In Post-Dot-Com Shakeout, B2B Exchanges Shift Strategy.

• Author: Erwin, Sandra I.
• Position: Business-to-business market within the aerospace industry

The shakeout in the aerospace industry's electronic marketplaces, which began more than a year ago, is expected to continue for the foreseeable future. The B2B exchanges that have survived the post dot-com craze, meanwhile, are rapidly introducing new products and services, in an effort to make themselves more valuable to customers.

Businesses that were created for the sole purpose of facilitating Web-based transactions between companies have found that B2B (business-to-business) electronic marketplaces could not generate enough revenue--through transaction fees--to keep themselves afloat. Many of those start-up exchanges have gone out of business during the past one to two years. Others are barely hanging on.

Those B2B marketplaces that have emerged as strong players in defense and aerospace e-business are those with robust financial backing from traditional manufacturers and suppliers. Exchanges such as Exostar and Cordiem--which are owned by established manufacturers of defense and aerospace products--have changed their business models and have developed new software and services that offer "value-added" to customers, instead of merely providing a Web site to conduct buy-sell transactions.

Many of the aviation-related B2B start-ups that failed, such as AviationX, Skyfish and AeroV, had been founded on the premise that, if the prominent buyers in a specific industry bundled their purchasing power on a single Web site, the sellers would follow. These suppliers, according to that B2B model, would compete in online auctions, underbidding one another. Start-up exchanges soon found that, in industries that are highly regulated such as defense and aerospace, suppliers and manufacturers were reluctant to participate in third-party controlled marketplaces. In other words, the problem with third-party Web exchanges is that they interfere with the relationships between suppliers and customers, said Peter Berghammer, chief executive officer of Copernio, an electronic-commerce technology firm.

"The premise of e-business is to create competition and lower prices," he said. But that is a flawed model, he asserted, because it assumes that price is the only thing that matters.

In the defense and aerospace industries, the B2B exchanges have found that suppliers have not been so eager to engage in bidding wars, because those auctions do not take into account factors other than price, such as quality, safety or reliability.

"It's been difficult to get sellers to participate," he said. "They are afraid to turn over proprietary information and to have prices artificially come down."

Public exchanges, said Berghammer, have yet to address how to protect suppliers' proprietary data, such as price lists and customer names, links into inventory, documentation and certification systems. That is a "big psychological inhibitor," which has resulted in a much lower level of participation in B2B electronic marketplaces than had been anticipated.

One drawback of virtual procurement is that "screening is tough," he said. "There are a lot of bottom feeders who speculate on parts."

In the aviation industry, where Berghammer spent most of his career, "people want a trusted source for their parts. With many exchanges, you have no idea who you are dealing with."

Companies that do military business, he said, "don't trust exchanges, because they themselves are trusted sources. Why should you attach your credibility to some Johnny-come-lately operation?"

Some companies often would rather spend money internally and control their customer's "e-business experience" by developing their own portals.

That appears to be among the reasons why TRW's aerospace division invested $10 million in AeroVantix, an e-business portal designed for the company's commercial customers and suppliers. Rather than focus on generating revenue from the portal, the company wanted to improve "customer service," said Arabella Bijlani, vice president for business improvement at TRW Aeronautical Systems. "We did not do this because we wanted to make money," she said.

"Our goal is not to recoup the...