Finding a niche in the new frontier

Volatile, problematic, but full of potential, the e-marketplace promises rich rewards for companies collaborating in the optimum trading exchange model.

Barely a week passes without the launch of a new ‘anyindustry.com’ e-marketplace promising its sector a brave new world of business on the internet.

The principle is seductively simple. Connect enough trading partners together via a central online trading platform and the benefits should soon start to flow. Buyers will have access to untapped sources of supply and easily be able to make quick comparisons in areas such as cost and specification. Suppliers can take advantage of a substantial new shop window to promote themselves to customers, potentially crossing geographic boundaries and finding whole new markets.

Commercial partners can collaborate more easily in areas such as project management and product design. And everyone gets the benefit of real-time access to data, lower transaction costs — often 90% cheaper than traditional processes — plus the chance to do business at ‘internet speed’.

The reality is far more problematic, and B2B exchanges are facing up to many issues encountered by their counterparts in consumer markets.

The ability of technology providers to deliver what they promise, the real-world logistics underpinning virtual supply chains and fears over security are all potential barriers to growth. But the most immediate battle facing individual B2B marketplaces is to make the commercial case for their existence before it is too late.

There are an estimated 1,500 trading exchanges out there already, with most industry sectors served by dozens of marketplaces, and there is universal agreement among observers of the online B2B scene that many of these will not see the end of 2001. In its recent study of e-marketplaces, Deloitte Consulting concludes that ‘the current level of competition among today’s e-marketplaces is not sustainable’ and predicts no more than 400 are likely to succeed in the medium-term.

Some forecasts of survivor numbers are even lower, and potential users of online exchanges are currently placing their bets on which will still be standing once the shake-out is complete. Interest is focused on the relative virtues of three exchange models — consortium, independent and private.

Defining the market

Consortium marketplaces have created the biggest headlines in the B2B world because of the clout of their big-name backers. In the consortium model, existing participants in a supply chain join forces to create their own marketplaces and invite others to take part.The best-known example is Covisint, the automotive exchange backed by some of the industry’s biggest players including Ford, GM and DaimlerChrysler.

Similar consortia are emerging in most other manufacturing and industrial sectors, including aerospace, electronics, energy and metals. The most obvious benefit of a consortium exchange is the ready access to huge sources of spending power. While a marketplace with no links to a major manufacturer might struggle to attract a few million pounds worth of business, Covisint is intended eventually to handle a substantial slice of its founders’ $300bn annual spending.

But this concentration of buying power could have a sting in the tail. Suppliers worry that they are being locked into a high-tech cartel, where buyers cosily control prices and squeeze their margins. Those concerns are shared by competition authorities, which have made it clear that consortium marketplaces will be under particularly close scrutiny. In response, consortia have gone to great lengths to stress neutrality, arguing that any bias towards particular users would so quickly undermine the marketplace’s viability it would not be worthwhile.

None of this cuts any ice with the operators of independent exchanges, who flag up their neutrality as their biggest selling point.

With no axe to grind for any particular group of buyers or sellers, the independents claim they can get on with the business of creating value for everyone involved. Despite this, independent marketplaces are expected to account for most casualties when the B2B online market consolidates. By extracting cost and efficiency benefits from the supply chain, consortium exchanges can return their founders’ investments in kind. Independent marketplaces, by contrast, have to return hard cash to investors, many of whom will be growing warier of ‘dotcom’ ventures.

Despite this, Peter Reed, UK general manager for online marketplace IndustrySuppliers, is bullish about the future for independent exchanges. He observes that even if multinationals decide to concentrate on consortium exchanges, there are still many smaller companies wanting to trade with each other online. Reed also denies e-marketplaces will founder on the reluctance of buyers to abandon long-standing trading relationships.

‘Nobody is saying that using a marketplace means cutting ties with the established supply chain,’ he says. ‘You can trade with your trusted supplier, but use the internet to see what else is out there. That creates competition, which is beneficial to all parties and could strengthen rather than undermine existing relationships.’

The hot tip for 2001, though, is strong growth in the number of private exchanges, closed networks established by major companies to conduct business online. For those with sufficient resources to set them up, private exchanges offer the chance to reap the benefits of e-business with their existing supply chain without the risks associated with more public exchanges.They also avoid the concerns raised by sharing confidential information outside a group of trusted partners and suppliers. Revealingly, many of the participants in consortium ventures such as Covisint are also quietly putting their own private web-based infrastructures in place.

Winning strategy

The best-known example of an early adopter of the private e-marketplace model is Dell, which for the past few years has aggressively pursued a web-centric strategy, electronically connecting its internal processes with customers and suppliers. All this has allowed it to enjoy considerable success with its ‘build-to-order’ PCs. Dell has overtaken several competitors in the process — a fact that will not have gone unnoticed in boardrooms.

Deloitte Consulting claims industry leaders are struggling to extract the expected benefits from other e-marketplace models, making the private exchange increasingly attractive.

‘The business case for building private networks will be easier to develop and more compelling for senior management to embrace,’ claims Deloitte’s e-marketplace study. ‘This strategy is expected to dominate.’

It is clear that e-marketplaces will have to offer substantial benefits to everyone in the supply chain if they are to achieve their potential. Companies are increasingly impatient with the idea of marketplaces simply acting as ‘dating agencies’ for buyers and suppliers, then sitting in the middle of a transaction — and taking a cut — for little perceived benefit.

Phil Dawson, e-business director for GKN, says some e-marketplaces seem to struggle to justify their existence: ‘In cases where people have just created an exchange and said come and do your business here I can’t see them lasting. There may be a value to be gained by the exchange but not by the customers using them.’

For him, the successful exchanges will be those offering tangible benefits to the business process, such as real-time visibility of the supply chain: ‘People will ask whether it actually adds value and whether it is useful.’ Creating this added value is the biggest challenge for marketplaces that want to be more than a vehicle for companies to find cheaper paper clips.

Exchanges which can survive this year’s cull, and then move on to offer cutting-edge solutions in areas such as collaborative design, will be around for many years to come. The rest are unlikely to see 2002.

Consortium: MyAircraft/Newco

This aviation marketplace is the result of pre-launch consolidation by two existing consortium ventures, and for sheer scale it runs Covisint close in the mega-exchange stakes.

MyAircraft was established early last year by a group of major suppliers to the civil and military aerospace sectors including United Technologies, Honeywell and BF Goodrich.

Like Exostar — a similar online initiative involving BAE Systems and Boeing – MyAircraft saw the potential of the internet to offer buyers a one-stop shop for a range of after-market products and services.Soon afterwards a consortium of airlines including British Airways, American Airlines, Delta and Air France saw a similar opportunity on the buy-side and formed AirNewco.

The decision in October to merge the two into a single marketplace can be seen as a significant milestone in the short history of consortium exchanges.Unlike Covisint, which has mainly been driven by the e-business ambitions of buyers, the newly merged aerospace venture could boast a formidable array of suppliers among its founding partners.

This equilibrium may ultimately prove crucial in deflecting any future anti-monopoly actions — and in addition, it provides the e-marketplace with a sizeable and potentially decisive head-start compared to other B2B ventures in the aerospace sector.

The merged exchange — which is tipped to retain the MyAircraft brand name — is due to begin operations early this year.

Independent Steelscreen

Steelscreen, a European online metals marketplace, is a classic example of the independent exchange model.

The venture was fast to market and aggressively expanded its presence throughout Europe, if necessary by purchasing other exchanges such as Denmark-based Metalexplorer.com.

Steelscreen made a point of not abandoning traditional ways of doing business, and established a network of regional offices to give users the opportunity for face-to-face contact.

The exchange has also been at the forefront of helping to develop MetalXML, an industry-standard technology platform for sharing data online.This energetic and active approach has helped Steelscreen build up a membership of around 1,300 registered users, with trading worth e2.3m (£1.4m) by the middle of 2000.

However, this is a drop in the ocean in a European market worth e150bn, and gaining the momentum to become a significant force in an industry with heavily entrenched traditional supply chains has proved extremely difficult. Helena Wetterwik, market relationships manager at Steelscreen, admits 2001 will be a make-or-break year for metals industry exchanges.

‘There are something like 80 sites serving the industry, and no way is there a market for that many,’ says Wetterwik.

She predicts a rash of mergers and acquisitions in the first six months, but remains confident that Steelscreen will still be around when the smoke clears.Like a number of independents, Steelscreen has hedged its bets by repositioning itself as a specialist provider of e-business software and services. This gives it a valuable second revenue stream, and a stake of the development of e-business which does not solely rely on the volume of trading through its marketplace.

Private Volkswagen

Volkswagen has shunned Covisint, the automotive consortium exchange, in favour of its own private marketplace.

The German manufacturer made it clear from the word go it was sceptical about Covisint, believing it was perfectly capable of creating its own platform for dealing with suppliers and partners.

The result is the VW Marketplace, which may not have as catchy, or obscure, a name as its US counterpart but looks turbo charged in comparison with the mega-consortium’s lumbering start-up phase.

Last April, VW signed an agreement with technology partners i2, IBM and Ariba to create the marketplace.

By the end of 2000 the company had already conducted around 100 auctions with suppliers and expects the finished article, complete with trainingfor all relevant employees, to be operational by the middle of 2001.

Jens Neumann, a member of the VW board of management, makes it clear the company has seen nothing to change its mind about staying out of Covisint.’We would not have been able to build on our comparative advantages,’ says Neumann. ‘In particular we would probably have lost precious time to implement our specific process improvement programme.’

Neumann sums up the appeal of the private exchange model to Volkswagen: ‘We believe the gold is in the process, and we want to dig for gold in our own back yard, with our own tools doing it our own way.’