011 versus the $2 billion that were acquired in 2012 and 2013.
Yeah, it's really tough to answer that, because first of all, the mix of what's in there and then also the maturity as well. Because very often, our plans involve a certain amount of synergy expectations and integration activity to get done, to be able to get to the returns that we desire. So obviously, if we've had something for three years in the process versus one year in the process, we're always gonna have, I would generally expect a different return profile in comparing those side by side. So, overall, I think my answer would be back to the way I answered Steve's question, we have taken a look.
We generally look on an annualized basis as a starting point, but then track even beyond that, at that total portfolio of M&A activity, categorized by, as I said, our, our estimation of how close it was to the core versus how extended, whether it was more of a consolidating activity, whether it was more of a geo. We actually show the categories down there that we kind of, the qualitative categories we look at as well. In our assessment of the aggregate overall returns and results, there is a, there is a general dissatisfaction with the overall aggregate amount of performance out of those acquisitions. As such, we've made some decisions. We've made some deselection.
We've actually took a charge in the third quarter on a complete exit of a particular business that was known as CenterCell, as an example. So we put these into our portfolio management activities and ultimately work with them. You know, the minute you buy an acquisition on the day one you start open, it's now an organic growth problem. So we work with them as part of our overall portfolio management, and if they're not gonna make the grade longer term, we make tough decisions, and we incorporate the lessons learned into the next set of pipeline activities that come through overall. So it's very, very tough to say that group was doing, you know, 500 basis points better than that group.
It really is mixed within both of those groups, but then you have the time issue, which always is going to have an impact because our, our, investments and returns in the long run generally reflect a post-integration expectation. Okay? It's a good question, though. We do go through that in detail. It's certainly part of our portfolio analysis.
You mentioned earlier about letting the regional heads kind of choose the strategy and then you know, creating the goals to hold them accountable. Could you talk a little more about, you know, what exactly those goals are, and are, are they changing at all in the current slow growth environment?
Yeah. So it generally, you'll be very familiar, it comes down to specific expectations on a return and then break down to earns and velocity basis overall. But where we talk about ROCE on the stage here today, so return on total capital employed, for the majority of the operating businesses, we really use the metric of return on working capital. So they have five key levers that they're constantly working on that. Two on the numerator, you've got gross profit, and you've got your expenses you can work on. And then on the denominator, you of course, you have influence on the amount of receivables, the amount of inventory, and the amount of payables that you can also negotiate from our suppliers as part of our relationship with them.
So, the primary metric for our regional and local business leadership teams comes down to that return on capital, and we do assign and hold accountable our regional leadership teams for both an income statement and a balance sheet associated with that. We just, when you get into trying to assign goodwill, depending on where the impairment charge took it in and took it out and trying to smooth it out and make it lumpy, that's why return on working capital we actually use as a pre-tax metric. However, there is some tax adjustment depending on the local tax rate of the region the leader is in, because they're competing with local competitors that have that same tax rate.
So ROWC is a pre-tax regional metric that is the primary goal, and then everything there has to dovetail and roll up, as Kevin showed you on the chart, to the overall ROCE goal that Avnet at the enterprise needs to achieve. Okay. I think we got probably one more question, Vince, we ran out of time. We, we doing okay? Oh, okay. Yeah, all right.
Can you talk about when you're thinking about your M&A strategy and the increased sensitivity to margins, how willing you are to look at new products and services that you haven't previously been addressing and maybe expanding a little bit from some of your core areas historically?
Well, I would share, there is a trend that it seems the further we get away from our core, the more interesting lessons we learn, right, as part of the equation. So I don't wanna leave the impression we're not interested in anything that's maybe a near adjacency as opposed to strictly core the components for computers today. But we would. Two things that would come into my mind.
Number one, not only would we take a look at the risk and adjust and take a look at the expected returns, but if you do all the demographics on the market and the growth rate and what the opportunities would be, I would also tell you, we may be thinking to approach what kind of critical mass do you need to really make a presence and try to do something new, as opposed to, can we be a consolidator like we've been in our core businesses, versus if we're gonna jump into something new, would it have to be something more meaningful and impactful, or as opposed to, would we go about it by trying to buy a number of small companies as a roll-up strategy overall?
So that's kind of the yin and the yang of what we're thinking about, if you think of things more extended from our core than the type of businesses you see today. We've got a pause for now, so- Vince, please. We'll break a little early, Vince? So, okay. Well, thanks, everybody. We'll take a break for now and set up for the. Vince, do you wanna give everybody the logistics?
Yeah, let me just once again remind everybody, when we come back at 10:15 A.M., those of you with a blue dot on your name tag, please go to the room next door, the Act II, and the red dots will come back to this room. And again, we'll have concurrent operating group presentations with ample time for Q&A. So I appreciate if everybody could please be back promptly at 10:15 A.M. Thank you.
Thanks, everybody.
Good morning, everybody. Thank you for the interest in our company, and thank you for spending some time with us. Let me first introduce my co-presenter, Patrick Zammit. Okay. Patrick is our President of our EMEA operations. I'll let him tell you a little bit about himself. I'll simply suggest that Patrick is a 20-year veteran of Avnet, which by our standards, makes him not quite a rookie, but let's say middle there, running a terrific business, doing a great job for us. So I'll let him tell you a little bit about his background when he gets up. As you can all see, because I see so many familiar faces, we're trying a different format this year with the breakout, two separate rooms, and really a condensed presentation time frame.
I believe the principal goal being to drive more Q&A. So I'm gonna move through my slides relatively quickly. Please jot down anything that I don't cover real clearly, and hopefully, we'll have time for Patrick and I to do some more hands-on Q&A. What I did do, because the format's a little different, is I forced myself to consolidate my own comments in the presentation, really challenged myself. These are the I wrote down four things that I suspect I really should cover. So these are things I'm gonna try and illustrate today. If they don't cover the main topics in your mind, of course, with Q&A, please feel free in bringing them up at that point, okay? And by the way, you'll notice, I just noticed this friend, you're sitting close.
I wrote my notes on the back of my boarding pass. So if this doesn't go well, and I have to leave quickly, I've got everything I need right here, hey, okay? I got my ID and my boarding pass, so you guys don't scare me. So these are four things that I'm gonna try and illustrate today, and hopefully, they are the main things that are on your mind. I've developed a theory that I talked a little bit about on last week's earnings call, any of you who joined us last week, that in hindsight, as we've digested the 2012 data, as the March data has started to come in and clarify, that 2012 actually was a more difficult market for the industry, and clearly for us, than maybe we understood at the time.
Theory being that the aggregate numbers that are produced by the industry, whether it be a TAM or a served TAM, in reality, the numbers are correct, but in reality, it's a bit skewed by some very high volume growth in a handful of industries, primarily smartphone and tablets, that when extracted from the overall numbers, you see a much more challenging 2012. I mention that, which is my second point, because part of Patrick and my responsibility today is not to predict the future. I've already had conversations with about six of you about what day the upturn will begin, and all joking aside, obviously, we can't do that, but we do want to give you our opinion. That's part of what you come here to hear.
You know, between the two of us, we have 50 years of experience in the components business, so we do have opinions. So we wanna share with you what we think is happening today. We believe, and the reason I mention a more challenging 2012, is we do believe there are a number of signs today that create some confidence, that we're looking to a better future coming forward. So we're gonna try and share those things with you. We also want to be very clear that we think we have been doing the right things through the downturn. We've been investing in the right areas. We've been pruning some things that weren't strategic and long-term, and we feel very well prepared for what we think will be a more positive environment coming forward, and obviously, our job is to convince you of that.
We think we're competing well from a relative basis. I did take a glance at our main competitor's results this morning, and nothing in that data doesn't suggest a high degree of confidence, so I'll speak a little bit about that, and hopefully, I didn't read the data wrong. The next point I think we want to try and illustrate to you is, although we are feeling more positive about the forward environment, we are very sober on the fact that predicting an upturn into what is still a very volatile, challenging macro environment does temper and provide a degree of conservatism and caution. So we call our views you know, kind of a cautious optimism.
But we believe that the model we have, I think that, actually, Kevin talked about it earlier today, has a degree of encouraging drop-through potential that we want to try and illustrate to you that we do think is coming in our future. And of course, last but not least, we feel it's our obligation, as Kevin did, on behalf of all of us, but we want to do individually as business leaders, is assure you that we do have confidence and that we can achieve and exceed, and get back over that 5% goal, and we're gonna try and show you that confidence and convince you that we, we've got a good case for that, okay? So let me go ahead and get started.
As I said, I'm gonna move relatively quickly, hoping that we'll get some good time for Q&A. So a simple agenda. I've underlined, as I do every year, design chain and supply chain. And the reason I do that is to reiterate each year that those two strategies, in our mind, not only are they cornerstone to everything we do as Avnet EM, but we believe they are the most sustainable value propositions for electronic component distribution, period, at a global level. Therefore, we think the leader in those is clearly the leader, not only today, but looking forward to the future. So a little bit about the environment. So here's the cautious optimism words that I suggested.
I mentioned before that we think the 2012 numbers, when you dissect them down to a more served view, actually were quite more ominous. You'll see here we've got a 1%, semiconductor decline number for 2012. I think in Kevin's presentation, he used a number higher than that. The variance being, you may recall, that we use a served TAM number. We exclude high volume processors and memory, 'cause it's not really an area where distribution participates. So you'll see we're looking at modest growth into 2013.
The other key data point here is we believe the industry today is split with about 60% of the total revenue occurring today, or I think this is projected 2013, excuse me, in Asia, and that's important because we have proactively run our business to have a different model, and I wanna explain why. So one of the data points that gives us optimism, and you'll see here what I was trying to illustrate about looking backward and also looking forward. If you look at these bubble charts, and especially the blue ones, what you'll see in the small white numbers, and I hope you can see that, is those particular end markets broken out individually with a calendar 2012 number.
So you'll see, these are the areas where broad line distribution companies like EM really earn their living, where we make our money in areas like industrial, energy management, medical equipment. If you look at just those three bubbles, and added together, you're talking about a 10%, 2012 double-digit decline, contrasted to what I just showed you, of a 1%-2% decline in the industry overall. So not in any way meant to excuse the fact that our, the business we're responsible for dropped below our 5% floor, but this is really the reason. These are the markets where EM makes a living. These are the markets where we need growth. You'll see current projections are for a more positive environment with these markets projected 4%-5% type compound growth. So we're encouraged by that.
This leads us to believe that the areas where we make our highest returns or highest profits and returns, will be healthier looking forward than what they were looking backward. A little bit about competitive landscape. As I think all of you know, the industry has consolidated to a degree down to two to three, excuse me, large global players, ourself, our friends at Arrow announced this morning, and then our largest Asian-based competitor, World Peace. And what the data illustrates is, number one, that obviously those three play a very significant part in the overall global, franchise distribution, landscape. But you can see how difficult calendar 2012 was, obviously, compared to calendar 2011 for all three of us.
I am proud, it would, it would not be appropriate, obviously, for me as the leader of EM, not to express some pride, that although it was a very difficult market, I do think we performed at the head of our class, and we retained our leadership position from a revenue perspective in calendar 2012, and, we gained a leadership position from a operating income dollar perspective. And again, based on my cursory look at the results this morning, I believe that gap may have widened, but I'll leave that for you to do your modeling in the March quarter. Okay? So a little bit about Electronics Marketing to tee up, our, our question period. The main point here on the left is that we are broad line. I always reiterate, broad line. That the value prop for us, you know, it's.
I think I've said this before, every supplier we have would like us to have one franchise. Every customer we have would like us to have 500 franchises. The secret is in between. The value we add to the industry, and specifically in the mass market, is resultant from our very broad supplier portfolio and our very broad customer portfolio. There is no customer at EM, for example, that makes up 10% of our revenues. You'll never see us announce anything. That is critical. The commodities where we continue to get the bulk of our revenues are very broad-based commodities, like processors, which includes microcontrollers, analog, obviously very broad and discrete as well. These are the commodities, really, where distribution makes the living, and these are the commodities that we obviously are looking for greater growth looking forward.
Now, I mentioned before, I showed a pie chart where as an industry, Asia is projected to make about 60% of total global revenues for our industry. The purpose of this chart is to illustrate that we have been very premeditated in managing our regional portfolio, because we believe, again, the secret sauce, the balance for global broad line distribution, is a more evenly mixed portfolio. The reason being, and I wouldn't want anyone to go away from this thinking or writing that EM is not interested, committed, or investing in Asia. Nothing could be further from the truth. We have a very successful business in Asia.
But for our business, and considering the available gross margins and returns, we think the balance that we have here, and you'll see, as the industry has gone from 55% to 56% to 58%, now projected at 60% for 2013, you'll see that our change has really been very modest. How do we do that? Because obviously, growth rates are higher in Asia. Well, we do it through organic investment in design chain resources, FAEs, capabilities, and also in our acquisition strategy, which we'll talk a little bit about. So active portfolio management is the point I was trying to make there. It's about balance. We will continue this balanced approach, demand creation investments, as I said, and I'll share a little bit about that. Margin accretive acquisitions, there were a few questions earlier of Rick and Kevin on this.
Part of why you don't see a whole lot about this is the companies that we have been acquiring over the last year are not, are not headline companies. Why? Because they're smaller. But what is consistent in each of these companies we have bought over the last year, is each one is and will continue to be accretive to our regional margin model in the region that it was purchased. That's the rule that we've had, and we will continue to do that. So we'll, you will see us supplementing around. Again, I wanna be clear, don't write that Avnet's never gonna make a big acquisition in Asia or Japan, 'cause that's not the case. But today, as we balance out the portfolio, take EM back over 5%, we are really focused on these accretive regional acquisitions. So a little bit about design chain and supply chain.
In essence, design chain is one that I talk about a lot. I talked a little bit about a theory I have on the call last week. We were actually just talking about it in the hallway, that one of the predictors, I believe, to when a company like EM will really return to the sweet spot of profitability, which for us, you will recall, was actually two years ago, this quarter and next, were the highest margin quarters in the history of EM forever, were two years ago, this quarter and the June quarter. My theory, and I haven't been able to put the data to it, 'cause it's hard to go backwards, is that there's a correlation between design win revenue growth, not design wins, design win revenue growth, as a ratio to total growth.
In other words, if I could dissect backwards and look at that period two years ago, my prediction is what you would see is that our design win revenues were growing at a rate well above not only our overall revenues, but the industry. That is the point where EM returns to that high watermark. Now, we think there's a gradual process. It doesn't happen like that, but we see some encouraging signs. I often talk about X-Fest because X-Fest is, has become the blue chip industry design chain event. It's a global, integrated design event done simultaneously in all regions. But what's key about X-Fest is we have migrated it from its original origins, which was essentially a Xilinx, design seminar, to an integrated solutions design seminar.
And you'll see in the middle here, we have been able to attract some really interesting, exciting partners, nontraditional distribution partners. The folks from ARM, for example, have been an active participant in our sessions, a relationship we value very much. Company called MathWorks, located up in New England, a terrific little company. So all of this is gelling together to take from what was a design-in seminar to a solution seminar. And as you can see, from the event we did this, this year, we've identified over $1 billion in upside opportunities. Now, again, consistent with the point I just made, is those opportunities need to turn into revenues. What is it gonna take to turn that into revenues? Well, it's gonna take, quite frankly, some end demand. So we're not that removed from, quite frankly, the global macro environment.
Patrick will talk a lot more about Europe, which is our largest design win, design chain region, because of the nature of that market and the nature of the way we've structured our business there. Indeed, that is a good example, where as those customers start to export more, as they start to build more industrial automation, et c, you're gonna see a lot of these opportunities come to fruition. To give you all a benchmark, just in case any of you aren't aware how significant this is to us, it's about $4 billion in revenue in calendar 2012, out of a $15 billion total, or maybe more accurately, a $12 billion semiconductor number.
So it's a sizable part of our business, but keep in mind, this business operates at a higher gross margin, a higher operating margin, and maybe even more important than that, if it's possible, is this business has tremendous value to us from a positioning standpoint, both with our suppliers, who value this activity more than anything else we do, and with customers, because it takes us much deeper into a customer and allows us to attach non-technology parts to it. So very critical. If I flip to supply chain real quickly, I think the key points I'd wanna make on this slide is more and more, the secret to supply chain is global. Okay?
The ability to manage customers who choose to operate, who prefer a customer service solution that goes across borders, nomadic manufacturing, to use a phrase, is becoming the key to successful supply chain. The efficient ability to do that for customers is critical. As you'll see, this has become a big part of our business. Today, about $2 billion of our revenue is done with customers that have a global support solution, global customer service, and that number is growing. Then a key differentiator for us is something internally we call business migration. What business migration means is a design win, to go back to my last slide, is awarded to us by a supplier in the West, for example, in America or in Europe, but the actual parts are consumed more often than not in Asia.
So this is $600 million in revenue, where we have the design in one region. We also have the fulfillment in another region. Think of the possibilities of the competitive advantage that gives for us, for example, against our Asian competitors, who don't have the hundreds of FAEs and engineering personnel in America and Europe. So a very critical, differentiated role for us. So summarizing up real quickly, we always remind ourself, and that's why we always start off with that TAM chart of $300 billion. As the largest distributor in our electronic space, we're, we're humbled by the fact that we're $15 billion in a $300 billion market. So we're not willing to focus exclusively on going from $15 billion to $15.1 billion to $15.2 billion. We try and drive in our culture, a thinking that how do we expand?
There must be more space. You know, I spent a lot of time talking about demand creation, for example. Don't read into that, that we're not interested in high volume, fulfillment type of global supply chain engagements. We are. What we're focusing on now is the balance. It's a balance act now, but there's still tremendous opportunity there. We think the industry is forecasting an improving environment. We see some signs, as I said on the call last week. We have two quarters and now one month, being April, of positive book-to-bill. So you've got a period now of seven months where our business is operating positive book-to-bill across all regions. That must mean something. We see some indicators, not gonna call anything, but we see some indicators in some areas of expanding lead times.
So there are signs now that give us positive belief that we are coming through, and we're gonna start to see some, some great opportunities coming forward. Again, we always remain committed. We must be a leader, bless you, in design chain and supply chain, and that won't change. We continue to look at alternatives, whether it be an embedded business, Patrick will talk a little bit about, or some other adjacencies. We, we continue to believe there's more room for us in that $300 billion market. And then, of course, I always close with a personal commitment. Time didn't allow me to put an org chart up here today. We're trying to, to keep it succinct.
But we have a leadership team that's very experienced, that knows our business very well, that grew up in our business, and we are committed, and we do believe that we can get the business back over the 5% number and higher, and we look forward to demonstrating that. So with that, without any further ado, let me ask my friend, Mr. Zammit, to come on up and chat with you a little bit. Okay.
Good morning. Harley left me 5 minutes to talk about EMEA. Thanks a lot. So rapidly about my background and 20 years with Avnet, 6 years in my job, I've been responsible for EMEA. Before that, I ran a business unit in Europe called EBV, and before that, I was in charge of finance. So let me speak rapidly about EMEA and maybe try to improve a little bit the perception you may have about EMEA. Reality is, okay, the macro economy in EMEA today is not good, that's for sure. Interestingly, if you look at 2009, which was the big crisis, 2010 was, in fact, a great year for us. 2011 was a great year for us. 2012, the market corrected, minus, let's say, 11%.
In 2013, we just got the figures yesterday, the market is still down year-on-year, 5%. So from an environment, the market is still a little bit challenged. Nevertheless, if you now look a little bit more bigger picture, and you look at the future, EMEA has got a few characteristics which make it rather attractive. First characteristic, this is a high GP market, and the reason for it is because this is a very fragmented market. So you may argue, EU, the markets are consolidated. The reality is still, language plays a big role, country cultures play a big role, and so you have thousands of, I would say, medium-sized companies we are serving. Serving those customers is expensive, and so that's the reason for we can get some higher GP thanks to that.
Also, one of the beauty of serving a high mix for volume type of business is that our manufacturers need us more and more. So as the value, the average value of the projects is reducing because of ASP erosion, our manufacturers are transferring to us more and more customers. So that's going to be an opportunity to continue growing. The other thing is the EMEA market is driven by two applications, really, industrial applications and automotive applications. Those two applications did extremely well in 2010, 2011. 2012, industrial corrected, automotive did well. At the moment, automotive is a little bit under pressure, and we expect the industrial market to come back to us. So rapidly about EMEA. So we are a EUR 3.2 billion company with 3,400 employees. We make 27% of the total EM Global sales.
I will come on it. We have a different organization. We have, in fact, five business units. Nevertheless, we consolidate the support functions as much as possible. One of them, a critical one for us, is logistics. So we have one logistic company serving all the so-called speedboats. In semiconductor, our share, so I've put 43% here because I prepared the presentation before getting the figures yesterday. And yesterday, in fact, we are at 45% for the first quarter, so we gain share. We have 8% of the interconnect electromechanical market, so that's for the future, for a big opportunity. 20% of our workforce are engineers. And if I look at the profile of my management team, I would say very experienced, very stable, average seniority with us, 15 years.
So in the business, where relationship matters, at customers and at manufacturers, that's clearly making a difference. So this is our model in Europe. So I've been 20 years. If I go back in the '90s, end of the '90s, EMEA was, I would say, the province size for, for Avnet. Then we make an acquisition, which was, EBV, and EBV was probably has been probably the most successful distributor in, in Europe. And what was very interesting is their model was completely different to what we knew. So instead of going to market trying to sell 300 franchises to the customers, EBV was a specialist in semiconductors, and they had a limited line card. And the reason for it is because I know distribution means box moving. If you only move boxes in our industry, that's not where you will make the GP.
You can only make the GP if you add value to the customers, and the way to do it is to support the design of the customers. So in fact, EBV had a model where their salespeople and FAEs were, I would say, experts on the products of the manufacturers. And that also, in return, created a lot of intimacy with the suppliers. So we took that model and decided to reorganize EMEA according to those principles. And basically, now today, we have five distributors, okay? They have their own. So first, we have one specialist in interconnect passive electromechanical, one specialist for system and displays, three for semiconductors. And the way the semiconductor guys differentiate is on the line card.
So they have a specific line card, and that's the reason for, for example, we are the only region in the world where we can have Altera and Xilinx, okay? So lots of beauty here. This organization, in fact, has been very successful. We are the number one industry in Europe. We generate today the highest GP for Avnet—for EM global, and also the highest operating income percent for EM global. If you now look at EMEA from a geographical level, I know that you hear or you read a lot in the press about the PIGS. The PIGS, in fact, in Europe, okay, for us, in our business, represent less than 2% of total sales or the market. So in fact, the issues in Greece, Portugal, Spain, or Ireland, have not really impacted, have a very little influence on our performance.
Very critical is Germany. Germany is 35% of the market in EMEA. If you expand it a little bit, if you add Switzerland and Benelux, okay, that's 50% of the market. If you add Eastern Europe, which is a growing region, that's close to 70% of the market. That's where you need to be successful. Fortunately, Germany is doing better than the rest of the market. Central Europe is doing better than the market, Eastern Europe also. So if you are doing well there, you will, relatively speaking, do better than the average market. The market, which is the most challenged at the moment, out of the big ones, is Italy, okay? So it dropped 17%. UK is holding up relatively well, and France is a surprise, but is also, relatively speaking, holding relatively well for the moment.
Nevertheless, okay, to be successful in EMEA, you need critical mass, so market share matters. On average, I said to you, we are 45%, and you can see that is, these are the red bars. Okay, we are in all the key countries, above 44%, 45%, and this is giving us a competitive advantage in the market. So how to take advantage of the market? For the moment, the market is down, so what we are doing is gaining share, so working on gaining share, and we are focused on gaining share where the margin is the highest, okay? So as Harley was explaining before, design chain is critical in our market. Customers value technical support. It's 35% of our business, roughly, okay? And even in the tougher times, we are very active at customers winning the designs.
Because we know that as soon as the market will come back, we will get the projects at a very nice GP. So design chain is critical. Supply chain, of course, we are supporting the global initiative. But in particular, in EMEA, what we are doing is implementing some sophisticated supply chain solutions at the customers to create intimacy and improve the service. IP&E, we have 8% of the market today and growing, and we see big potential because this is a very fragmented market at the moment, a lot of players. And in addition, this is a higher GP percent than, for example, the semiconductor business. So it's quite strategic. Last, focus is on embedded. So in fact, so far we have been, I would say, a hardware distributor.
What we see is that there's potential for us to add, I would say, another brick, which is software and services. So we just start on the journey. We are looking at how we can accelerate that. But clearly, selling solutions is probably going to be the future for us. So hardware to software and service, selling the full solution, this is clearly a very promising opportunity for us going forward. So I talked about how to compensate for the market by growing organically. Of course, the last component of it is going to be M&A. We have made some small acquisitions last year or in the last three years, and clearly, we continue to look into the market at bigger opportunities. What is driving our decision-making process will be margin.
So we are looking to buy companies with a higher GP, and we are looking to buy companies who are going to give us critical mass in the embedded space and IP&E. Okay, so let's see what the future will bring. In summary, about EMEA, so yes, the market for the moment is a little bit challenged. Also, we are seeing the decline reducing. Book-to-bill is positive, so hopefully the prospects are looking a little bit better. Second thing, in that market, we are the leader, so as soon as the market will pick up, we will take an unfair share of the pickup, and we have a team which is already well positioned to take advantage of the future growth opportunities in the market I mentioned before on IP&E and embedded.
We're gonna open up to questions. Please wait till we get your microphones, so anyone following us.
Patrick, a question for you. That figure that you put up regarding your IP&E market share in Europe, which I think was 8%?
Yes.
It seems fairly low. What are you guys, and is that consistent with where you've been? Are there any sort of market share issues? And as you look to acquisitions, is that one area where you're focusing on?
So historically, EMEA has been more focused on semiconductors. We have been pretty weak in IP&E. If you go back four years ago, our share must have been around 3%, okay? We made then an acquisition called Abacus, which enabled us to double our share in the market, and since then, we have consistently increased our market share. So historically, it, it's a little bit historical, okay? Big focus on semiconductors. IP&E, not so, but we've changed it. So since, three, four years, we are driving an aggressive strategy to become one of the leader in IP&E. By the way, to just to give you a flavor, with that share, we are number three in EMEA. Very close to number two, by the way. So it's a very fragmented market. Very fragmented market.
And the margins in that business? I think-
The-
Those margins typically are higher in IP&E, right?
They are, I would say, compared to our semiconductor business, that would be four, four points higher, 4-5 points higher than our semiconductor business.
Okay. And Harley, I wanted to get your thoughts on your relationship with the EMS industry- particularly the big guys that tend to buy more direct. Two years ago, they were your best friend because there were shortages, lead times were stretched. As you've seen the market decline, have you seen your share with those big players decline? And as the market and the component cycle comes back, do you think that'll come back, or there, is the relationship different now?
Okay. All right. Let me just add one additional point on Patrick's answer on the IP&E. In addition, if you look at the acquisitions we made there previously, they were all semiconductor-focused people. Not only EBV, but even Memec Europe-
Memec.
was all semiconductor. So it's a legacy issue. In America, and I know this because that's where I started my career at Avnet, we've been in the IP&E business for 55 years. So it's really a startup for Patrick, and he's gaining great share. But we're encouraged by the fact that at 8%, we're approaching number two, so we see good opportunity there. To your question on EMS, it's such an interesting relationship, isn't it? Between franchise distribution and EMS. You'll recall, 'cause you've been following this a long time, there was a period where we were openly sniping at each other, right? It goes back a bit. We were openly sniping. There was concerns that one was gonna displace the other. There were even some distributors about 10 years ago that got into the EMS space, and none of that worked out too well.
They all got out. So we seem to have found a very, very comfortable, palatable equilibrium. If you recall the $2 billion number I had up there for globally managed accounts, so they have a global structure. It all reports to a woman named Lynn Torrel, who's on my staff. About half of that is that customer base that you're focusing on, just about $1 billion. What has evolved over time, Matt, is the business we do with them is primarily proprietary products. So where there was friction and alterations in our relationship due to market conditions, it was on commodity products. The reason being is commodity suppliers would allow them to purchase directly in certain environments. Then, as you suggested, in a down market, they come to us to buy up inventory.
So that portion of our relationship, very cyclical, based on lead times. The driver of our relationship, and I can't give you a number, but I'm gonna guess it's 75% of the sales, are in proprietary products. So our relationship with EMS has evolved to a degree as an advocate for our suppliers in a very challenging, very tactically, difficult, business setting. And I think that's comfortable and sustainable for both parties. So our relationship is really quite good with all the main EMS guys.
Okay. Thanks.
Hi, thanks, Harley. I wanted to get a little more detail on your portfolio management strategy. It seems difficult to me to be able to balance keeping Asia at a third of your revenue when that market is the one that's growing and is 60% of the business. So can you give us a little more detail about how you offset that? And over time, aren't you kind of going to be pulled more into Asia, even if you do do acquisitions?
I think the quick answer to your last question, Sherri, is absolutely. It's not going to stay stagnant. So if we allow that, and I assume this is your inference, then we'll fall behind market growth rates. So don't think of it as a stake in the ground as much as a trend comment. It's not our desire today to see our business become 60% Asia. You know, a question was asked in the earlier session if those margins will always remain lower than the West, right? And I think either Rick or Kevin answered it. I think I would have added to their answer that it's an impossibility to answer that question for perpetuity, okay? So you have to limit and put a timeframe. The reason I say that is, it's not inconceivable to me.
I, I've had the privilege of running our Asia business in my career. It's not inconceivable to me that at some point, China will fill a design chain, IP development role similar to the West. I would almost predict it. What I won't tell you is when. So I wouldn't rule it out that one day we will have a core design chain business in Asia that looks and has numbers similar to the West, but it won't be tomorrow. So clearly, the current growth rates, and for the foreseeable future, are being driven by volume.
I think the issue with the 60% number is, I think I used this slide actually, a year ago, is somewhere, around 100% of the industry growth in the last year and a half has come from a handful of segments, primarily, smartphones and tablets and things. Everything else has been pretty weak, as Patrick talked about, specific to Europe. So I think, to get a real feel for the portfolio that we want to manage, you have to somehow isolate that piece of the 60% out, and it is substantial. So if I could give you a served desirable TAM number for Asia, it's far less than the 60% number, and we are going to continue to invest. So how will we keep the balance?
Well, we're going to grow in Asia just like everyone else, and again, we're proud of our business there. But we see some opportunities for some acquisitions in the West that, of course, we're not going to talk about ahead of the curve, but they're on our pipeline. We're very involved, and we look forward to to making some announcements where you guys go, "Huh, didn't think of that one." So we think there's room for us to grow there, okay? I hope that answers your question. You had one over here, I knew.
In the general presentation earlier, where we had all the major regions by the two divisions laid out, and sort of the sore thumb that stood out was EM in Japan in terms of no growth, lowest returns. It's a highly fragmented market. When you showed your pie chart of the players, there's a number of them there. Do you need to be the consolidator in that market to make that business better? Or do you retreat and say, you know, it's just not the place to put capital, and there's other more desirable areas you should be investing in?
I think that's your region, right, Patrick?
Japan?
Yeah, it is for now. No, no, no, just joking. Did you just join Avnet's board? Because I got that question recently. So it's a very fair question. If you would look at our internal data, what you would see in that data is that we are competing quite well in America, Europe, and Asia. What you would see is that our, our pure play, high risk, take a gamble, roll the dice, whatever stereotype you want to answer, is EM Japan. So you picked it off the chart very well. And the reason is more so than the growth, because from an aggregate market size, Japan is actually of equal size to EMEA. You know, we do over $3 billion in EMEA. We do less than $1 billion in Japan. So the market size is the same, so the issue isn't the potential.
And by the way, one of the things that attracts me to Japan, and one of the reasons I explain it to my board every quarter, is the gross margins there, by the way, are far more consistent with the West than they are with Asia. So when I tend to think about our business looking forward, I actually group Japan with EMEA and America from a size of market and from a gross margin achievable. Now, that's the good news. The challenge, which I think was the root of your question, is it is a market where business is transacted in a way that's quite foreign to any of our other regions. They have something that you may be familiar with called a Koza system, where accounts are assigned.
So unlike in the West, if Patrick picks up a new product line tomorrow, he's out trying to sell that product line to every customer that has an open account with Avnet right away. In Japan, when you pick up a line, you get a list of authorized accounts. Now, that account list can move over time, but by our standards, at glacial speed. So the market structure, the way they operate today, is very regimented and different. So the reason why it's on that chart is that structured environment and a history of distribution often being attached to a large, vertically integrated company, has created an environment with enticing gross margins, but difficult op margins, and that's why it's on that list. So you will see some growth as the market starts to improve, and I think you'll see some of that this year.
So I'm not concerned about growth rates there. The challenge for us on the EM side is proving, not only to all of you, but to my own board, to be candid, that we can create a margin model and return model there that's exciting. And candidly, we don't have that yet. There's a lot of work to be done. I was just there. I think the world of the market, and I am very committed to it, but I wanna be candid. I don't wanna keep investing Avnet's money because I like Japanese food. It's an exciting market, and there is an opportunity, but it is a challenging one. We need, you know, some of the changes we need, if I could one last comment, well beyond our purview of responsibility, are actually, cultural and, secular to that market.
For example, very difficult place to drive synergies via M&A consolidation. It happens, but things, like everything there, moves at a pace quite different than what we're used to. That is indeed what we are working on today. We don't publicize this, but if you looked at our Japan Op expense numbers on a sequential basis, you will see the improvement coming out every quarter, but it's at a pace that's different than what we're used to. But to be successful there, we've gotta buy a couple companies, which we have, and we've gotta get that synergy, and hold the gross margin. So I'm still optimistic. I think we've got a great opportunity there.
My last comment on Japan, I mean, I know I probably sound like I'm prophesying, is one of the reasons for our investment there is back to the design chain and the global migration data that we had on the chart, which is, we believe one of the secular changes that is occurring in Japan is their customers, their large customers, and there are some blue chip companies there, are going to have to be more aggressive in outsourcing globally, primarily into Asia. We are seeing that now. We are seeing quite a bit of customers that are asking us for support in design done in Tokyo and fulfillment done in China, and that's a big part to our success there. Okay?
I've got two questions. One, maybe Patrick, do you think in terms of, you know, portfolio pruning, that there are challenges to prune some of the product lines? So, for example, take Italy. You guys got out of Italy, and the TS business, has that impacting the component side of the business? Are there any tie-ins that make it difficult to cut one business out versus, and keep the other? And then probably, to go back to Asia, you know, I know historically, you guys talked about how Asia is still primarily consumer, smartphones, PCs, and you guys don't wanna be there. But why not look at, you know, why not go in there?
I mean, if you look at Ultra Source for Arrow, that's been pretty, you know, pretty successful, especially on the, you know, on the, on the coattails of MediaTek. If you look at some of the other guys, like WT Microelectronics, they're still doing really well with TI line card, even Digital China and those guys, they're not just all just, you know, traditional commodity stuff. I mean, they do some PCs, but they also do a lot of, you know, system integrations, et cetera.
Mm-hmm. Do you want me to start? Good. Okay. So I would not compare TS with EM in Italy, okay? So we, I would say the market dynamics are a little bit different. So Italy, by the way, if you go back just two years ago, was the second biggest market in EMEA after Germany. So they have a culture. They have. The strength of Italy has always been a sum of very innovative and active, medium-sized customers, and being out of that market would be a major issue. It is really a strategic market. Our manufacturers would not understand that we don't stay there. So that's the first point. The second point is, in fact, we have done some cost adjustments, minor, by the way, but we had, we had to do some because of the market decline. Margins are good, okay?
With the cost adjustments, Italy is a very profitable business. A little bit less than the average, maybe, but remains a very profitable business. The third thing is about the future. So yes, Italy is challenged today, but they will come back because they have this culture of innovation, of entrepreneurs. So we are very confident that they will come back, and they will fuel growth again for EMEA. So I'm not concerned, and at the moment, Italy is not, in fact, an issue for our profitability, not at all.
Well, I was talking specifically about the other thing. Are there any delays, possible delays, which is, yeah, you know, EM, where one partner-
So we are really in two different businesses.
Yeah.
Okay? The decisions made by TS have not impacted us. So yeah, maybe it has created some emotions, but I would say from a pure business standpoint, our customer base is different, the supplier base is different, so no issue.
I remember, Patrick, when it was going on, you were careful, and you and Graeme worked together to communicate to the EM folks that this was not their story. Because one area which I think you're exactly correct is employees read things into adjustments that have nothing to do with them, because they all have their employees. But you guys were very collaborative on that. I'm not aware of any damage.
Just, just to add, Italy, we have today close to 44% of the market, so we are clearly the leader, and we have grown in the last five years by 10 points. So it was really a good investment.
Great.
Italy will remain a very good investment for us.
Thank you. Then I think the second part of your question related to Asia. And so I appreciate you asking me this, because I wanna be very clear. I don't want someone to get the wrong impression that we are in any way disenchanted or de-invest in Asia. So thank you for forcing me to clarify. We feel very strongly about the market opportunity there. I will be there on Monday, okay, which is not exactly a short trip. With that said, if you asked me—if I took my list here and said, "Harley, you can only have one item," okay? If Vince truncates this down to three minutes, and you got one item, I think the item that I think I have to answer first is the long-term margin model, I think.
I want to try and answer all of them, but I think that's the one. So what you're sensing from me, Ben, is, we're all over that because we feel a degree of- we're very proud of our results. We're very proud of EM, but we don't like being below that minimum goal, and so we're obsessing, and maybe we're overcommunicating on obsessing that point. What I would say to you is, with all due respect, to my largest competitor there, who is a terrific company, I know them intimately, but look at their results. They have a real challenge. Okay, what they have is they've got all the excitement of growth and no drop-through, and I'm not sure how they're going to fix that.
If you think back to that bar chart I showed, as difficult a year as it's been for us and our largest competitor, it's been a more difficult year for them. They're mired below 2% operating, and their return on working capital is close to single digit. So the issue there is what I tried to talk about, which is finding that balance. We absolutely want to invest in design chain and embedded opportunities there. But right now, we, as an industry, have to fix that imbalance, and that's probably, you know, over-influencing the color I'd put on it. Okay? Wrap it up?
Yeah.
Okay. Well, thank you all very much. Thank you for your questions. We go to the next, right? We switch or they switch?
We switch.
You stay. Okay.
Okay.
Thank you very much.
Yeah. All right. Good morning. I'm Phil Gallagher, responsible for Avnet Technology Solutions on a worldwide basis, and here to give you an update on what we think is the opportunity in the marketplace, a little bit about where technology is growing and how Avnet TS is positioned to capture it. So again, thank you for being here, and thanks for your interest in Avnet, as well as the TS operations. There's going to be four areas I really focus on most today, and I think you'll see a theme. I talked to some of you one-on-one already, is this whole notion of the technology shift. You know, what's happening out there from technology?
The ecosystem, you know, the dynamic ecosystem we're finding ourselves competing in, which is providing, again, terrific, opportunity from an Avnet standpoint. The global leverage, okay, we've been expanding our operations worldwide and really beginning to see, even more so than in the past, the real opportunity for scale and scope, and the leverage around our global operations and presence. Converged technology, what's happening in converged, and how are we positioned, with the brands that we carry to maximize our success there?
Really hot off the press, literally, was a press release this morning going out on Avnet Services, and what are we doing around services to continue to add incremental value to our partners and to our customers, and our partners, both being our buyers, system integrators, ISVs, managed service providers, as well as our suppliers. We're providing many services to our suppliers as well. Really a theme, we make channels better, and we're committed to the channel, period, and we're about making the channel better. So let me jump in. Avnet Technology Solutions, I believe we offer an unmatched value proposition, creating sustainable, competitive advantage for our customer suppliers by developing and delivering value-added solutions across the IT supply chain globally.
Today, we're going to cover the current state of the environment, technology solutions overview, and then what we're talking about when we say global solution delivery capability and the leverage and opportunity that's providing us as we see it, and then a brief summary. Current state of the environment, serving a large and growing market. This chart's really depicting that over the next three years, there's going to be roughly 4.6% compounded annual growth or $154 billion in additional IT spend, comprised of hardware, software, and services. I think a key point here is the fastest growing from a dollar standpoint, okay, is services. It's comprising of 70% of that $154 billion dollar growth, $111 billion is coming from services.
Again, a key point is where Avnet's making some major investments here in the last year, launched officially today. The total spend in IT, $1.2 trillion. On the right-hand side, it's really articulating where that growth is coming from, okay? And you can see 63% is coming from more the mature markets, with 37% coming from the growth markets, okay? And the growth markets, as a percentage, are growing nearly twice as fast as the mature markets. So point being, the geographic expansion is going to play key. You'll see how we're expanding and overlapping to this growth chart, as well as the overall IT spend, $154 billion in the next three years, and we're right in the sweet spot of that opportunity.
Just some trends from an environmental overview, things that we look at constantly. In the IT world, if you're not moving, you're going to fall behind. You can't stay where you were last year. I'm not going to touch much on the macro environment. I think Kevin and Rick touched on that, and you all study that probably more than I do. Well, I do want to talk just briefly about some things we're doing around converged technologies, a huge movement afoot. I have a chart in the slide presentation that will articulate why we believe, you know, we're positioned to maximize the opportunity there. And then suppliers and customers, there's a huge requirement, it's really coming to foot around from the suppliers and the customers on services and solutions, and wanting global deployment of those services and solutions.
You know, with the suppliers, I always like to say it's a heart and brain argument. What's more important, our suppliers or our customers or our partners? Okay, and really, we can't live without either one. So when we put our solutions together, we're always keeping in mind, what are the suppliers' needs? How to satisfy their needs, you know, take their products to market through the channel to our customers. But a real increase in the last year on wanting global deployment, deployment and more around services and solutions. And really, the whole channel ecosystem's evolving, and this is exciting to us. You know, we talk about VARs, and we've always talked about value-added resellers. You have the system integrators.
More and more, the system integrators we're seeing coming to us for opportunities to help fulfill some of their needs. ISVs, managed service providers, OEMs still, on the embedded side. So the ecosystem's evolving, and exciting, in our case. So, I talked a bit about where the growth was coming from in IT spend. Well, this is Avnet TS's global mix. Back in 2001, you can see that, the Americas was roughly 74% of our total revenue, in the enterprise space, EMEA 24%, Asia Pac just a blip. And now you got Americas at 53%, okay, EMEA at 29%, and Asia Pac at 17%. By the way, this does not mean our Americas business shrunk. We just grew faster outside of the Americas, okay?
But again, when you go back to that IT spend, 37% of the incremental IT spend over the next three years is coming from the growth markets outside of North America, in both Latin America, Europe and Asia Pac. We're serving 80 countries today, we're shipping into 170, and just in the last 18 months, we've added on over 130 discrete lines globally, okay? These are product lines or brands that we've added, either through acquisition, or through organic investment. The top right-hand chart, this is really to depict just graphically, how we diversified our portfolio. The horizontal line, as I readily will admit, from a transparency standpoint, we're not at our long-range planning targets yet at TS, the 3.4%-3.9% that Kevin touched on earlier.
However, we have at the enterprise goal, okay, enterprise benchmark, then at the return on working capital benchmark that the company's set for us, okay? Now, this fiscal 2013, you say we're gonna dip a little bit below that. We're coming around 27%, 28%, mostly due to the September quarter, but we're on a plan on trajectory in fiscal 2014 to turn that around. So recognize we're not where we need to be. We're talking about the growth opportunities and how we're gonna get there, but we are providing returns back to the corporation. Technology shift. So a lot of conversation around what's happening in technology. Similar shift as geography. If you go back 3-5 years, hardware was roughly 70%+ of our total revenues that we did at TS, and the balance was pretty much split between software and services.
Today, fiscal 2013, nine months year to date, hardware, you can see, is at 61%, okay, and the balance made up of 20% software and 19% services. So there's a real conscious move, okay, not to get out of hardware, by any stretch of the imagination, make that really clear, but to drive services and software as a greater portion of the total mix, thus adding greater value around the hardware that we are selling. So absolute conviction around margins and returns optimization, been a very proactive and deliberate move to drive the mix management, and drive more operational efficiency. So up here in some of the one-on-ones on the break, you can see, ISS is industry standard servers. Roughly 11% of our business, was much higher than that 4-5 years ago.
So that continues to become a lesser part of Avnet's business. Other servers, which is proprietary, that's your Power and BCS and some others, but that's the bulk of it. It's around 13%. So if you look at where we were probably 5-7 years ago with servers, it was a much greater percentage of our total business today. Today, it's 24%. But what you will note is that storage, okay, is the fastest growing at over 30%. Okay, so when you talk about this mix shift, that's just the hardware piece. That's what's happening in our business and probably not a lot different what's happening in the market. So we talked about the ecosystem. I just touched on in the introduction.
You know, whether it's software, services or hardware, I think that middle box there that, you know, just depicts the brand partnerships that we have. I get asked often, "Do you have the right line card?" Absolutely. We, we have the - we believe, the envy of the industry with the line card that we have today and the partnerships that we have. In addition, rounding out some alliances that we've built to help fill out the ecosystem needs as they continue to change. It's getting more and more complex. It's not getting simpler for our partners, okay, or our end customers. So more they come to us to help them simplify and aggregate, okay, and decomplicate, if you will, the opportunities that are out there. But if you look at the partners, whether it's software, services, hardware, we'll provide that solution.
No issue at all. If it's more virtual, that's fine, too. You know, we deliver this through the cloud, okay, to our, to our partners, to our end users, okay? So again, this is the ecosystem. It's evolving, it's moving fast, but we're at the center of technology... Okay, where there's complication, there's opportunity for us. And part of our, again, our primary goal here is to help, how do we help aggregate, and simplify for our partners and for our customers as they, as they evolve their needs in their data center? Converged. So, basically, in the converged, we've got, some very large brands that have their own, converged, system solutions, and we're having great success with those brands. There's a lot of customers out there that really wanna go with the best of breed from a technology standpoint.
So whether it's picking the best applications, the enabling software, the best server and storage, best networking products, the Avnet we can do, we can aggregate it, okay? We can integrate it. We get the custom racks. We'll add the power supplies, we'll load the software, and it goes from basically this, a bunch of discrete boxes, which in some cases still happens today, shows up, the customer integrates it, does a lot of that themselves, or our partners do, to we'll ship the rack directly to the end customer, and effectively they'll plug it in. And now with the services capabilities that we've further enabled our partners to sell, we can help them install it, maintain it, service it down the road. So huge opportunity in converged.
It grew 59%, in the last six months, on six months, and it's gonna continue to grow. Again, you know, the brands we have here, you know, allows us with a global footprint, the product portfolio, and the service delivery capability to maximize success. You know, last year we talked about globalization, specialization, and innovation. The center of this is that we make channels better. Everything we're doing, okay, is to further accelerate the success of our partners. On the left-hand side, you've seen this before. I call it the, it's the lifecycle chart. We're still as committed as ever to capitalizing, you know, the financial by the way, benefits we bring to the market is still one of the greatest values we bring, but, you know, helping with demand generation, planning and procuring, integrating, and testing.
You know, very core, very high value. Still wanna help enable our partners to go drive demand, okay, in the marketplace. It's a big part of what we do. What we've added when we talk about innovation, now we're, we're enabling our partners, okay, to, to, to deliver a whole other service capability that many of them did not have. Yet, as you saw earlier, it's one of the fastest-growing parts of the business. So we can now install and implement. We'll sustain and maintain all the way to extend and end. So we have ITAD capabilities, IT asset disposition capabilities. We have refurb, resell, so now we have partners that come to us and say, "Hey, we need to empty the data center and sell new stuff." No problem. We can do that for you, okay, or with you, okay?
We have teaming agreements to go do that. Then the one I'll touch on here in a second is we've always done education and enablement. It's a big part, obviously, of our business. We're further leveraging that with some acquisitions we've made recently, and we acquired some IP out of Magirus that's really enabling us to further globalize, okay? And suppliers are now coming to us to help them educate their partners, their end users, on accredited course that we're delivering multi-language, multi-country. So very exciting new opportunity for us, or I should say a leveraged, accelerated opportunity for us around the lifecycle. But bottom line is, from womb to tomb, you know, we've got it covered from an IT lifecycle standpoint. This is what was released today. I'm sure there'll be some questions on it.
Bottom line is everything we're doing is to further expand the capabilities and the solution delivery capabilities of our channel partners, extend our suppliers' reach, and enhance project success and ROI for the customer deployments. That's why we're doing what we're doing, and add more value to the overall channel. This business today is, service is around $675 billion. Okay, $675 billion, and 40% of the business is done by 20 service providers, with no one having greater than 7% share, which means this business is extremely fragmented, and more and more partners are starting to bring us in, to help them consolidate the many different service providers they're using today, because they don't wanna use 50 partners. They love to just use an Avnet, 'cause we can provide the capabilities.
So it's a growing opportunity, it's fragmented, and it's well underserved by the IT channel. The three areas of focus that we have, software services, education services, and IT lifecycle services. I have a brief video. You know, 'cause we're really going from, you know. People think it was Someone at Q&A said, "Well, you guys are starting to transition from products." We've been on that move, okay? We've gotta go from product solutions to services to differentiate ourselves. A lot of you know CDW. We asked them to do a, and they volunteered, frankly, to do a brief video on how we're engaged with CDW, a great, great partner of Avnet's. Can you roll the video, please?
My team partners with Avnet to leverage their broad product and services portfolio to provide solutions to our customers nationwide. P.J. Carlin, one of our inside solution architects, is here to tell you about a recent win for CDW and Avnet.
The business issue CDW was trying to solve with our customer was a large nonprofit customer who had two data centers and a large footprint of HP storage, HP EVA storage. In fact, ultimately, they were refreshing their storage and implementing HP 3PAR and some HP X3800 NASs. CDW needed a partner to leverage to help us tie together the entire solution to the customer, not just the hardware, but the services. And leveraging Avnet, we were able to do that successfully for the customer. So the engagement was closed not only on the hardware side, but on the services side, and that was great, thanks to Avnet.
Avnet, one of our top strategic partners, is leveraged for implementation and support services for professional AV, client computing, software, and our server, storage, and virtualization practice. These services support our commercial and public sector clients. Avnet's consistent investment and alignment with our organization led to them earning our first-ever Service Partner of the Year award in 2012. Voted by CDW coworkers from our partner services group, billing and administration team, our project managers, and sales organization, Avnet was recognized for their consistent delivery quality, strategic investments, and product and services portfolio. We've already engaged them on multiple other services opportunities, stemming from the success that we had in this engagement. We greatly value our Avnet partnership and look forward to many future successes.
So I want to thank CDW for that. But again, a well-known brand out there. We do a lot of business with CDW, and these service offerings that we really have expanded on in the last year is going to further our penetration of opportunity with them. So in closing, on summary, before I bring Graeme up, we're absolutely committed to our long-range planning targets. We're seeing great leverage in our scale and scope globally, as I mentioned. Services and solutions portfolios, we think at this point, is unmatched in the industry today as we stand. The ecosystem and the converged solutions, big opportunity for us to leverage, and we're there, and we're doing that now.
We've got to continue, you just saw the video, provide the best customer experience, and then continue to scale and drive efficiency in our business, which we're doing all the time. We're absolutely committed, the TS management team, to get to the long-range planning targets that we've set out for. Okay? So with that, let me ask Graeme Watt, President of TS EMEA, to come up and give you an update on our business there, and then we'll take some Q&A. Thank you.
Thank you. Thanks, Phil, and good morning, everybody. Thank you for your time today. Just a quick piece about me. I've been in IT distribution now for 25 years. It started with a small independent company in the U.K., went through a couple of acquisitions, ultimately by Tech Data, ran Tech Data's European distribution business from 2002 - 2003, then joined Dell for six years, Bell Micro. The majority of that, I was running Dell's global distribution, and then joined Avnet six years ago, courtesy of the Avnet Bell Micro acquisition in 2010. I'm delighted and honored to be running our EMEA TS business, reporting to Phil.
I'm going to jump straight in, in the interest of time, and just tell you that we currently, inside our business in TS EMEA, we're operating in 22 markets. That's where we've got a physical presence. We do, of course, export to further markets outside that list there. And we're currently working with somewhere in the region of 12,000-15,000 reseller partners covering segments such as ISVs, SPs, service providers, managed service providers, corporate VARs, OEMs, and system integrators.
We operate a centralized model, so we centralize, to Rick's point earlier on, we centralize wherever we can and localize what we must, and we're particularly centralizing functions of mid and back office in a way where we can scale and leverage our investments in those areas and provide a high-quality service across our organization, both internally to our countries and also externally to our business partners. And a good example of that centralization would be our warehouse in Tongeren, a centralized logistics and integration center in Tongeren, which is in Belgium. It's a 34,500 square meter facility. It's expandable, and we supplement that with a few 3PL, third-party logistics, operations around Europe to create a local service where we need to. In terms of my team, there's 13 of us.
We've expanded, invested, and involved the team, certainly since I've been with the company. I'd say the most significant recent investments have been, one, in terms of putting in a formal regional structure, a full regional, structure under Judith, Sukh, Roman, and Miriam. And that's really to provide and drive the strategy, but also drive execution, as importantly, if not more importantly, drive quicker and more effective execution in the markets. The second area my organization I want to highlight was the, appointment, around about 18 months ago of Alice Smitherman from an operational excellence perspective, and that would tell you that we continue to see driving operational excellence and productivity as a key goal for our, our operation on an ongoing basis.
The third area very much fits the announcements and everything Phil and others have been saying about services: we announced that Christian Magirus would be the European services lead, and that appointment was made a little six or nine months ago. Sorry, a little over six months ago, when Magirus were acquired by us in October 2012. And then in terms of the kind of growth opportunities that exist within our business, while there are economic uncertainties and headwinds in our market, I think from an IDC and a Gartner perspective, the European proportion of those growth—that growth in hardware, software, and services is depicted here on the slide.
And I would say from the Avnet perspective, we've got a few areas that I want to highlight to you in my closing slide, areas of targeted focused growth, which is largely organic and also will create some lift, we believe, from some of the integrations that we've or acquisitions we've already made. And whilst we're talking about some of the acquisitions we've made, obviously you can see from this slide here that it's been one of the key drivers of our growth over the period in TS EMEA. The acquisition requires integration, rationalization, synergies. And what we've really been doing here is building some very selective acquisitions to support and enhance our business.
It takes time and bandwidth to integrate these and create the operating lift that you have when you first go in and make the acquisition. We've got to learn more about each other as people. We've got to learn more about each other's businesses. We've got to build the right organization and the right leadership in that organization. We've got to rebrand the business. We've got to bring the people together. We've got to merge our supplier and customer portfolios. And the people inside the business are always at the top of the tree for us, so we very much reliant and value the expertise and experience that people bring inside our acquisitions. But they are very much targeted.
We will, at any point in time, go and look at the market and see who's out there and make sure that we understand the landscape, and occasionally we'll make proactive moves. But there's also a lot of approaches to us with Avnet as a consolidator and acquirer in the business. And I have to tell you that we pass on many, many more than we press ahead with. And so our acquisition trail here has been very much specific and targeted, and it's been targeted around market and line card plays, targeted around consolidation and scale, creating co-consolidation, scale, and capabilities. And just to maybe highlight from the Bell Micro one, that when I joined the company, Bell Micro was very much a consolidation and scale play.
Amesys was very much a market and line card play in France, where we wanted to scale our business in France and get deeper into storage, virtualization, and related services. The Mattelli acquisition was a small team of software developers who've developed a software platform that can deliver value, both internal to the organization and externally to our customer and supplier partners, and if we get time, we can go into that in more detail later. But perhaps the biggest and most important acquisition of all was the Magirus acquisition. I mean, last summer, there was some accelerated consolidation in the European market, IT market, and we very much feel that we targeted and got the jewel in the crown with Magirus. Very strong people, an excellent geographic fit.
It did take us incrementally into Denmark, Italy, Spain, and Portugal. An outstanding portfolio of key suppliers, the most notable of which I would call out is VCE, EMC, Cisco, and VMware, and a very we're already partnering with three of those partners, but it was a very good chance for us to build out the line card in areas where we didn't have access to their products and services across EMEA. A strong services business, too, and as Phil alluded to earlier on, when you put Avnet and Magirus together, our education services business is particularly strong across Microsoft, Red Hat, F5, Juniper, and others. We are very proud to be VMware's largest training or education services partner in EMEA.
From a structural and commercial strength point of view, I mentioned already the regional structure, the four regional structure we put in place. I think we're operating, just to give you a flavor, and this probably won't surprise you. We're operating at a three-speed economy currently. The central and eastern regions, I would categorize as being in pretty good shape. The north region and the elements out of the west region of Benelux and France, I would describe as flattish. Then Italy and Iberia, so Spain and Portugal, considerably weak and challenged.
In terms of size, maybe just take another cut for you, the north and central region make up approximately 60% of our enterprise business, and they're of similar size to each other, and then the east and west make up 40% of the enterprise business for us, and they, too, are similarly sized to each other. I just want to point out also that we continually manage within our business. We manage a portfolio of business. Within a customer, we're managing a portfolio of transactions and products and services. We're managing a portfolio of customers by country. We're managing a portfolio of suppliers and a portfolio of countries.
And I will tell you that we're operating at different levels of operating profit in our countries across Europe, and within that portfolio, several of our countries are at, around, or above our long-range operating targets. The regional and central model is key to us. As I said, we're looking to leverage that wherever we can and scale our business, and make our investments work for us across multiple markets. Most latterly, we scaled our materials management and procurement teams. We've centralized our accounts payable in the U.K., and we earlier on this year, we closed our U.K. logistics and integration center coming from Bell Micro, and absorbed that into our Tongeren facility in Belgium.
We find that in the major markets, the larger markets, scaling within the market creates a lift and incremental drop through. I think we've done a reasonable job of scaling our U.K. and German markets, and we're looking to do the same in France, which is our third largest market where we're physically present. The other key thing is obviously, you can see from this map here, we're a multi-country player, and it's becoming increasingly important for our suppliers, for our partners and their end users, to have that consistent, high-quality delivery of product, services, and value add across multiple markets. We find that increasingly becoming a competitive advantage, not just within the region, but on a global basis, where, as you know, Avnet operates across multi-regions.
The line card is very strong and goes to the heart of the data center where we operate. I'd say the line card there is, delivers approximately 80% of our-- over 80% of our business. It's extremely important that we're relevant to those suppliers, and they're relevant to us. I would particularly point out that, we're uniquely positioned on the converged infrastructure side, where we have-- we're the only distributor in Europe that has the ability and the authorization to build and integrate on VCE and FlexPod, and we view that as a significant or a compelling competitive advantage for us.
And then across, again, back to my scaling and the investments, we will look as we develop further on services, and we develop further on our solutions and our SolutionsPath program, driving technology and vertical expertise through our business partners. We'll look to scale those business. Wherever we invest in those business, we'll be looking to scale across EMEA. Something that can scale is much more interesting for us than something that doesn't. And then my final slide, just wanted to talk to you about the path to achieving our targeted goals.
I think at this point, you'd be entitled to ask, "Well, what's going to be different, and why the cautious optimism that, Graeme, that you're saying that you're going to start seeing and driving further lift in the operating profit performance in Europe?" Well, I've said that we've built a leadership team, and with some focus on the regions and execution, focus on operational excellence and focus on services. We're now significantly progressed with many of our integrations, and that's going to free up bandwidth and focus to drive commercial upside. We've been building a scalable services platform, as I've already mentioned. The focus in our organization, starting with me, the team, and the entire organization, is to create lift in the operating profit.
We're going to continue to work, to work at and look at the portfolio and address performance issues, as the slide suggests here. We're going to continue to drive efficiency and productivity. I can tell you that a lot of the actions that we took in fiscal 2013 will happen during the year, so next year, we'll see the we'll have a full year's runoff of those, cost, that cost management and those cost reductions in fiscal 2014. But I think probably the biggest lever we've got is targeted growth opportunities and the associated drop-through that comes with it. And if I just highlight very briefly, and if you'd like some more detail, you can ask in the Q&A session. Just like to highlight the five, without probably going into too much detail at this point, the five key areas of growth that we're focusing on.
And we're, in some cases, we're building, this is aspirational. We're building real pipeline of organic growth as we speak. But there's obviously the Magirus, Magirus leverage, generating growth from our. Which, and Magirus is already creating, is a growth engine for us. It was growing when we acquired it. It continues to grow, double-digit growth. So it's a growth engine, and we want to create lift, across both organizations from pulling that into Avnet. There's key customer segments that we want to drive and get deeper in and create, more of an ecosystem play, and rather than being more supplier or sometimes, too much supplier sales and product marketing-oriented, come to a cross-brand selling of value and solutions into the, into key customer segments.
And in fact, we've just created a system integrator, Pan-EMEA System Integrator team, to take advantage and work on the system integrator opportunity. Core supplier expansion continues to be a part of the game, and I think, and I know that we'll continue to see expansion across EMEA with the key suppliers that you saw on the previous slide. Services, we're going to scale our business in Europe with the services and service offerings we have today, and also scale on a global basis, because a lot of the functionality and offerings that we have in the, in the U.S., for example, aren't currently available in EMEA. And we're going to drive the growth markets, in particular, but not exclusively, Germany, Austria, Switzerland, Turkey, and the two major markets in Eastern Europe of Czech Republic and Poland would most specifically come to mind.
So, with that, I'm confident that we'll deliver a lift to our operating profit performance in EMEA and play our part in reaching the TS global goals, and long-range planning targets. So, thank you for your attention. If I can, now open it up for Q&A.
The question's twofold, but it's focused on the same issue, and that is, you know, two of the three TS divisions are well below the appropriate returns. You started obviously focusing on the EMEA side. So my question there is more, is this really a barbell issue, where you've got some very good businesses and some real- anchors, and obviously the, you know, announcement that you're going to abandon the Italian market. Are there, are there more of that to do? And if that's done, does that solve the problem, or is there something more in terms of it's pervasive in all the, you know, the countries that you operate in? And then the Asian issue there, I'm guessing, is somewhat different, but obviously suffering even worse from a contribution standpoint. What's the structural impediment there that needs to be reversed?
Okay, why don't you. You want to take Europe?
Shall I go, shall I go on the European piece? Yeah. Just maybe make a couple of comments to your question and then try and answer it. One is that I wasn't talking about operating profit performance when I talked about the region. I was talking about their sales performance. And then in terms of your reference to the Italian business, we did take the decision, around about 18 months ago, to exit the Italian business based on the business we had there at the time, and the supplier portfolio and the customer portfolio in place. To answer your question, I think that there will, as I mentioned, there will continue to be a hard look at some of the non-core strategic, non-performing elements of our business.
I think you should expect that we'll continue to take action on some of those elements. Does that, to your question, create, in its entirety, the lift that we're looking for in our short-term planning targets? No, it doesn't. So that's part, but not entire - you know, but it's not the whole of what we're driving in EMEA. We're driving - I think we've got a pretty good working capital and margin environment. I think we've got - we'll continue to look at cost management and efficiencies and productivity.
I think the growth, those five growth areas that I just talked about, I think they will be more significant, shall I say, than some of the pruning or the fixing of the non-performing businesses, if that answers your question.
I think it's a combination of a bunch of things. To build on Europe. You know, within Graeme's business in Europe, there are some countries that are very close to the long-range planning target, or maybe even over, okay, than what we have.
Above, yeah, some above, yeah.
There's others that aren't. Okay? And I even, on the call last week, I mentioned the U.K., for example. And we're not pleased with our performance in the U.K. Part of that's the market, part of that's we haven't performed well. So there is an action plan in the U.K. If we fix the U.K., that gives us a lot of lift across Europe, okay? As Graeme pointed out, Germany, Turkey, a bunch of other regions are actually doing pretty well. So it's. And then you get, you know, once you get inside the region or the country, then you gotta get inside the brands. You know, whether it be your, I mean. So it's a. You know, we measure our business by country, you know, by region, okay? Then by country, and then by brand.
And there, there's all kinds of levers that are constantly being worked. So it's gonna be continued expense management, portfolio management. So we didn't just exit countries, by the way, but we're also gonna exit businesses, okay? There's a technology, and we've been pretty open that if we can't get certain returns out of disk drives, for example, then we're gonna move that business out. Switching over to Asia Pacific. Well, let's just close out on Europe. Big issue in Europe, we need growth. We get growth, we're, we believe our structure is right. Okay, we get growth, it'll drop through. And so we're really focusing. You just can't continue to focus on the denominator. Okay? We gotta focus on the numerator and drive revenue growth and profit growth.
Can I just add a-
There's a plan.
Sorry. I was just gonna add a comment on the UK before you switch to Asia Pac-
Yeah
If that's okay. You know, U.K. is our largest market in EMEA, and as Phil correctly says, it's been a drag on it in terms of our performance. That, that's not a new issue for us. We did address that with some management changes, a little over six months ago. And I'm pretty confident now we've got the right management team in place and the plans to create the lift and the progress in the U.K. That's been more of a, an Avnet issue than a market issue, because some of our competitors have been growing there, and I think we need to recognize that.
And certainly last quarter, when we look at the revenue levels, the sequential performance, in Q3 versus Q2 would suggest that we have stabilized the business, and I'm pretty optimistic about now creating the performance we need to in the U.K. Sorry.
No, that's fine, 'cause Europe, and your, your question's very fair, by the way.
Yeah.
We're just being very transparent in the response. If you go back to Kevin's what if chart, you know, the bubbles, clearly, the biggest bubble that can create the biggest opportunity for Avnet is Europe. So that's why we've got our eyes focused on Europe. And we got the right team. That's the other thing. We built this team, and we think it's, we know it's the right team. Asia Pac, similar but different, okay? Asia Pac's a growth region. We're making investments in Asia Pac. We're managing them to a lesser drop-through, 'cause we're, we're dropping more investment back into Asia Pacific. You might have noticed in the last two to three years, we've been somewhat quiet in Asia Pac, not doing any, we have not done any acquisitions down in Asia Pac for several years. The last one was ItX in Australia.
And part of that was frankly, my decision. We need to get the foundation laid, okay, and get it more stable before we start adding any more on it. Again, Asia Pacific, you start looking at Asia breakdown, again, you look at these bubbles within Asia, you know, ASEAN's performing pretty darn well. Australia's had some setbacks recently, but we've got a model there that offers us very fair gross margins, that we should be able to derive operating margins, and we've made some pretty aggressive moves in the Australian market to get that back to where it needs to get to. India's moving up to the right, but it's still an investment region and a high growth.
One of our biggest challenges in Asia Pac has been China, to be very candid with you, and we're figuring out the value model in China, okay? We went in there and set up a beachhead, and we've learned a lot, let me just say that. But we've slowed our growth in China intentionally, because we weren't getting the returns, and managing that closely. But in Asia as well, we didn't make big news, but we acquired a company called Vanare several years ago. It was a SaaS application in financial markets. Turned out to be too far outside our core. We couldn't leverage it, couldn't scale it. We divested it last year, if we can't get it to work, let's get rid of it, and we did.
So we're doing the same thing in Asia Pac, and again, very encouraged as we do a fiscal 2014 planning, that we're gonna make some pretty good strides in Asia Pac's improve performance. Okay? Yeah, Matt?
Yeah. Phil, could you talk about the news this morning, the shifting of that $200 million integrated solutions business to your division? Talk about exactly what that division does and the opportunities, cross-selling, synergies, et c, in your business.
Yes, as best I can in this format, Matt, it's a good question. So, we talked about Avnet Services. The press release will help describe what it is, if you get a chance to read that, or I'll be here afterwards as well. What happens when, on the TS side of the business, we've been driving services, as you know. We started with SolutionsPath years ago, enablement, and those different areas of focus. TS started to make acquisitions that, and these names will go away, but I think you'll relate to the names and are in the press release.
Companies called Pepperweed, companies called Ascendant, Genalogix, Brightstar, Canvas, and they were all around, really, I'll say, for the most part, the front end of that lifecycle chart, you know, helping to drive demand, services, software. Canvas was a little bit different. That's more of a, a refurb resell, type of operation. But, you know, we really were focusing on, on driving services, software to further enable and drive hardware. Okay? So it's all, all tied together. When you add that integrated side, Matt, where, under Steve Church previously and Roy, we had these, it really started with ITAD. For the most part, stat, it started with reverse logistics and asset dispositioning, right? Green, from a green standpoint. And it started to mutate, okay, kind of more where the acquisition started to look a lot more like tied to the, to the enterprise lifecycle, okay?
Companies like PDSi and Nexicore, you know, started to come into play, and we started to look at that at the corporate level, saying, "Hmm, this is a lot closer." A lot of their customers were our customers. You know, Nexicore, the CDW vendor, we're doing some service there from the TS side. Nexicore is one of their-- is the one that got their top service provider for CDW at their last sales conference. So we started to look at the overlap and said, "This is a real opportunity for us to bring that business much closer to the enterprise, to the technology solutions business." So we made a decision late last fall that we started moving on very aggressively in the January timeframe to start bringing these organizations. There's roughly 12.
Almost 12 acquisitions we've done in 18 months that are partly integrated, but they're kinda sitting outside of Avnet. We're bringing them all together, okay? So we're bringing, bringing them together. Gonna get the synergies, frankly, in the back office side that we hadn't leveraged yet, okay, had, had not maximized. Those brands name-brand names will go away over time, but people still relate to them, so we still use them. But they'll, they'll fade out, and we'll drive the service offerings. Because service offerings, when you look at them, customers don't buy service offerings by brand, okay, they buy it by need, okay? So this IT lifecycle, you need cloud enablement, you know, so on and so forth. Training, they don't buy training by brand, they buy. They want training. They want cloud enablement. So what we've done is pulled those together.
They're gonna be reporting into the enterprise computing, directly into me. Bill Wendt is gonna be leading that. So to be married very closely to the enterprise, it'll dotted line report into my, into the regional presidents, 'cause we wanna leverage the enterprise space. But we know services, traditionally, product people selling services, it's a different selling motion. It's a consultative sell. It's just a different sell. So we keep it really close to leverage the relationships, leverage the VARs, the system integrators. Oh, by the way, our suppliers, a lot of these companies we've acquired, we're finding they're doing business with HP, IBM, NetApp, EMC, because those suppliers, they're outsourcing a lot of this break, fix, repair, depot. They're outsourcing it. Okay, so now we've got an opportunity, both upstream and downstream. So stay tuned for more.
It's gonna be a separate business under technology solutions, but leveraging the enterprise space. Hopefully that, hopefully, that helps in bringing down. We're really excited about the traction in the market is very good. The partners, even our larger partner, like where's the CDW? You wouldn't think they'd be using an Avnet for services. Well, they are. Okay, 'cause they don't have it, they don't wanna build it. They would rather leverage it from us. So we have, you know, small, medium, and large partners and system integrators coming to us that won't come to us before for some of this enablement, from cloud to break/fix.
On the IT solutions ecosystem evolution chart, obviously, we've got, like, a whole bunch of, you know, impressive names on there, you know, your Amazons, your Savvis, et cetera. And of course, they're all gonna let you sell their product on their behalf. What confidence do you have that your piece of the ecosystem is gonna be a major driver of volume versus some other major driver of volume? You know, in other words, they're gonna try to have as many distribution channels as possible. Why are you guys gonna end up being a material portion of the end game there?
It's a good question. I'm not sure if I have the exact answer to that yet. Right now, Savvis is, you know, is used, so they see the value that we bring into the VAR base and into, into the enterprise space. Will they go bring on- today, they haven't, but will they go potentially bring on other distributors or partners? It's very possible. All we wanna do is be sure that we have a suite of services, okay? Because we're gonna try and sell everything through our current supplier base, obviously. But customers, again, as I said earlier, they want, they want choices. So they might be buying some of the services from our current suppliers. Others might be saying, "Hey, but I wanna go use a Savvis as well." And so it's not gonna be...
I don't think it's gonna be a war. I think it's gonna be an end. But I think it's very, very new, and I think we're all still trying to figure out this whole model, you know, moving forward. But clearly, some of those partners on there were more tied to more the consumer, if you will, or the, or the S, to the SMB, that realize that they wanna get into the enterprise space, okay? They need to partner with someone like an Avnet, okay, to go get into that enterprise space. How this ecosystem changes and evolves and who knows that list is around tomorrow? I mean, it's really, it's really tough to call, okay?
But we're very confident, okay, not overconfident and comfortable that the ecosystem we're putting together for the partner base is the right one to enable them to, you know, just like that chart says, whatever they want from a service, we can go provide it. And we have IO in there, for example. Some customers want on-premise, some want off-premise. Well, we're partnering with IO . We can do it either way, and we'll manage it from anywhere, okay? And that's an increasing demand from the customers as well. So we'll just have to play that by ear as we go, okay? But it's a good question. I don't have the exact answer to it today.
One of the most interesting things which I heard is this idea that people who are in the service business are buying services from you, and, like, CDW doesn't wanna build other service capabilities and that sort of thing. Can you just walk through a little bit of the logic on that? Because it, it sort of seems like that's their business. Is it, is it things that they're— Is it services that they would only use occasionally? Like, "Oh, we only use this on 5% of our deployments, so that's why it makes sense to, to outsource it." What's the-
Yeah, let me. So I don't wanna speak for CDW, okay? They absolutely wanna be in the services business, so they're not outsourcing everything. So I'm gonna be really careful on that. They're absolutely committed to the services model because that's a big piece that they offer to the marketplace. I'm sure where they get a lot of their margins from. But anyway, that's CDW. I'll use CDW, or I can just use another, and I can't name this one. Well, you know, I just impressed with these larger Logicalis in there, you know? It may be a couple reasons, maybe non-core to them. Okay, so, hey, if it's gonna be a one-off type of deal, hey, you know, we don't wanna go add on our own direct reps or direct service people.
Or why go use some, you know, 10 other small service providers to get done, if Avnet has the scale, the reach, and expertise, let's use them. You know, if you look at the Logicalis, for example, is using us for some Cognos, analytics, and cloud enablement. Just means that they, they wanna, they wanna be- they're gonna be the prime, but they might not have some of those exact resources. And rather than hire them, "Hey, I can just contract them and team up with Avnet," because we're a safe haven. So when these partners come to us, they don't have to worry about us competing with them. They bring us in, we're just there to go help them be successful.
We have a teaming agreement with them on how we share and how we get paid and get sharing the gains and the win. There's another large system integrator I went to last week that really, frankly, almost surprised us. They've got a very large services business, but they have 50 different partners today that they use still to. You know, they have their own force, but they still have to outsource, you know, all these one-off type of situations. They think if they can come to us, we can help reduce that by half. So now they're managing us instead of 25 other guys. So it's such a fragmented business. To have all the offerings that customers are gonna want today, it's tough to build out.
But if they can build—it's no different than what we do for them today. If we can build—help them build a variable model versus a fixed model, again, we, we can provide that scale. Okay, so that's... I don't wanna speak for them, but that's, that's what I'm hearing, in the short time that we've started to bring this Avnet Integrated over. It's, it's exciting. And probably the same thing on the, you know, when you look at Ascendant and Pepperweed and Genalogix, the capabilities they bring, our partners can just leverage and take it into their own customer. Okay? I think where we have time-
I think Ascendant is a good example, Phil, just to build on that, where Ascendant is helping with system integration, particularly, I'm talking about the European, particularly around IBM software and some of our IBM, hardware-focused, partners, are really looking to team with Ascendant, as Phil said, to take them. You know, they're getting into opportunities.
Absolutely.
They're seeing a big opportunity and currently only being able to take advantage of some of that opportunity, and they wanna kind of create and leverage the expertise Ascendant brings to get into-
We have a lot of partners are hardware-driven.
Yeah.
You know, predominantly hardware, maybe 90% hardware, do a little bit of software. Well, now, you know, they needed to sell a total solution. They want some software expertise or Cognos. They can come partner with us, they can provide a total solution. They don't have to worry about us competing with them. That's a big part of it. Sometimes that, that partnering didn't always work in the past, going, you know, two VARs working together. We help enable that. Okay, I think we gotta-- we got. Hey, thanks for your questions. I'll be around through lunch-
Thank you
And for a little while afterwards. Thanks for your question, yeah. Okay, so we're gonna get started. Still good morning. I'm Phil Gallagher, responsible for technology solutions worldwide. I wanna thank you for your, your time today, and your interest in Avnet Inc. During this session, we're gonna touch and drill down a little bit on the technology solutions group for Avnet. The opportunity is Avnet's TS position to win in the market. Gonna highlight on the presentation today, really four, five key areas that'll be a theme that you'll see as far as why we think TS is a good investment for growth and opportunity. One, the technology shift, which was at the top of the conversation with many of you in the one-on-one already. The dynamics around the ecosystem.
You know, what's happening in the ecosystem? Global leverage. Don't ever like to use the word global, but I'll tell you, in the last year, there's been a real movement afoot as far as leveraging the scale and scope that Avnet brings to the marketplace in the enterprise space. Converged, and converged solutions, and really becoming a sweet spot of technology and just a huge opportunity for us as we're well positioned in that space as well. And something that came out this morning that many of you have been asking about, and hopefully, if you haven't read it yet, you will, is a press release on Avnet Services.
As we've brought many organizations together inside of Avnet, pulling them together under the TS umbrella, as you'll see, it helped fill out the value offerings we wanna provide our partners, okay, to sell more services as part of their revenue stream as well. And lastly, the whole theme or everything we're about is making channels better, okay? And that's what Avnet's about, you know, driving our business through and with our channel partners. So with that, let me jump into the presentation. Avnet Technology Solutions offer an unmatched value proposition, creating a sustainable, sustainable competitive advantage for our customers, suppliers, by developing and delivering value-added solutions across the IT supply chain globally. Gonna cover today the current state of the environment, technology solutions overview, how we've been performing and our position in the marketplace, the global solution delivery capability.
Much of this will be focused on services, converged, and our cloud offerings, and then a brief summary. So how do we see the market today? Over the next three years, you can see by the chart, there's gonna be an additional $154 billion in incremental IT spend, just in the next three years. 63% of that's coming from the mature markets, or 3.6% of the growth. 37% is coming from the balance, the emerging markets or the growth markets. So double, greater than double the growth coming from the growth markets. You'll see, as I set this up, you know, how Avnet's expanded our presence in these global markets in these growth markets to better penetrate the opportunity of the IT spend as it shifts around the world.
The other key point I want to make is services. You can see services is roughly $111 billion in incremental growth alone in that category. Clearly the largest, okay, and it's grown 70%-it's 70%, okay, of the incremental growth in IT spends coming from services. So we talk about technology shift, okay? Hardware, software, services, it's definitely a movement afoot, and we're positioned to go maximize our success in that space. Environmental overview. This is something we study constantly to be sure we're positioning ourselves in the marketplace for growth. Can't stand still in the IT world, that's for sure. If you're slowing down, you're falling behind. I'm not going to touch much on the macro trends.
Rick and Kevin already covered that well, and you know that as well as I do in the world we're living in today. But when we look at technology, the IT spend drivers are changing, driving more value, and this whole opportunity around the converged technologies. Again, a sweet spot where Avnet can play and maximize our success. When you look at suppliers, and I'll kind of combine the suppliers, customers, and globalization, but you know, we're constantly in that heart and brain, what's more important, our suppliers or our customers? And it's you can't live without either one when you're in distribution. So we're serving two masters constantly.
But there's no question there's a theme going on from both customers and suppliers with regards to expanding, wanting to expand reach and wanting to expand services and solutions, not to mention a keen impact from the suppliers on expanding in Asia Pac. Graeme will talk more about Europe. There's a movement afoot as well from the customers needing more global support, okay? From our VAR, traditional VAR partners, the system integrators, service providers, the scale that we're starting to see and the need for more global deployment, okay, has increased, I would say, double in the past year, which is an opportunity for us. And then just in general, the overall ecosystem, okay, is moving fast, both on the supplier front, the alliances front, and the partner front, okay?
Whether we're talking about system integrators, value-added resellers, ISVs, service providers, managed service providers, the ecosystem has expanded for us, which is a great opportunity. So what's our portfolio look like today? From a geographic standpoint, you go back roughly 10 years, and you can see 74% of our revenue and profits were coming from the Americas. The balance, with about 2% in Asia Pac, was coming from EMEA. Now, we're in over 80 countries served. We're shipping into 770 countries worldwide, and just in the last year, we've added over 130 product lines across the world, both organically and through acquisitions. And our portfolio today is now roughly 53% Americas, and the balance, 29% Europe, roughly 30%, and 17% Asia Pac.
So when you go back and look at the opportunity of where the growth is coming from, in growth markets, okay, this, you know, obviously, the mature market is still huge for us, but the opportunity in growth markets, we're positioned to go capture some of that growth. The chart on the top right just shows it a bit differently. The point I wanted to make here is that although, admittedly, we've not hit, to date, our long-range planning targets of 3.4%-3.9,% we have, over time, been trending above the enterprise return on working capital goals. We did dip slightly here in fiscal 2013, as we estimate, the year-end coming in somewhere around 27%-28%, just below that line.
Okay, but we do plan, as we're getting ready for next year, that line will reverse back in fiscal 2014. But the point there is we are still tracking to the returns, not hitting the operating margin. I'm sure you have some questions on that, but we are getting to the enterprise return on working capital returns. Talked about technology shift, the portfolio management. We're working hard, okay, deliberately to continue to improve our mix shift toward higher-value products and services, and software. If you go back 3 - 5 years, hardware was roughly 70% of our portfolio and a balanced mix between services and software. Today, you can see, as we close out this past quarter, year to date, roughly 60% of our business is hardware, 20% software, and almost 20%, 19%, in services.
So again, going back to the opportunity moving forward, we're positioning ourselves not only today, but for the future, particularly some of the announcements we made earlier today. When you look at it, the hardware mix, a lot of focus and attention on servers. Other servers there, by the way, is the proprietary servers. That mix has changed dramatically over the last five years. But servers in total, okay, as a percentage of our total hardware, is now 24%, with storage, may not surprise some of you, is our largest technology, largest commodity at 30% of our total revenue. I don't see this shift changing, but I wanted to just share that we are evolving and driving margins and returns optimization based on the mix management. Talk about global solution delivery. It's one of my favorite charts.
It touches on a lot of the questions I had at the break. You know, the ecosystem's getting really complex, which means that, you know, complexity is good for us because we help to simplify it. We play the great aggregator, and our customers, more than ever, need help in deriving the solutions. Our partners need more help than ever in deriving the solutions for their end customers. But basically, whether it's software, services, or hardware, we'll deliver that solution through some of the best supplier partners in the world and alliances that we've built. If you want X-as-a-Service, you want Platform-as-a-Service, Infrastructure-as-a-Service, Software-as-a-Service, Storage-as-a-Service, no problem. We can deliver the virtual assets through the same partner base to meet the needs of our partners, okay, to provide that total solution to the end users.
So this is an exciting chart for us, 'cause whether it's physical or virtual, we're right in the center of technology. The global solution delivery, converged systems. We have opportunities today where we have, you know, some of our larger brands offering their converged system as one brand. That's great. We're selling those and having great success. Many customers want to take the best of breed across technologies, okay, and take what's the best application software, enabling software? What's the server and storage solution they want to use? Which networking do they want to use? And this is an increasing opportunity based on our global footprint, our integration and services capabilities, that we can take it from discrete, okay, and build it in a rack, custom rack.
We provide the power supplies, we load the software, the hardware, we test it, and ship it directly to where the end customer, the partner's customer, wants that delivery to arrive. This is one of the fastest growing businesses for us, as it is for the industry, and we don't see that slowing down at all. But Avnet's, again, footprint, portfolio, and delivery capabilities are much differentiated based on our product offerings that we have. Last year, we talked about globalization, specialization, and innovation. The theme of this chart is, We Make Channels Better. And we're going to continue to drive the opportunity identification and fulfillment services. We wanna do demand generation. We're gonna do plan and procurement.
We're gonna continue, which is a great value we bring to the channel from a financial services standpoint, and we're gonna continue to integrate and test, back to the previous chart on just the converged systems, for example. Well, in the last year plus, from an innovation standpoint, we've made some major investments, some organic, some acquisition, to further enable our partners to deliver more services to their customers. So we can now do install and implement. We got 24/7 call desk. We got spare parts depots. We can actually take it all the way to, you know, recycle iPad or refurb and resell, okay? And these offerings are relatively new, okay, but very exciting. We're getting great traction from our partners.
By the way, our partners in this case being value, value-added resellers, system integrators, service providers, and by the way, our suppliers. Big customer for a lot of these services are our own, our own suppliers. And educate and optimize. Education services is new. We, we've been doing that, we're scaling it, and you'll hear a lot more about some of the things we're doing for our suppliers from an education standpoint. So why Avnet Services? You know, it's roughly a $675 billion business worldwide, extremely fragmented, with 40% of the business today being done by 20 partners, professional services providers, with no more than one at 7% of the business, and the rest are barely above 1%. It's a very fragmented market.
So what we've been doing in the last year and a half is helping to consolidate that market so we can further expand the solution delivery capabilities for our partners, extend our suppliers' reach, okay, and enhance the overall value of the channel in the marketplace. The three major product services or service offerings we have are software, the IT lifecycle services, and education services. You know, we're transforming from a product and services to solutions. First came the products, and now came the Avnet Services. I have a brief video, if you can run it, from one of our major partners and a name I'm certainly sure all of you recognize, CDW. You roll the video?
Avnet to leverage their broad product and services portfolio to provide solutions to our customers nationwide. P.J. Carlin, one of our inside solution architects, is here to tell you about a recent win for CDW and Avnet.
The businesses CDW was trying to solve with our customer was a large nonprofit customer who had two data centers and a large footprint of HP storage, HP EVA storage. In fact, ultimately, they were refreshing their storage and implementing HP 3PAR and HP X3800 NASs. CDW needed a partner to leverage to help us tie together the entire solution to the customer, not just the hardware, but the services. Leveraging Avnet, we were able to do that successfully for the customer. The engagement was closed not only on the hardware side, but on the services side, and that was great, thanks to Avnet.
Avnet, one of our top strategic partners, is leveraged for implementation and support services for professional AV, client computing, software, and our server, storage, and virtualization practice. These services support our commercial and public sector clients. Avnet's consistent investment and alignment with our organization led to them earning our first-ever Service Partner of the Year award in 2012. Voted by CDW coworkers from our partner services group, billing and administration team, our project managers, and sales organization, Avnet was recognized for their consistent delivery quality, strategic investments, and product and services portfolio. We've already engaged them on multiple other services opportunities stemming from the success that we had in this engagement. We greatly value our Avnet partnership and look forward to many future successes.
So I wanted to thank, CDW for that. They volunteered to do that for us, knowing our Analyst Day was coming up. And again, many of you know CDW. So in summary, prior to getting to Europe and then Q&A, we're seeing a leverage in global scale and scope that we haven't seen prior. It's really accelerating. Our services and solutions, as I've described in the press release, we'll further go into, and we can have more Q&A, is really getting traction in the market. The evolving ecosystem, okay, is exciting for us and that the opportunity around converged solutions continues to expand. We will provide the best customer experience, have to, for our customers, both our partners and our suppliers, and we need to continue to drive scalability and efficiency.
I can assure you that we are committed, TS Global Management Team, to hit and attain the long-range planning targets that we've set out. The team knows, I know, that that's not optional. So thank you for your time. I'll come back up for Q&A. I'd like to introduce Graeme Watt, President of EMEA, TS EMEA. Thanks.
Thank you. Thanks, Phil, and good morning, and thank you, everybody, for spending some time with us today. My name is Graeme Watt, as Phil said, President of Avnet TS EMEA. And what I want to cover with you, this morning is kind of four key areas. One is a snapshot of our business, TS business in EMEA. I then want to move on to some of the M&A that we've been doing as a key growth driver for our business in Europe. I want to highlight within our business some structural and commercial strength that we have at Avnet, and then I want to conclude with how we're going to increase our operating profit performance. And in TS EMEA, a lot of that will be around organic growth, and lift from our prior period M&A.
So if I can just jump in, with a snapshot of our business. You can see here that we're physically present in 22 markets across Europe, Middle East, and Africa. We actually export out of those, some of those markets into further markets. We're currently operating with somewhere in the region of 12 thousand-15 thousand business partners across Europe, and that's covering customer segments like ISVs, OEMs, service providers, managed service providers, system integrators, and corporate VARs. We operate a centralized model in Europe, so a lot of our mid-office and back-office functions that support the business are run centrally. We do try and create a very consistent and high-quality service to our operations, both internally and externally, by virtue of that centralization.
A good example of that is our Tongeren facility, our logistics and integration center in Tongeren, Belgium, which is a 34,500 square meter, expandable facility. We supplement that with a few 3PL organizations, operations around Europe to provide some of the more localized services that we need to provide to our customers. From a team perspective, I've got a diverse team running the business and our 2,100 employees in Europe. You'd expect a diverse team because we have a very diverse market to control and manage. I've got five different nationalities in my team, covering seven different locations. In fact, seven of the team in my three-year tenure at Avnet, seven of the team are new to the team. The team's also expanded, I might add.
Two of those coming from acquisition, three coming from internal promotions, and two from outside the company. So we continue to evolve the team very positively. And in terms of investing, you know, probably the key thing I'd point to in the team currently is where we've invested lately. So we invested in a regional structure, a full regional structure, moved that from an informal to a formal regional structure at the start of the year, primarily to drive strategy and execution. We appointed a services lead in EMEA, Christian Magirus, coming from our Magirus acquisition that we closed in October 2012. So that's a key move and very much in line with the services piece that Phil mentioned earlier on today.
The final piece I draw your attention to is the dedicated operational excellence head, Alice Smitherman, also an investment in the team, and that would tell you that we take continuous improvement around productivity and efficiency inside the organization very seriously indeed. Despite the, and we've said this a few times already today, despite the economic headwinds in Europe, you can see here from the IDC and Gartner statistics, they're forecasting between 2012 and 2015, a $37 billion increment in IT spend across hardware, software, and services. But on top of that, I think that we- what I'd like to come on to during the course of this presentation is show you that we have a few targeted growth areas inside our business that we think will deliver lift and organic growth in the coming periods.
Then I was asked to say a quick word about myself. I graduated at Edinburgh University in Physiology. Don't try and look for a pattern here, by the way. I then moved into accountancy and became a chartered accountant in 1987. I then joined a client of mine, which was the largest, at the time, largest U.K. distributor in England. That company was acquired by Computer 2000 and then was acquired by Tech Data. I ran Tech Data for three years from 2000 to 2003 in EMEA, and then left to join Bell Micro, where I was president for six years, a six-year tenure, the majority of that running Bell Micro's global distribution. As you know, Bell Micro was acquired by Avnet three years ago.
So I've had 25 years' experience in IT distribution, and 21 years married with 4 children based out of London, England. That's about as quick as I could do it and make it sound half interesting. Moving on to the next slide, I want to talk about the growth that we've been experiencing and driving in Europe and how M&A has played an important part of that, particularly laterally, I want to focus on. But I also, as you can see from the slide here, we have been investing in the future, and it does take up a lot of skills and energy around integrating, around rationalizing, around synergizing.
You know, when we're buying companies, we've got to learn about each other, both at a personal level, but we've got to learn each other's businesses, and a lot of that learning comes after the acquisition. We've got to create the right organization with the right leadership. We've got to physically combine teams. We've got to rebrand the business. We've got to merge our supplier and customer portfolios. And throughout all of this, we put a great emphasis on making sure that we retain and motivate the people in the business, the most important element in the business, and all of the expertise and experience that they bring with it. And our acquisitions have been very much targeted.
As you can imagine, at any point in time, we have views on who might be a good strategic fit, a good cultural fit, and who could create the right levels of return in our business. But we get an awful lot of people approaching us as a consolidator and acquirer in the business. And I just want you to know that we pass on many, many more than we chase down, if you like. And so the acquisition trail here that you can see depicted has been very targeted. Just to make a comment, you know, some of the plays that we're involved in on M&A, market and line card plays, consolidation and scale plays, and capability plays. I just want to make reference to a few, two or three very quickly.
The Bell Micro acquisition three years ago was very much a consolidation and scale play. The Amesys acquisition that we made was very much a market and line card play, which was focused entirely in France. The Mattelli acquisition we did was a small team of software developers, and the IP with which they brought to the company, we use that both internally and externally across three different areas to create value, as I say, internally and for our business partners. But perhaps the most outstanding acquisition is the Magirus acquisition. You can see that Magirus is up on the chart twice. In 2007, the company bought the hardware piece of Magirus, and then in October last year, we bought the remainder of the business. There were a lot of acquisitions.
There was a lot of consolidation going on in the EMEA channel at the time, and I believe that we got the jewel in the crown. We bought a company, very much storage, virtualization, software, and services oriented with exceptionally strong people, a very good geographic fit. It did ultimately take us into four incremental markets of Denmark, Italy, Spain, and Portugal. An outstanding portfolio of key suppliers, most notably VCE, Cisco, VMware, and EMC, with a very, very good fit to where we had gaps in our line card and a strong services business. And in fact, when you put Avnet and Magirus together, as we have, one example of our strength in Europe is the fact that we're now VMware's number one training education services or training partner in the region by quite some distance.
On this slide, I wanted to highlight some structural and commercial strengths. As I alluded to earlier on, we've got four regions that we've put in place, and we're very much seeing, and this probably won't surprise you, seeing what I would describe as a three-speed economy. So the central and eastern regions are in good shape. The north region of U.K. and Ireland, the Benelux portions and French portions of the west region, I would describe as flattish. And the other element of the west region, the Italy and Iberia, so Portugal and Spain, is quite severely challenged and actually quite weak.
In terms of where our business is coming from, I'd tell you that our North and Central region make up about 60% of our enterprise business today and are of roughly equal proportions. I would tell you, therefore, that our East and West regions make up the remaining 40% of our enterprise business, and again, are of roughly equal proportions. You've got to remember that we're managing a portfolio business. You know, we're managing a portfolio of customers, we're managing a portfolio of suppliers, we're managing a portfolio of countries. I will tell you that some of the performances that we have today going on inside the region are already at and around and exceeding our long-range planning targets. We just haven't got them all to that level quite yet.
The regional and central model is very important to us. We, as Rick said earlier on, we look to centralize as much as we can and localize what we must. We look to leverage every single bit of our business across the region where we can and scale the investments. Some of the moves we've made laterally, most laterally, have been to further centralize our materials management and our procurement functions. We've centralized our accounts payable function out of the U.K. About six months ago, we moved a legacy Bell Micro logistics and integration center from the U.K. We closed that and integrated that into our Tongeren facility in Belgium. We look to scale our larger markets in particular.
I think we've made some strong progress in the scale of our U.K. business in Germany, and we look to scale much more aggressively going forward, create the same level of scale in France, which is our third largest IT market that we currently address in EMEA. You'll also know, and it is depicted in this slide, that we're a multinational business, and it's becoming increasingly important for our suppliers, for our customers, for our business partners and their end users, to be able to receive and take advantage of the capabilities that we deliver, and the value we deliver on a multi-market basis. And I say that not just within EMEA, but while a lot of the opportunities do remain within the region, increasingly now we're seeing global opportunities.
As you know, Avnet is very well-placed globally to work with our partners and deliver on those opportunities. The line card, as depicted by the strategic suppliers here, is a very strong line card. It represents probably in excess of 80% of our business today, those suppliers. And it's important to me and important, I think, to our suppliers, that we're very relevant to each other. I think if we're relevant to those suppliers and they're relevant to us, not only does it deliver a short-term tactical opportunities and advantages, but it also means that we're aligned in the mid and the long term, and it creates the right level of investment, too. And I would comment at this point that we're also uniquely positioned in EMEA, in the converged infrastructure space, as a result, again, of bringing Magirus and Avnet together.
We're the only distributor in Europe that has the ability to integrate and build and supply both VCE and FlexPod in the region, which we think is a, is a, a strong competitive advantage. And then from a services point of view and a solutions point of view, we've rolled out SolutionsPath, which is a, a, again, a global initiative that has been emanated from our North American business, creating strong technology and vertical focuses to our partner base. What we do is we make sure that on services and solutions, that our offerings are very much scalable, and we make sure we can again leverage our investments across the business in EMEA. And I'd like to close with a, a slide which talks about how we, the path to get to our targeted goals.
And you'd be entitled to ask at this point, what's going to be different and why the cautious optimism that we have in terms of creating lift in our operating profit performance in EMEA? Well, I go back again and echo Rick's comment, that we've been building value in the business. We've built a leadership team, and we've added focus on the regions, on execution, on operational excellence and services, as I've already mentioned. We're now significantly progressed with our integrations of our M&A, and that's freeing up bandwidth, and we're now in a position to start putting more focus into delivering the commercial upside. And we've been building a scalable services platform, and the focus inside my business with me and the team and the whole organization is very much to now create lift in the operating profit performance.
We're going to continue to look at the portfolio and address performance issues, and you'll, you'll see and hear as we make moves, you'll, you'll see and hear that, I'm sure. We're going to continue to work very hard to drive efficiency and productivity in the region and cost, and continued cost management. And in fact, we did a lot of work in the fiscal year that we're in right now, fiscal year 2013, to take cost out of the business. And you will see the full benefit, or we will see the full benefit, of those cost actions. We'll get a full year run through of those in next fiscal, fiscal year 2014. But I think by far and away, the biggest lever we've got is targeted growth opportunities, and many of which are organic with the associated drop through.
So I just wanted to conclude with kind of five key areas and highlight to you where we see that growth coming from. One is Magirus Leverage. It's a growing entity. It's already a growth engine in its own right, and we see the potential to further leverage the extended customer, supplier, and services portfolio as being a key growth engine for us going forward. The key customer segments, we're looking to continue to deliver an ecosystem play to our partners, delivering cross-brand, cross-brand solutions and services value. And we want to get deeper with some of the big players out there.
And we're also, I mean, one example of what we're doing in this respect, is we've just invested in a Pan-EMEA System Integrator team, which was previously U.K.-focused, very strong, performing U.K.-focused team, we've decided to take that, and leverage that across EMEA. Third category I wanted to mention to you is core supplier expansion. We want to extend our coverage with those strategic suppliers that I mentioned before, and there's already positive elements to that in the pipeline. And we want to invest in the growth areas, the growth technology areas of storage, software, virtualization, networking, security, and converged infrastructure. The fourth area I want to highlight to you is services. Not just what we can do to leverage our service in EMEA, but leverage the global services footprint.
We've got to scale ourselves and leverage that services business into our core Avnet, if you like, more traditional distribution business, and we've got to leverage our Avnet business into the services business as well and create lift both ways. I think the fifth area I want to highlight to you is there are areas, as I mentioned before, areas of our business that are growth markets. They're growing at a good rate, and so therefore, we have to invest and drive growth in the markets of Germany, Austria, Switzerland, Eastern Europe. When I talk about Eastern Europe, mainly Czech, Poland, and Turkey. Not just exclusively those markets, but those would be the areas I would highlight.
That's really why I'm confident that we'll deliver an operating profit lift in EMEA and play our part in reaching the TS Global goals. With that, I'll conclude, and Phil will join me for Q&A. Thank you.
Thank you.
Hey, Graeme, Phil, it's Brian Alexander, Raymond James. So the first question: If we go back to an earlier slide, I think it was Kevin's, the $100 million opportunity to fix underperforming businesses for Avnet overall, how much of that comes from TS EMEA, specifically? I don't know if you can break that out. That's number one. And then number two, more detail on IBM. You know, obviously, we know that they've brought Ingram and Tech Data into the server and storage mix, and there's a moratorium on when customers can move. If you could just kind of update us on that time period, and then, and more importantly, why does this not create risk to your business, given that they're your largest supplier?
On the first question, Brian, on the cost reductions, I don't have that information available on the total. Can share with you that not only Europe, okay, but in other regions of the world as well, we participated in that $100 million number that you're articulating, and we probably gave our unfair share, okay? Because we need to, okay, to get to the long-range planning targets. Graeme's been in Europe in particular, quarter on quarter, looking at the cost reductions and continues to look at it this quarter, you know, to try and get that to fine-tune it. You know, we gotta... There's a balance.
I think someone also said earlier today that, you know, you also wanna, you can't devastate the business either, so you're in it for the long term, so you, you start to get into muscle, and you gotta be careful about that. But, fair to say that, our Europe team has performed well against the cost reductions, okay? And now we need some lift and growth, which is what Graeme's focused on, and we'll get the drop-through. Okay, so that's, that is on that one. On IBM, and you're specific on the Power, right? And the-
And storage.
On the expansion, right. Okay. We've not seen, you know, we've not seen an effect at all on our business there, and that's a roughly two-year, if you will, I don't know, protection, if you will, that we have from IBM on our current business, where Tech and Ingram cannot, you know, go in and disturb that. And we've seen, we've had this in Europe. By the way, this is not new. In Europe, they've had a lot of those products, and we've not seen it negatively affect our performance with IBM in Europe. So I think the best way to say it is we trust IBM as our largest partner.
They've been constantly forthright with their programs, extremely channel-friendly, always open to inputs, and I know that they don't want to do anything to disrupt their largest, okay, value-add distributor worldwide, okay? And we continue to expand our programs with them. That was something they felt they need to do. You know, in distribution, we've been around 50+ years. You know, I've been here 30 years. We're always gonna see some of that, okay? And the suppliers think they need to go do something. The key is how do they help protect the investments we've made, okay, so it's not disruptive to our business. And they've been very forth right, and it's been. There's been no effect.
Can you say what your operating margin for that part of your business looks like in North America versus the average for TS, where there's not competition? And then, Graeme, in Europe, where does your IBM portfolio stack up, even if it's just qualitative relative to your overall margin?
I'll answer first. We do measure that as far down as we can within the IBM business unit. But then it starts to get a little dicey with allocations, but we certainly don't, you know, break that out publicly, okay? You probably knew that. But overall, IBM's performing well within the range of our long-range planning targets, okay? But Graeme, would you-
Yeah, just to your earlier point, Brian, you know, we, you know, it's not just a point on the slide. We are looking at businesses, and if it's not core strategic or performing, that we will continue to evaluate hard and take action and just not ready to go any further than that. But there are things that we continually work on in that respect. In terms of IBM, IBM is our largest partner in Europe, and I'd say you know, by virtue of the fact, you probably expect it to be in the range of normal margins and returns in Europe, so, and which it is so.
I was hoping you can elaborate a little bit more on the IBM commentary. Within the server part of the standard server part of your IBM business, can you talk about the protections you're mentioning a little bit on the storage part in the North America the x86 server business, do you have those same types of protections? And then maybe you can also tell us, you know, how you're currently incented in terms of rebates from IBM on your standard server business, and you know, if you would envision that changing if it were ever to change hands.
Yeah, so you're talking about, and really it's more closed market is what they call it, versus protection. But you're talking about the rumors that are out there in the server?
Correct.
Oh, yeah. Yeah, yeah, we're really not gonna comment on that. It's a rumor at this point in time. We're in constant dialogue with IBM. Again, they're very forth right and very committed to, to frankly, I'd say, to the channel's success and our success. So at this point, that is what it is. It's a rumor. They've had no additional information released on that. Okay, as far as rebates, there's different incentive programs with all the suppliers across the portfolio by technology within the supplier, but we don't, again, you know, publicize exactly what those rebates are by technology.
Yeah. Okay,
Or by brand.
Shifting gears a little bit, could you provide us with a relative rank order of your gross margins within the different product categories of TS? So, I mean, proprietary servers, number one, and so on and so forth.
I don't know that I have that off the top of my head. Because so much of it's getting—I'd rather say that the more value we can add, okay, because the assumption in the industry, and since I've been in this role the last three to four years, the industry standard servers are lower margin. It's xSeries, and it's low margin. That may be the case if you're just doing pure fulfillment, okay? But if you're bundling the servers, whether it's industry standard or Power or Unix, BCS from HP, it drives the margin up, which is why we're so focused on the converged and doing more of the integration and tying more services and software around it.
So, you know, very rarely we're just out, you know, selling a piece part, you know, at the lower margin. That's, we- that's not our business. That's some of the other guys' business, frankly, that run a different operating margin than we do. But certainly, when you look at the portfolio mix, you know, software, you know, may run on a different margin, but it has a great return. There's no inventory. It's a phenomenal return. Services, okay, as we expand on that, it runs at a resold services, runs comparable to the hardware, okay? The Avnet brand of services, gross margins run much higher, as you might suspect. And hardware really becomes a mixed bag, you know, within the, you know, storage, proprietary, networking, UCS.
I would say they're all, they're all pretty comparable. But again, it depends on the, the opportunity, and depends on the complexity of the opportunity and the more value we can wrap around it. Okay?
Hey, guys, thanks.
Yeah.
Could you just talk a little bit about the drivers of the operating margin expansion that you guys see? Sounds like you mentioned it. Sounds like you're talking about most of it is to come from revenue growth and in more attractive areas. I guess, can you talk about what you need? Are you positioned in the way that you need to today to get to that kind of growth? Do you need to add line card? Do you need to continue to add service relationships? What's necessary? And then aside from that, can you kind of quantify for us at all, even an anecdotal quantification, what portion - like, if you connect here on that, where does that get you as far as the margins? Does that get you up into the range?
And in addition to that component of it, where do the other... Can you give us some specifics around, I guess, what the other leverageable opportunities look like?
Yeah.
I know you guys talked about some efficiencies. Maybe you can give us some specifics around that. That all would be great.
Can you be specific? What was the one that you were asking about? The one that- there's a middle one right there. You, you kinda-
Maybe just to keep it into two, the revenue component-
Got it.
of getting up into the margin range, what's necessary
Okay.
To have that happen, and then what are some of the specifics around the cost efficiency aspects of it?
Okay, I'll touch on it from a global standpoint. I think a big part of that is happening in Europe. And there's always the levers, okay? We are managing expense very carefully, and we've continued to manage expense and adjust where we need to. In the last quarter, we've made adjustments, frankly, in our North America business. We had a large brand that's been challenged for a couple of years now, remain nameless, that we had to make more adjustments in our business unit, unfortunately. But we're gonna go do that. If we see the margins or the value that we're providing not being rewarded, we're gonna go do that. And we do it by business units, so we don't do the peanut butter spreads.
We did that very specific by business unit right here in North America. As I articulated earlier, Graeme has been almost quarter-over-quarter, managing his expenses, and last quarter, managed some more expense. Now, as he mentioned, he should start seeing some of that drop through as we plan for fiscal 2014. So there's always the lever of expense. There's a lever of working capital, not as big a play for TS as it might be in EM because of the inventory model. And then there's the growth opportunities. So we're gonna continue to look at acquisitions that are accretive or fit the strategic and financial model for us, whether it be in current consolidation, less of that these days, but more adjacency. So acquisition is still very much a potential play for TS, where it's accretive.
Then you got the organic growth. We just talked about, you know, the converged solutions is, we think, a major opportunity for us. The global scale and scope, we're getting more and more partners needing the services that we provide. That's driving organic line card growth. As I said, we added over 130+ lines in the last 18 months, both organically and through acquisition. Then the one that we're real we launched today, that we've had, that we're now aggregating, okay, under Avnet Services, is services. So how do we continue to go drive services, okay, to further help us sell? I had this conversation with someone earlier. Help us sell more software and hardware, while we increase services sales because it's higher margin, it actually helps us drive more value around the total solution.
So there are the four or five levers, okay? And then we just got to continue to drive efficiency, okay? And that's just not expense, but that's efficiencies in our ERPs, efficiency in our quote cycle, efficiencies in our logistics centers, and we're constantly working that, okay?
And so-
As far as the brands, the line card, somebody asked that, I think it was part of it. We think that that line card that's in your package I covered today. I think we've got the suite of brands that we think is the envy of the industry, plus additional lines as we've built. Graeme?
Yeah, I just maybe add to that. In terms of the levers, the revenue, the margin controls, the cost controls, and then the working capital that we employ in the business to produce returns. I'd say from a margin perspective and a working capital perspective, we're in the kind of range that we want to be and need to be. There's lots of moving elements to that. There's margin pressures in some areas, and we're creating mix and lift in our margins in the way we manage the business. I'd say from a cost perspective, I would hope that we've done a lot of the cost actions and the structural actions we need to take. They never stop.
But as I said earlier on, we're gonna see, you know, a good lift in terms of a full year rollout of those actions because a lot of those actions have happened partway through fiscal year 2013. And so I think for me, the growth and the revenue is a big lever. You know, and I mentioned them earlier on, but the lift that we can get and leverage we can get out of our Magirus acquisition, we will see not new, in a significant way, new suppliers to the line card, but we will extend the line card with our existing suppliers because we don't currently partner with them in every market.
As I said earlier on, I know we've already got some instances where we've, you know, I've got cause for some optimism because we're already down the line with some. We'll be announcing some announcements shortly, I hope. I mentioned the services piece, which is clear that we can create lift from our services play. Investing in growth markets will continue. And then the customer segments. I'd just say that, from a customer point of view, we're moving more resource and deploying some resource from what were traditionally more supplier-led sales teams and support teams into more customer segmented sales teams.
That's happening, starting to happen more in our bigger markets initially, where we're looking at different customer segments, the segments I mentioned before, the ISV, OEM, the service providers, the system integrators, and really delineating them by the value add and the services and support they need and giving them on a segment basis rather than a supplier. You know, these guys aren't. They're buying cross-brand solution services now. There are many of them aren't buying, you know, single brand options. But in doing so, those that are, we'll give them the option to buy that way still as we evolve the piece. And I know for a fact that there's increasingly, and this will continue to be a trend, I believe in this, some of the corporate VARs are consolidating their purchasing decisions on a multinational basis.
So we're in the middle of a tender at the moment, where a big corporate buyer is going to its distributors and saying, "Now, I want you to tender for my," whatever business it is, "across five different markets." And I know that there's gonna be some opportunities. We're in one at the moment where we don't currently partner with that supplier, with that customer, in any of the territories, so anything we win out of that bid will be net new. So there's a lot of different areas. In terms of quantifying it, though, I wouldn't be able to, off the top of my head, you know, stick a number on it for you or even the constituent parts. But we do plan our business that way, so that's how we're planning our, into our long-range goals.
Thanks, again.
Hi, you had started the presentation by talking about the incremental growth opportunity in services. I know in the past, you've done a good job of detailing the IT life cycle side of the business. I was wondering if you could give a little more detail on the educational side and the software services in terms of what's the composition of the profile or the portfolio, excuse me, where the growth is coming from, et cetera?
On the software side?
And education.
Education's relatively new. We've been doing that. I'll let Graeme, you know, touch briefly. I think we're getting tight on time. But we've acquired. We've been doing education services. I mean, enablement's been a big part of the channel, big part of what we provide for the suppliers already. We, through some IP we've acquired from Magirus, okay, one of the benefits not only is their traditional value that they bring to market, is they had an educational component. That's gonna allow us to scale, okay, that opportunity in all regions of the world, where a lot of that was being done in Europe.
Mm-hmm
-previously. It's tough to quantify that at this point in time, but that's, that's just a big component that we see, and we've working with some major suppliers right now that are looking to outsource, okay, all their accredited training, okay, to us on a worldwide basis, okay, multi-language. So it's a new opportunity for us from a leverage and scale standpoint. On the software and services side, a lot of the- if you, if you recall some of the acquisitions we've made in the past year, in particular, you know, are companies like Ascendant, companies like Brightstar, they, you know, they're predominantly IBM services, software enablement around web portals. Brightstar brings us opportunities in Cognos and analytics, and we talk about Big Data.
There's a shortage of resources out there, so we have partners now teaming with us, okay, to go provide that service and add value to the end customer. Then we've got companies like Pepperweed, okay, and Genologix, that's allowing us to further enable our software services around cloud enablement, okay? And so these are some of the things that we're doing. There were acquisitions that we're now able to go invest in and scale and bring to our partner base. And the partner reception to date is very exciting. The total services play out there, as I said, is about $675 billion. I don't have that here broken out by every different service offering, but what we've acquired, okay, enables us to play much more in that whole IT lifecycle chart. Okay? We got, we're out of time.
Okay. All right. Well, we'll be around through lunch. Thank you for your questions and attention. Appreciate it.
Thank you. Okay, so we gotta,
And now we're ready for a prime time viewing here. Now, as I said with that group, because we've changed the format here, and what we're trying to accomplish is move through formal presentation process, Phil and Graeme may have said the same thing, relatively quickly to allow us as much time as possible for Q&A. We're gonna move pretty quickly on that. So what I did is I challenged myself to write out here, what I think are likely the most important topics I should cover. My message being, please jot yourself a note if this really doesn't cover what you would like to have answered, and Patrick and I will try real hard to get to that in the Q&A.
So what I was thinking. And by the way, you'll notice here, one of your peers in the other room noticed that I'd written my notes on the back of my boarding pass. So I just wanna show you how adaptable and tactically driven distribution executives are. If this doesn't go well, I got what I need. Okay. Okay, Rick, they're all yours. So these are the things that I wanna try and highlight today in our brief talk.
I said this to a few of you, actually, at one of the breaks, and I was kind of ruminating it over this fact on the earnings call last week, and that is, as we've dissected 2012 a bit deeper from the aggregate macro numbers, it feels to us like 2012 was actually a more challenging, more difficult year than we actually realized, and maybe that the industry realized. I wanna share that with you and give you a little more detail. Why does that matter? Well, it's irrelevant from a backward-looking perspective, but we think it is relevant when we're trying to share with you our opinion.
Part of our role here today is not to predict the future, but based on our seniority and our experience, we wanna try and share with you where we think we are in the cycle and where we're going. We think that challenging 2012, based on historical precedent and some of the other signs we are seeing today, tell us that we are turning to somewhere that feels better for us, but let us try and convince you of that. Yes, of course, we don't lose sight of the fact that our financial results, looking backward, are not what we need. We've made a commitment to Avnet and to the financial community, that we can run Avnet EM at 5% or greater through the cycle, and over the short term, looking back, we've fallen below that.
We believe we can get back to that, and we're gonna share with you why we believe that. Hopefully, we'll convince all of you that we can accomplish that. And I think the other data point that I'd like to leave you with is that we believe our model, and I think Kevin actually talked a little bit about this in the earlier session. We believe the model. He was calling it, I think, unattractive reverse drop-through. Well, we're here to give you the other side of the coin, which is, if the core markets that drive the lion's share of franchise, global franchise distributions profit, where we really earn our living, show modest improvement this year, we do think that'll have significant impact on our ability to right and get back over that minimum 5% goal.
So that's what we're gonna try and sell you on. And of course, as always, in a public setting, we need to recommit and assure you that we are fully committed and comfortable and confident that that goal is achievable. So real quickly, an agenda. I always include our mission statement at the top. You may all be tired of hearing me talk and segment my talks around design chain and supply chain, but just to reiterate, for any of you that may be new to the story, the reason we do that is, in our view, those two strategies, design chain, demand creation, whatever you wanna call it, and supply chain, or how we define it, global supply chain, are the two most sustainable value propositions for franchise distribution.
We believe we're currently the leader, but obviously, we wanna, we really wanna extend our lead, and we stay committed to those, and we'll talk a little bit about that. We'll talk about the environment, talk a little bit about EM, we'll talk about staying focused on our core, and then, of course, we'll move to a summary. So current state of the environment. To size up our opportunity, again, EM is a $15 billion company, give or take. We believe our served market, our playing field, is about $300 billion. So although we are currently the leader, we still think there's room to grow. It's gonna require a degree of creativity because, as all of you know that follow the story, the franchise distribution portion of the $300 billion is about $80-ish billion.
So $15 billion out of $80 billion, we're represented as the leader there. $15 billion out of $300 billion, gonna need some creativity to expand into that particular area, but we still see it as a good opportunity. It's a large market. The other point on this slide that I'll get back to in a little bit later on, is I wanna talk about our proactive strategy of creating a regional mix and a regional portfolio that is purposely different than the market in total. You'll see here on the pie chart, for 2013, the market is projected to be about 60% Asia, and as all of you probably know, but I'll show you, our ratios are quite different than that.
So one of the reasons for our optimism, and this slide is meant to illustrate what I said in my opening remarks, both backward and forward. If you look in the bubble charts, and for time's sake, I'll just focus on the blue ones, you're really talking about the key industrial markets. You're talking about medical, energy management. These are really the areas of our core focus. Patrick will talk a little bit more about them because you're clearly a leader in those areas, a big part of our business. If you can see the small white print, you'll see that those three markets combined probably suffered a 10% deterioration in the market overall in 2012. I included that to contrast it to the numbers that we all talk about as an industry.
You saw previously I had a 1% decline. Kevin had a 2.7% decline. Difference being that he is total market, I'm using a served market. But if you follow the industry, 2012 was somewhere between, let's call it, 1%-3% decline. These three core markets, these markets where a company like Avnet EM really earns its living, were off somewhere in the neighborhood of double digits. That, quite frankly, is a picture into why we've had the challenging year we had, and quite frankly, why we've dropped below our 5% barrier there. Oh, one other, if I could go back. The other point on this slide is, and again, I always use industry prognosticators to project forward, and we use facts to project back, because I'd rather they were wrong than I.
But what the industry prognosticators are saying here is these markets are likely to have a compound annual growth rate in the neighborhood of, let's call it, 4%-6%, and that feels about right to us. That feels about right. The point I was trying to make in my opening is if we get that kind of growth, if we get that mid-single-digit growth in these core markets, we believe that you'll see a flip, and you will see- you'll see the reverse of what Kevin described as the reverse drop-through. So that is one of the drivers. Question was asked this morning, what are the key drivers? One of the drivers are those core markets, quite a bit of it in the industrial West, need to start to accelerate and show some growth, and clearly, that was not the case in 2012.
A little bit about competitive landscape. As many of you are no doubt aware, the industry has, to a degree, consolidated around three global players, ourself, our friends at Arrow, and the largest, Asia-based competitor, World Peace Group. Comparable size right now, so you see three companies that, in a pretty good race for volume leadership. We are currently the leader, so we feel good about. That's the, if there's three slots, we'd like to be number one, so we feel good about being number one today.
But really more important, we're pleased that although it was a difficult market, so make no bones about it, we understand the challenge year-on-year, but we are pleased that when compared to our peers, we did establish and take the number one position, not only from a revenue perspective, but from a critical operating income dollars perspective. And as my friend, Mr. Brian, over here, were chatting before we started, I only took a very cursory look at the results from our largest competitor this morning, but unless I misread it, I believe that gap is likely to expand. So I feel good about how we're competing, and more important than the backward-looking, because, again, sitting at 4.3% margin, humble is probably the appropriate behavior for me up here.
But we do believe, we do believe we've been doing the right things, and we do believe that the leadership position that we believe we have earned will continue and accelerate looking forward. So a little bit about EM. I think all of you know this, but the principal value proposition that we, we will never, ever adjust is broad line, broad supplier base, broad customer base. No Avnet customer makes up 10% of our sales, no supplier makes up 10% of our sales. That is not by accident, that is intentional. I often joke that every supplier in our line card would like us to have one supplier, but that's not our value prop.
Our value prop to our customers is not only the breadth, but the future for us is the ability to integrate and create solutions from that broad proposition, and we will continue with that. You'll see here 65,000 design wins annually, up 15% year-on-year. So good activity there. One of the points I was trying to make on the earnings call last week, which I think is critical, if you think back to the bubble charts I just showed, and I meant that to illustrate and explain a little bit about why it's been such a difficult backward year or so. One of the elements of that bubble chart is that the design win revenue stream, and I mentioned this on the call last week, has been well below what it's been in previous peak periods.
So there is clearly a correlation I'm trying to make here. I want to put some data behind it as we research it further. My theory being that when design win revenue, not design win activity, when design win revenue accelerates at a rate well above industry growth rates, that's when Avnet EM hits its sweet spot. No doubt Avnet EM's competitors, but Avnet EM hits their sweet spot. If you look back to our record quarters, which was March and June of two years ago, that indeed is what was happening. As I sort through the data, I predict what the data will tell me was that we were growing our design win revenues.
I keep saying that because one of the things that I think predicts our success in an improving market is we have not in any way diminished our investment in design win capabilities, design win resources, and that really is the point of the 1,000 engineers and the 15% growth. We have been doing the right work necessary to build our business in the future, and I feel strongly you'll see that in coming quarters. I mentioned the regional mix. If you look at the top three pie charts, they illustrate what's happened globally, where you see the migration here from 50%s to 58%. I mentioned 60% is projected for calendar 2013, whereby our ratio has stayed relatively constant.
Now, granted, over time, and this question was posed to me in the last session, over time, of course, you're gonna see our business move up. Otherwise, if we stay too small in Asia, we run the risk of not being relevant, but also our growth rates will start to fall behind the industry. So we're not gonna allow that. But what we are saying is, by being premeditated in how we invest in our hundreds of engineers in the West, how we make acquisitions. You know, we've made a number of acquisitions over the last year in both Patrick's region in EMEA, as well as Eddie Smith's region in America, but they're not headline acquisition announcements. They're relatively small companies, but the criteria we've used for all of them is they must be strategic.
We don't just wanna buy a company 'cause they have high margins, but in addition to being strategic, the acquisition must begin its Avnet life at an additive margin level to the existing regional margin levels. So each of the small deals we have done over the last year meet that criteria, and you'll see us continue to do that, especially in the West. So for us, it's about balance. It's about managing the portfolio in a balanced way. Again, we have no desire to become small in Asia. We are a major player in Asia, and I believe we continue to be the most profitable major player in Asia, but we also wanna balance it with many other activities. I think this question was posed at the initial Q&A: What are some of the things you're going to do to manage that portfolio?
Some of the things, as I just mentioned, are very premeditated acquisition decisions. Some of it is deselection of revenue, and I think Kevin talked about that. A number of those things he's referring to were EM decisions. And we'll continue to look for specialized offerings. One of the challenges in the distribution industry today, and you can see it actually, if you, if you recall the bar chart I had up a moment ago that showed World Peace's results, you know, $13 billion-$14 billion in revenue, but well below their two main competitors from an income perspective. One of the reasons for that. Well, a number, the main reason is 98% of their sales are in Asia, which makes it more challenging.
But in addition to that, if you dissect their Asia business, part of what's happened to all of us over the last couple of years is high-volume fulfillment revenue has become a bigger part of everyone's portfolio. So what we're really trying to say here is, we're gonna find creative ways to make that business more attractive, non-dilutive, but if we cannot, we are more than willing to move away from that, and we've made some of those decisions already. Design chain and supply chain. I'll move through this relatively quickly 'cause I think I've talked about it. I think, again, I just wanna reinforce, this particular part of our strategy requires ongoing investment and commitment, especially in a difficult market, and we think we've positioned ourselves well for the future because of that. You've heard me talk about X-Fest in the past.
X-Fest is really the blue chip, mother of all design chain events. It began its life about 10 years ago as a Americas-based Xilinx roadshow, design process. It's now a global multi-supplier. And what excites me most about X-Fest, and the reason I use it as an example, if you look at the middle of the chart, you'll see that is, it has attracted some non-traditional partners where we value the relationship very much, and we're deep in conversations with them about doing solution-based things that will take us somewhere we haven't been before. You know, our relationship with the folks at Arm are a great example. Our relationship with a small, exciting company up in New England called MathWorks, a good example.
So these are the things you'd expect to see us in the future, and you'll see a $1.2 billion opportunity resulting from that. Now, again, as I said before, we need to see growth in the industrial market to enjoy the fruits of that work, but we have laid the ground for that, and we feel very good about the work we've been doing over the last couple of years. Supply chain as the yin to the yang of design chain. Supply chain, for us, is all about finding customers, supporting customers who desire a customer service solution that is multi-regional. That is easier said than done in any industry, particularly difficult in ours, because our industry evolved as a very regional business. It is becoming a substantial part of our business, and we believe our efficiencies and our offerings are best-in-class.
You'll see, in the, first box, $2 billion. So $2 billion of our current revenue stream is with customers today that we service in a different model, reports up to a different leader who's on my staff, who we support at a global level, okay? That number will grow at a rate above our core business, so we're very focused on it. We wanna be the leader. In reality, there's actually only one other customer, one other competitor, excuse me, who can provide that same service. So we think it's a pretty narrow offering for, for distributors who are looking to support that piece of the business. The middle box is about something we call global migration. Today, it's about $600 billion in revenue.
And the way I have to ask you all to think about that revenue stream is, that is revenue where we have been awarded an authorized design win in the West. Today, primarily in America, some in Europe, some in Japan, by the way, but we have an authorized design win, which, by the way, means higher gross margin, but we are supporting the consumption and fulfillment for that business, primarily in Asia. $600 million is a substantial piece of business from a competitive standpoint, again, only one other company who could do that. So think of the challenges, for example, of some of the large Asian distributors, like World Peace, that I mentioned before. And this explains to you why they've been working so hard trying to establish a beachhead in the West, because this piece of business is attractive and it's also profitable.
So closing out my summary, as I showed with the $300 billion, the market is still large. We should not ever accept that we are bound by our $15 billion range. We need to challenge ourselves to be creative and think of additional ways to expand into that market. We do believe more indicators have turned positive. We have become cautiously optimistic, as I said earlier. We think there are some more positive results coming in the near future, and we feel we're well prepared for that. Again, we continue our commitment to our leadership in design chain and supply chain. We'll continue to invest in nontraditional things like X-Fest. We're talking about expanding our OEM embedded solution business. Patrick will talk a little bit about that.
Of course, last but not least, we always need to leave the stage with our firm personal commitment. We are a very senior leadership team. I'm gonna have the pleasure of introducing Patrick, but as you'll see, we take our role, our responsibility to Rick and the board very seriously. We know we fill an important role as part of Avnet's overall results, and we are firmly committed and firmly confident that we can get the business back over the minimum 5% threshold, and we aim to prove that to you very much. Okay? Now, let me take the liberty of inviting up Patrick Zammit. Patrick runs our EMEA business. Our EMEA business is our most profitable business. It is a leader in design chain.
There are many things about the structure that we manage in our European operation, which Patrick is gonna run you through, that you're going to see exhibited in many ways and in other spots through Avnet EM globally. So Patrick, without further ado.
Thank you, Harley. Good morning. So I know it's representing me at the moment, if you look at the press, is a little bit a challenge. The reality is that distribution, we play in this, a portion of the economic environment here. And in fact, our success is highly dependent on how our industrial and automotive customers are doing. So if I look at the last four years, basically since 2009, where we had the major crisis, 2010, 2011 showed a very high growth, despite a very bad macro environment in EMEA. 2012 showed a decline of 11% of the market. Nevertheless, second best year in our industry. And then, 2013 starts, we are still declining a little bit on the year, 5%. We got the figures yesterday.
But again, if you look at the dynamics of the market, highly dependent on what the industrial customers and automotive customers are doing, and themselves are highly dependent on how export is doing. So basically, if you look again, 2010, 2011 and 2012, the weakness of Europe has been compensated by good export activities, first to Asia, and now since one year, one year and a half, to the States. So EMEA has got other very interesting characteristics, and one of the most important, it is a high GP region. The reason for it is because despite creation of the EU, it is a very fragmented market, okay? We are selling to 30,000 customers, those customers don't compete on cost, usually. Europe is a high-cost region.
They compete on innovation, and because they compete on innovation, they are looking for partners who are going to support them from a technical standpoint. That's the reason for design chain is clearly so strategic for us and is a clear differentiator in the market. Rapidly about EMEA, we are now a EUR 3.2 billion company. We make roughly 27% of EM global sales, 3,400 employees. We have a specific organization to take advantage of the market. So in fact, we have created separate business divisions or distribution businesses. We call them the speedboats. I will explain it in a minute. Nevertheless, when it comes to support functions, logistics, IT, finance, we have consolidated all that to get the economies of scale. We are clearly the number one component distributor in EMEA. In semiconductors, here I mentioned 43%.
Since yesterday, I have the latest figures for Q1; we are at 45% of the semi business. We have 8% of the IP&E business. The reason for the low share is because historically in EMEA, we have been focused on semiconductors. We have really, since 4 years, invested the acquisition and organic growth in the IP&E space, and this is a nice business for the future. I will come back on it in a second. Very important, customers require technical support, so we are trying to have as many engineers as possible, of course, the FAEs, but also in the sales force. And last, we have a very stable and experienced staff, and especially at the management level. I'm 20 years with the company, and if I look at the average seniority of my staff, it's around 15, 15 years also.
So long seniority, lots of experience, very powerful when you—we are a service industry, very powerful to have close relationships with your customers and also with your supplier partners, because especially in the tough times, that makes a difference. So we have a different go-to-market strategy. In EMEA, we grew thanks to acquisitions, so 20 years of acquisitions. In the late 1990s, I would say that EMEA was probably the problem for Avnet globally, and then things changed with the acquisition of EBV. So EBV was, and is still today, the most, or one of the most successful distributor in the market. And they came to us with a model which was completely different than what we knew at the time, which was to go to market, trying to sell all the franchises to the customer base.
This company was first specialized on semiconductors, and second, they had a very limited line card. With that, they had an incredible success. We learned from that, and we said, "Okay, let's go to market using this EBV model," and that's how we implemented the speedboat model. Basically, today, when you look at our model, we have created five distributors. They are all of, the five of them are specialists, okay? In, so Abacus, for example, is a specialist for interconnect, passive and electromechanical. We have three specialists in the semiconductor space. They all have a limited line card, okay? And the reason for that is, if you want to be the technical specialist at your customers, you need to be focused.
So you need to know the products of your manufacturers very well, and the way to attain it, is to have this type of structure. The model has proven to be very successful, okay? So today, we are the number one in the market. We've grown shares consistently in the last six years. I mean, in the semi space, my assessment is we gain roughly six points of share, so one point per year. It is today, EMEA is today the region providing the highest GP percent, and is also the region providing the highest operating income percent. So when you look at EMEA, we need to differentiate by countries. So the PIGS, for example, make only 2% of the market. Okay, so Portugal, Spain, Greece, Spain, it's 2%. They don't have such a wide industry.
If you want to succeed in EMEA, you need to be strong in particular in Germany. This is by far the strongest market, 35% of the market. If you now add, I would say, the countries all around Germany with the same type of of model, having powerful, innovative, industrial customers, like the Benelux, like Switzerland, like Austria, you get already to 50% of the market. If you add Eastern Europe, where, in fact, German customers have outsourced some of their production, and if you add, for example, the UK, you get rapidly to 70% of the market. Where, in fact, today, even if the growth they are still slightly declining, but the prospects, because of the positioning of their companies, are pretty good. Italy is, at the moment, a strategic market for us.
It's probably the country suffering the most from the macroeconomic environment. Last year, they dropped roughly 17%, but still very strategic for us, and they have also, they are made of a lot of medium-sized companies who are requiring technical support, innovative, and as soon as the market will come back, they will benefit from it big time. So in summary, we need to look at the different countries. Some countries today are doing slightly better than others, like Germany or the U.K. France is interesting. In fact, at the moment, they have declined less than the average. So I talked about the -11% for the total market. France is around -8%. They have one advantage. Aeronautics is very strong, so they take advantage of it.
The other thing is, because of the fragmentation of the market, if you want to be successful, you need to have critical mass. And that's the reason we've been driving for years to our market share. And today, you can see that on average, we are at 45%. In countries like Germany, we are at 44%-45%. In Nordic, we are slightly below the average, but because of Sweden, because we are not present at one of the big customer in the region. But overall, we have managed over time to get in all countries to a leading size, and so that means something around 44%-45%. So EMEA remains slightly challenged for us. So the way to compensate for it, two ways. The first one is to gain share, and so far, so good, I would say.
We have consistently gained share. We want to gain share in the segments of the market which bring good GP, so the highest GP percent. The first one is Design Chain. Again, because of the needs of our customers, because of the fact that the market is fragmented and that our manufacturers are less and less in a position to support medium-sized customers, we think here we can differentiate. Design Chain now represents 35% of our total sales. Even in, I would say, the bad times, we have invested, we have built up our design pipe. We expect customers, as the market picks up a little bit, to bring their designs into production, and that should help us going forward. On supply chain, we of course participate in the global initiatives.
But one dimension which is very important is we are trying to get as many of our customers bound via supply chain solutions. So consignment stocks, forecast management, just-in-time solutions. The reason for it is the first reason is, of course, improving the service, but also increasing the intimacy with the customers. And that has worked very well also. IP&E, today, we have 8% of the market. It's a very fragmented market. With 8%, we are the third player in the market, very close to the number two. So nice opportunities for consolidation, nice opportunities for gaining share. Also, in that space, we see the manufacturers slowly but surely moving some of their direct customers to us, so we see very nice prospects here. And last, embedded. So today, distribution is about, I would say, selling hardware.
What we see going forward is that we have a nice opportunity to add software and probably services to our value proposition. So embedded is a way to address it. This is also an area where we don't have yet the critical mass, which leads me to the second dimension to fuel growth, beside the organic growth, is M&A. We've been very active in M&A the last six years, okay? We've made some significant acquisitions, pretty successful. Integration went well. We continue to look at opportunities. Clearly, our objective is to make acquisitions, especially in the IP space and the embedded space, to get to critical mass. Because again, in our fragmented market, critical mass will make the difference, not only with our partners, but also from a financial standpoint.
So in summary, about EMEA, yes, the market in the last, so 2012, 2013, is still a little bit challenged. Nevertheless, we see that going forward, and, this is confirmed by a few research companies, the applications who will bring the growth going forward, and, Harley mentioned it, are industrial applications, automotive, lots of prospects here. We are in the EMEA market, the clear leader, very well positioned, partner of choice for, I would say, most of the customers and for all our supplier partners. So we believe that despite, I would say, the short-term challenges, and we are in a cyclical business, we see ourselves very well positioned to take advantage of the next growth opportunities in the market. And with that, we can open up the Q&A session.
Thank you, Patrick. So timing looks good. Let's go ahead and open up to questions. I think probably have a microphone back there. Yep.
Hey, Lou Miscioscia, CLSA. Thanks, Harley. So could you just go back into what your comments were about Asia, in the sense of the market's very challenged because so much of it is lower margin. You know, how much is the opportunity for you to do acquisitions in higher margin things that will help your business there? And I have a follow-up to that.
Great. Again, thank you for the question, because I wanna be doubly clear, and nothing in my comments should be construed as a decommitment or a disenchantment with our Asia business. We're very proud of our Asia business. We like our position there. But I think what has been coloring my comments is that we feel such a strong obligation to get the business back over 5%, that that particular drive, and I made a comment earlier, that if you guys would have forced me on this, to just have one item, okay, and I could only have one bullet, the bullet would have been, get back over. Excuse me, get back over 5%.
And so in some ways, my comments are being colored by that obsession, that drive, because we accept and we understand that's the lowest we wanna be. So we're very preoccupied in doing the things. What my Asia comments should be interpreted as is, again, not a decommitment of any sort, but acknowledgment of the challenge that exists in that market today, primarily driven by the explosive growth in a couple of industries that have driven monstrous volumes. And distribution, this is not an EM story. We are in as good a shape or better than most over there, but distribution as an industry story in Asia, is trying to figure its way now through an environment where you've got all this volume and minimal drop-through. So that's the piece I'm really focused on. Are there opportunities for growth? Absolutely.
But what's happened there is that volume is so big, and it's taken on such a big percentage of the total, the acquisitions we're making, and we've made multiple. If I had the data pointer, I'd show you. We've made a couple IP & E acquisitions in Asia. We bought a small company called Prospect in Taiwan that does advanced power design for TI. So we are filling in and making these investments because we do believe, and I was asked to put a timing on it in the earlier session. Excuse me, granted, I'm a little biased because of my previous connections with that regional, personal connections. But I'm one who believes that at some point in our future, Asia, parts of Asia, and specifically China, are going to play a design chain role similar to the developed West.
I just can't put a timing on it. So our behavior today is saying, it's not tomorrow, so we're gonna continue to invest in those various ways that I saw, but the prospects of a large consolidation play in Asia today are not impossible, but it's not a top priority for us. Okay?
To follow up on that, what is the demand creation mix in each of your regions? I think Patrick said 35%. In Europe, it's 35%-40% globally. I would have thought Asia is a lot lower than that. And then if you could just kind of talk about the design model for the industry and for Avnet by region, and how does your demand creation mix today compare to what it was a few years ago? Is there any market impediment to increasing that over time? Are suppliers any less receptive, are customers less receptive, or are they more receptive?
Okay, good question, Brian. Let me answer that, and then, Patrick, you can fill in specific to EMEA. There are no market impediments other than the balance comment I was just alluding to in my response to Lou question, which is, you got to grow your demand creation revenues pretty rapidly to overtake that kind of fulfillment volume. So if you isolate the two, there's no reason to believe that we won't continue. You know, it's interesting, I hate to sound philosophical because that means old, but distribution as a percentage of the TAM and design chain as a percentage of distribution, hasn't moved 5 points in 30 years. Hasn't moved 5 points in 30 years. It's generally in that 35% range, give or take, 30%-40%. I think Patrick's are the low end.
I would have put him closer to 40%, but obviously, he's closer than I. I would put Americas relatively similar, just a bit lower, and then Asia a bit lower. The difference in Asia and the challenge in Asia, and the reason why it, the numbers probably don't compute for you, is there's also a margin challenge. So one of the secular challenges in Asia is that historically, suppliers have not awarded the variant gap in design chain in Asia between that and fulfillment, as is built into our industry in the West. So that's a piece we are trying to be an industry leader. The good news is this is an area that we and our peers have found common ground on. So it'll be an interesting, I know some of you follow the semiconductor suppliers.
It'll be a good place to poke there a little bit because we need to change that. That is the fundamental piece that has to change for distribution, especially global distribution, to continue to invest and expand in Asia. So nothing secular, Brian, that I can think of. What the drag has been, as I think both I showed and Patrick illustrated, is that core customer set where we do the bulk of our demand creation has exhibited, I think, double-digit negative growth in 2012. Patrick, go ahead.
So if I, if I look at my portfolio, if you take Avnet Memec, which is one of my history, probably their share of demand creation is 50%. Reason for it, focus on nichier, specialized lines, fulfillment comes less in question, so they have really to win the business at the customers, so 50%. If you now take the broadliners, like Silica or EBV, as I mentioned before, we have customers who are transferring to us more and more of their direct business, which is then treated as fulfillment. So the challenge for us, or the opportunity for us, would be to convert that business from being pure fulfillment to become design business, which we'll be working on. But so of course, there's a timing issue. So over time, in fact, the 35%, so okay, 35%-40% was lower than that, okay?
EBV historically had a high share. You take Silica or you take Abacus, they had a much lower share. So year after year, thanks to the design activities and building up the design pipe, this percentage has increased. And I think going forward, this percentage will continue to increase in Europe. In Europe, because, again, the manufacturers cannot take care of the customers as they want to, and so we can take over that responsibility. I think the second question you had was about if the customers value technical support and the supply. So things have changed. If you go back many years ago, our FAEs would go to the engineering department and provide data sheets. Okay, this is over because we have internet, so all the information is available. Nevertheless, where do we bring more and more value? Is in helping the customer to design the solution.
So I take an example: in the past, we would have sold only the FPGA. Today, our FAEs are going to help the customer, not only to design in the FPGA, but to explain him or to help him design the power solution and memory. So in fact, our value proposition or I would, yeah, our value add is constantly increasing because of the increasing complexity of the solutions the customers have to, have to use. And I am very convinced that the next level would be around software. We are already starting, for example, to support customers in the selection of the operating systems, okay? Linux, Microsoft. We have added, for example, some software specialists in our business.
So we're at the early stage, but clearly, the future is about helping the customer to design his board and to bundle the different technologies, including the software, on the board.
You know, it may surprise you, by the way, back to your original question on design win as a percentage. Although it's our smallest region today, the region with the highest percentage of their sales in demand creation products is actually Japan. One of the reasons, so I'll I can answer a question that hasn't been asked, but it was asked in the last session, is what's going on in Japan? Someone noticed the size of the bubble, the relative growth rate of the bubble, and the return of the Japan bubble on either Rick or Kevin's slide, so they posed the question is, where are you going with that?
I was explaining that, if we've learned a lesson, and I'm sure we're not the only one who learned this lesson, it's how long things take in Japan from a time perspective. But one of the reasons we're attracted to the market is the gross margins are relatively good. I'd rate them in the same neighborhood as in our Western businesses, and the reason is it's a heavy design region. Part of what we're banking on is part of the evolution of that region, similar to America, for example, is that design activity will remain and be important, but part of the secular change in Japan will be more outsourcing, to Asia, primarily. One more question. Anybody? No? Okay. Well, as always, thank you for your time. Thank you for your interest. It's always wonderful to be in New York, and, have a good day.
Thank you.
Wrap everything up for the day. If you'll remember, as I got started, I talked about the strategic agenda, as I call my 3 Gs of profitable growth, globalization, and great people. Actually, where I'd like to start as we wrap up for the day, is just a little more detail on how we think about the importance of great people to the overall equation. As you've heard reinforced, I think, throughout the presentations and commentary today, we are a services business that happens to service two very important parts of the technology world, in electronic components and enterprise computing products. But we actually, among our enterprise-level metrics, hold ourselves accountable to this concept of employee engagement. We believe in the absolutely inextricable link to customer engagement as well.
We have specific metrics on our balanced scorecard, one of which I will show you a little bit of track record on here on the next slide. But this, this chart is a very, very eloquent illustration of the straight line connection. But at some level, for our organization, it's really not rocket science. You know, you take really good care of your people, they create really great customer experiences that enhances the customer relationship and the long-term loyalty, and that certainly enhances your prospects for long-term organic growth contribution. Another way to think about this very simply, and the way we put it, is the best way to start growing is stop shrinking, and we put that to work every day at Avnet.
From an employee engagement point of view, we have been on a multi-year journey to hold ourselves accountable to, being able to incorporate the voice of the employee into our strategic planning, management, and review process. This will show from fiscal 2004 through fiscal 2012. First of all, at the very bottom of the chart, just the rough number of total, headcount across the globe for Avnet. That's total, including all organic and acquisition activities, the progression in our earnings per share, and the progression in the key metric known as employee engagement, which actually looks very, very closely at, the commitment of the employee, as well as their opinion of the line of sight and how they feel connected to Avnet's overall goals.
In addition to that overall score, which has helped, we helped get benchmark on where we stand from an upper quartile company perspective using the outside firm of Towers Watson, we are also very proud of the fact, in those last two surveys noted in FY 2011 and 2012, we had 85% and 83% global participation, respectively, in those two years. And that strong indication of the participation is our first metric that we believe illustrates that the team takes seriously management's commitment to take what's important to them and integrate it into the overall plans for the business. Because as I said, it's not just investing in people and offering development, the tools, and the specific career opportunities.
You've got to get the infrastructure in place and make sure they've got the resources to do their job, to accelerate that success for our customers and suppliers, day in, week in, month in, quarter in, year in, and year out. Didn't want to leave without underscoring a little bit regarding our commitment to our people, the way we hold ourselves accountable to that commitment. And we refer to this internally as our coincidence slide, because we do not believe that the continued progress in our overall employee engagement and the improvement in our results is a coincidence. We don't believe that's a coincidence at all. Also have one slide just with a very few selected set of external recognition and rewards for, awards for Avnet. We've you've heard a lot today from an internal perspective.
We showed a lot of charts, a lot of data, a lot of pies, a lot of ratios, a lot of graphs, a lot of finance, for that matter. In addition to what you see here, mostly from, let's say, more of a general business point of view or some trade or industry point of view, we have a number of awards. It would be too many slides to try to go through in a day regarding the amount of recognition we get from our customers and suppliers on a year-in and year-out basis.
But among all the other attributes regarding Avnet today, wanted to make sure just to highlight that we do look at our total results, our total brand in the marketplace, our reputation in the marketplace, and our culture as part of our overall value proposition, and we're very pleased and honored with the external recognition, some of which are reflected here, whether it be more towards sustainability. You'll notice it's not just exclusively North American or Americas or even Europe, for that matter. And among all those highlights noted there, perhaps the one that I think I take the most pride, and I think the team takes the most pride in, was as of 2013, to be named the Most Admired Company for our category for the fifth year in a row.
Wrapping it all up, hopefully, these are familiar bullets to you, but I'll put my final spins on them. First of all, we are playing in a very large, wonderful sandbox called technology. It's a very large served market, and we believe, again, not that we're making the forecast, but we believe what we see from the industry forecasters and pundits, that it is a, it's a market that will be growing faster than GDP for the next few years. We believe we have a very strong competitive position across these markets, bolstered by a very experienced and responsive management team with a sense of urgency to the task at hand. We believe also, we've demonstrated and helped show and illustrate some of the deep engagement we have in those markets as well.
You've heard about design chains, you've heard about supply chains, you've heard about ecosystems today, all of this making a difference in helping deliver the total solution to accelerate the success of those customers and suppliers. We can back that up. We are investment ready. We're proud of our strong financial position, our capital structure, our capital allocation priorities, and our cash flow profile. We believe we've demonstrated, certainly with that dose of humility, we can always get better, but we believe we've demonstrated a clear, disciplined approach to the allocation of that capital. We look at all options.
We try to balance it out and to count on our continued, not only disciplined approach that you know us this far. Think about the kinds of tweaks and improvements and turns on the knobs on the dial that we look going forward as we enhance our fundamental commitment to value-based management to accelerate our profitable growth. And with that, I will once again probably wrap up exactly where I started. We stand behind our steadfast, solid, and long-term commitment to the creation of shareholder value. We believe we have a winning formula, a winning team, and a great marketplace in which to conduct our operations. Thank you for your time and attention today, and I think now we'll move to lunch and look forward to updating you on more results later in the fiscal year.
Anything else, Vince, we got to cover?
Nope. Just two, two rooms over.
Two rooms over for lunch. Thank you all very, very much.