Web-based business-to-business exchanges hold the promise of rewiring the world economy, but as usual, the promise is well ahead of the reality. Sorting the hype from the benefits, three B2B providers size up the implications of Net marketplaces for CEOs.
Last year, e-procurement was the next wave in e-commerce. This year's buzz is e-marketplaces. Whatever the month's flavor, the Internet revolution has always contained equal parts threat and opportunity, laced with a dollop of industry overreach.
Still in its infancy, B2B e-commerce is estimated by the Boston Consulting Group to account for $2.8 trillion in sales by 2003. GartnerGroup pegs the figure even higher at $7.2 trillion, and predicts 7,500 to 10,000 B2B marketplaces to emerge by 2002. Robertson Stephens estimates that even a 10 percent adoption rate by 2003 implies $1.8 trillion in B2B commerce volume. The global market could almost double that of the U.S.--exceeding $3 trillion worldwide. Somewhat more circumspect, Forrester Research forecasts that B2B transactions will grow to $2.7 trillion by 2004 from $406 million in 2000, with 53 percent of that passing through e-marketplaces compared to about 1 percent now.
Some 1,200 B2B Internet exchanges have blossomed since last year, with many claiming to have the killer app to bring buyers and sellers together, either in horizontal or vertical markets. The severity of last Spring's Nasdaq sell-off in tech stocks proved to be a corrective for a sector that was engulfed in its own mania. Some of these companies were little more than a T1 line and brochure-ware. Others had traction issues. Plastics-Net.com, with $1 million in revenues was ranked as the leading independent exchange in the plastics industry, but GE Plastics, a $7 billion market leader is not a part of it. Nor is Wal-Mart, the world's largest retailer to be found on the Worldwide Retail Exchange, which offers itself as the industry's largest B2B retail marketplace.
According to A.T. Kearney, less than 15 percent of Internet exchanges are really delivering value-added services or fulfilling end-to-end transactions. At issue is how to best attract buyers and sellers. Neutrality is prized, but will the middleman's cut survive as volumes increase? Will smaller suppliers get crushed in marketplaces set up by giant buyers such as big auto's Covisint? According to Deloitte Consulting's Steve Sprinkle, only a handful of these exchanges will get sufficient traction in each sector to thrive.
Initially, the promise of e-procurement--where companies had hoped to trim up to 20 percent of their total spending and drop transactions costs by two-thirds--is hard to resist. However, after studying both vendors and users, Forrester Research analyst Laurie Orlov found that implementation fell short of reality. Many simply automated their paper-based processes. "To be truly effective the process needs to be handsfree," she says. "Every supplier you need to buy from needs to be electronically accessible. And much depends on eliminating 'rogue' purchasing outside the system. These are very big cultural issues in some companies."
In most exchanges where buyers and sellers trade bids and offers until they make a deal, commodities or standardized products are the easiest to transact. GM's recent $147 million purchase of sealing packages from Opal through TradeXchange "is part of a growing trend of buyers pushing online procurement boundaries into direct materials used to produce finished goods," says Forrester analyst Stacie McCullough.
If e-marketplaces are to succeed, costs have to be removed from the entire supply chain, not simply pushed down on hapless vendors. Suppliers are naturally reluctant to join trading communities because they are concerned about pricing and information transparency.
Further, second and third tier suppliers typically have very old computer systems that are difficult to integrate. Product information is highly fragmented and often exists in forms that not even they can readily understand. Many underestimate the difficulty in managing these supplier "onramps" to an exchange. As these marketplaces evolve, 20 to 30 percent of safety stock can be eliminated from industry inventory right away, according to GE Global eXchange Services CEO Harvey Seegers. Given that $2 trillion is tied up in inventory, that amounts to $400-to-$600 billion coming out of the supply chain. Those are some sizeable savings--and the kind most CEOs want a piece of. Toward that end, CE asked a few of the leading exchange enablers to size-up both opportunities and pitfalls.
CommerceOne's Mark Hoffman Reaches for Global Scale
The Covisint deal was a big win for CommerceOne, a Pleasanton, CA-based software and e-commerce service provider. The company--which already had a deal with General Motors to handle all of the car giant's online procurement from janitorial services to car parts--got a boost when Ford, and later DaimlerChrysler and Renault/Nissan, combined forces to create a single marketplace. (Oracle, which had sold Ford on the idea of its own exchange, is part of the expanded arrangement.)
GM estimates its aggregate spend at around $500 billion, with the whole market coming close to $1 trillion. CommerceOne charges, on average, one dollar per transaction regardless of size on its principal exchange mechanism, MarketSite. The company earns revenue from software licenses, upgrades, and services, which tend to be 20 percent of the initial price of the software. Tucker Anthony Cleary Gull analyst Richard Davis's revenue estimates for CommerceOne are $130 million in 2000, $270 million in 2001, and $435 million in 2002, with the Covisint deal...