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Electronic Buyers News - Oxygen breathes life into obsoletes
For immediate release - Monday, November 27, 2000
By Edward Silverman
(11/21/00, 04:31:38 PM EST)

Abandoned on the top shelf in an engineer's office or a company's back storage area, obsolete parts are destined for the scrap heap, like so many old tires.

But one company is challenging that commonly held notion, and is making a name for itself by buying and selling obsolete parts on the spot market.

Oxygen Electronics LLC, a five-year-old company based in Guilford, Conn., said a surge in the use of electronic components in a variety of everyday goods from household appliances to cellular phones is restoring value to older components.

“Obsolete components have become much more of an issue these days,” said Mark Pasdon, Oxygen's co-founder and managing partner. “Most companies do a lot of firefighting. They scramble for parts at the last minute so they can fulfill an order. They need a vendor who understands these issues and can move quickly. In my experience, about 90% of companies just don't have a proven method for managing obsolete parts. It's not a healthy way to do business.”

But it seems to be a healthy pattern for Oxygen. The company's sale of obsolete components has risen from roughly 30% of sales when it first opened its doors to nearly 50% today. The rest of its business is composed of stocking hard-to-find and allocated items. The privately held company declined to disclose revenue figures.

The increase in demand for obsolete parts reflects the electronics industry's phenomenal growth rate. Lightning-quick production cycles have increased component consumption but have also led to rapid product obsolescence, making today's cutting-edge chips outdated virtually overnight.

Pasdon estimates that the average component has a life cycle of just two to five years, compared with seven to 10 years in the early 1990s.

Of course, there are exceptions to the quick-turn cycle. Altera Corp.'s flagship Classic product family, for example, has been actively selling for more than 17 years.

“We review the family line and when demand moves out of the market for a certain product, that's when the product is characterized as obsolete,” said Arun Iyengar, senior marketing manager at Altera in San Jose. “Basically, a product becomes obsolete when you have the next generation that'll take over the same spot with the density and all the characteristics that were in the prior generation, plus with the benefits.”

Altera has been known to render chips in some product families obsolete about every six months, Iyengar said.

Such short life spans can complicate product planning for OEMs. For instance, an aerospace contractor with an order to upgrade a given system may be looking at a relatively easy overhaul until he discovers that one or more necessary components has been relegated to the semiconductor graveyard. And cell-phone makers are particularly susceptible to such changes given the ceaseless innovation in that industry.

The solution, Pasdon said, is to turn to companies like his, which can round up needed parts without having to scrap big jobs. The key is finding the parts fast.

All of which sets the stage for a hot aftermarket in such goods. Obsolete components may account for only 2% of the total electronic-components market, but they can require up to 20% of a purchasing department's resources, according to Pasdon.

“It's not a huge market, but clearly there's much opportunity here for a distributor to claw out a niche,” said Robert Damron, an analyst at Tucker Anthony Cleary Gull Inc. in Milwaukee. “With the huge, installed base of electronic equipment worldwide, there's going to be a need for replacing systems and building new ones, and with that there's the demand for incorporating the older technology. As a niche distributor, [the company] could be a good business model.”

To accomplish its mission, Oxygen uses a real-time database that tracks more than 4 million unique part numbers and more than 20 million historical details of availability for commercial, military, and aerospace components, as well as thousands of vendors that regularly inventory these products.

“If you can understand who has supplied what part in the past, it narrows things down,” Pasdon said. “We track it all. And most manufacturers can't do that. It's difficult to manage thousands of vendors and parts availability. We've spent a lot to gather and manage this data. We've had a lot to learn about the issues to provide good solutions.”

Oxygen also networks closely with hundreds of distributors that largely specialize in obsolete components. Pasdon believes there are nearly 500 such distributors in the United States, with another 1,000 operating in the rest of the world.

Mostly, these distributors purchase an original value that equals hundreds of millions of dollars in obsolete components on the cheap, and stockpile the goods indefinitely. As with any discarded item, the hope of these distributors is to eventually sell some of the items at a large enough profit to cover the cost of allowing many other items to languish in warehouses.

“The rule of thumb is that most of those components won't sell,” Pasdon said. “And they know that. But these distributors purchase the goods very cheaply. And people are continually doing this. The network of distributors is actually growing.”

Oxygen, meanwhile, is growing its own business by supplying such behemoths as Computing Devices, a division of General Dynamics Co. located in the United Kingdom; Thomson CSF of Paris; and General Electric's Snecma subsidiary in Moissy-Cramayel, France.

Such clients have helped Oxygen's sales jump 180% annually. The company, which maintains $4 million to $5 million in obsolete parts in its inventory, employs about 30 people.

Pasdon thinks the obsolescence market will span well beyond components and expects to it migrate toward entire systems, particularly among military and aerospace contractors that find themselves facing orders for upgrades.

“The bottom line is that products of all sorts are going obsolete quicker because product life cycles are shrinking,” he said. “Over the next five years, this market will definitely more than double.”

- Click here to see the Electronic Buyers' News Article.
Oxygen Electronics LLC
56 Lafayette Ave.
White Plains, NY 10603
Phone: +1-914-289-0202
Fax: +1-914-289-0222