Until recently, unprecedented demand and worldwide shortages made for one of the hottest electronic component markets ever. But when the demand for computers and telecommunications equipment collapsed, OEMs (Original Equipment Manufacturers) and CEMs (Contract Equipment Manufacturers), because they had been stockpiling parts, were left with billions of dollars worth of electronic components sitting unused on their shelves.

How companies deal with an abundance of suddenly unneeded parts is a major indicator of how well they will fare in this uncertain marketplace. Many OEMs and CEMs, under tremendous pressure from stockholders and Wall Street analysts to keep sinking share prices from declining further, are increasingly relying on independent distributors to improve their bottom lines by helping them reduce their excess inventories.

They are depreciating their overstocked items---often writing off hundreds of millions of dollars at a time---by selling components to independent distributors for cash. This maneuver reduces a company’s expenses and enhances its chances for future earnings. In an extreme case of what is becoming known as the “big bath,” Cisco Systems wrote off $2.5 billion in excess inventory earlier this year. (Recently, several public companies that have reported historic loses due in part to inventory write downs have found themselves under the scrutiny of the S.E.C. and the I.R.S.)

These surpluses have caused the value of many kinds of electronic components to hit rock bottom as evidenced by the recent one dollar price tag in some Asian markets for 128Mbit SDRAM memory chips. Prices have dropped for the full gamut of active and passive components, including flash memory, capacitors, memory modules and CPUs. (There are higher levels of excess inventory among passive components because active components generally have longer lead times.) This precipitous decline has prompted some observers to call the present situation the industry’s worst ever.

But selling off excess inventories involves risk. Before completing such a transaction OEMs and CEMs must be certain they are dealing with an independent distributor they can trust. Most important, they need assurances that the parts they sell will not fall into the hands of their competitors or be distributed in countries and regions declared off limits. This is where long-term relationships come into play. Despite the fact that parties on both sides are multi-million dollar corporations, mutual trust developed over years of doing business together often determines if a manufacturer will sell its excess inventory to a particular independent distributor.

The independent distributors that broker these deals must also exercise caution. Some parts are designed for specific products and will have little or no value on the open market. Most brokers make a careful inspection of the merchandise and arrange for a buyer before a transaction is completed. This is one reason that selling off inventory through online databases has not had the impact many predicted when the Internet revolution began. In an industry in which trust and company reputation are such valuable assets, face-to-face brokerage offers both sides an irreplaceable human factor that cannot be replicated on a Web site.

The international market for electronic components is fiercely competitive. The advantage goes to the independent distributors that have superior financial resources and an international physical presence in the form of warehouse facilities that enable them to store and ship products on the ground in North America, Europe, Asia, Australia and South America.

Independent distributors, long noted for their expertise in allocated markets, are now recognized for their value added services in an over supplied market. By transforming themselves from sellers of allocated merchandise to both buyers and sellers of excess merchandise, they can offer manufacturers up-to-the-minute spot market pricing on commodity components and still provide many of the same services that franchised distributors do.

Because of lessons learned during this downturn, it is likely that in the future many manufacturers will be careful to limit the number of components they keep on their shelves. This will make the distributor’s role even more significant because many more transactions will be made at the last possible moment. As a result, value-added services such as J.I.T. (Just-In-Time) delivery provided by distributors will grow in importance. Even though they pay a premium for these services, manufacturers will benefit because they decrease the risk of being saddled with unneeded parts.

Most analysts agree that the market will not improve until worldwide inventories, including the flood of excess items, are depleted and demand for consumer and corporate electronics increases dramatically. But with growth among the European nations slowing to about two percent and Japan showing signs of yet another recession, relief does not appear to be imminent.

Eventually the market will turn---it always does. Most likely it will be the computer industry that recovers before the telecommunications sector because it is better managed and has greater experience surviving these market fluctuations. To ignite this resurgence, the industry is counting on the development and successful introduction of a new appliance that will generate demand and enthusiasm among both consumers and corporate buyers. Such a product might combine an Internet-enabled cell phone with a PDA (Personal Digital Assistant). When that happens there will soon be shortages of flash memory and other components and the cycle will begin anew.