Last Year, The Only Business Stroy that could compete with the twilight of the dot-coms was the sudden struggles of the U.S. auto industry. In February, the Big Three car companies, long derided as oversized, slow, and inefficient, seemed to be ready to jump on the New Economy bandwagon. They announced an online business-to-business exchange, Covisint. One year later, the site has barely launched -- but it's still better off than most other "B2B" exchanges.
Roughly 600 online Web exchanges were launched over the last two years, according to Zona Research. As of January, the vast majority were still waiting for their first transaction. E-marketplaces were part of the second wave of the dot-com boom, when venture capitalists abandoned consumer-oriented sites to fund companies that hoped to create vast online hubs that would connect multiple suppliers and buyers, make pricing and ordering items more accurate and efficient, facilitate new business growth, and ease the exchange of information.
A Bold Move in Tough Times
Ford, General Motors, and DaimlerChrysler's announcement of the Covisint formation was an unprecedented instance of cooperation between the Big Three. Renault and Nissan joined in April of last year, but the ballyhooed exchange still has only a small number of businesses on board, no CEO, and no permanent physical home. Still, Covisint spokesperson Dan Jankowski says that's nothing to worry about. "Here we are, less than a year from announcing, and we have a viable, revenue-generating business we've created," Jankowski says. "In automotive time frame, I would call that hyper-speed."
Ultimately, any online exchange is at the mercy of the companies in its industry. Original equipment manufacturers like the Big Three have to bring their first- and second-tier suppliers into line. Standards must be created and enforced. And every business, both large and small, must have enough money to investigate and fund such ventures.
"A small supplier has to be concerned with costs," says Frank Lopez, the CEO of Aztec Manufacturing, a Romulus, Mich., company that supplies brackets, brake parts, and chassis. "You look at what additional investments you would have to make to get involved with the process."
Doug Washbish, president of Moog Warehouse, a 39-year-old Kentucky auto parts distributorship, invested thousands of dollars to get involved in e-commerce. He uses the online site, Car Parts Technologies (www.CarParts.com), which serves the automotive aftermarket (an area Covisint doesn't cover). Washbish says he'd rather downsize later than get caught empty-handed in the short term. "I hope to do 15 to 20 percent of our revenues on line," he says.
Lopez and his company have begun to dip their toes into e-commerce through sites like Covisint and Autoexchange.com, but he admits that their adoption may be slowed because most businesses in the auto industry are looking for short-term cost savings, not long-term pay-off. Earlier this year, headlines in the local Detroit papers announced layoffs and plant closings. "Now everyone is drawing in their horns," Lopez says. His staff, which from 1995 to 2000 grew from 80 to 160 people, has reduced by attrition to 128, and the cuts may go further.
What's Holding It Back
But just by getting involved, Lopez's company has put itself ahead of most competitors. Last year, the consulting firm KPMG conducted a study of e-business progress made by companies in seven major industries, including financial services, chemicals, and pharmaceuticals. The automotive industry finished last.
Execs blame cost, security fears, the need to re-engineer business processes, and lack of e-business skills, according to Brian Ambrose, national industry director of KPMG's automotive practice. Like many other manu-facturers, companies in the auto industry have grown accustomed to using a technology called electronic data interchange to swap data about shipments and inventory. EDI uses proprietary (and expensive) connections -- the opposite of the cheap, open architecture of the Internet. But it's familiar, and it works.
Furthermore, EDI is simply an electronic means of transmitting information on transactions. The contracts used to supply these parts have usually been worked out years in advance, off line, and usually in person. "We usually work face-to-face with whomever we're purchasing from," Lopez says. "We make visits to their factory and make sure they visit ours. On the Internet, you don't see where the product is coming from. You want to see the site and the processes."
Washbish says he's still waiting for a big business boost after a year on line. "I don't know how much of a distribution tool it's going to turn out to be," he admits. "The customer has to get familiar with it. He's used to calling up on the phone and having you do all the work."
EDI and face-to-face conversations are emblematic of what Christine Taylor, vice president of business-to-business manufacturing for the consulting firm Cap Gemini Ernst & Young, calls the current "point-to-point" model of communication. It's what online exchanges are designed to eliminate. "You and so many other people are connected into one hub," Taylor explains. "[Point-to-point communication] doesn't allow that."
Not all products are equally well-suited to the auction format that most exchanges encourage, according to Gary Erickson of Great Lakes Technologies Group, a Southfield, Mich., consulting, Web development, and e-commerce firm. Commodities like paper and steel (available on Covisint) may fare better than highly engineered parts that require complicated contracts and quality checks. Used cars can be traded on line more easily than some of the intricate parts that they comprise.
Dale Harrison, owner of RBM of Atlanta, a Mercedes Benz dealer, frequently buys preowned vehicles at auction through Manheim Interactive (www.manheim.com), one of the oldest e-marketplaces on the Web. A subsidiary of Manheim auctions, a major force in the industry, it has sold over 120,000 pre-owned cars to used car dealers on its CyberLots since its debut in April 1996. The site gives car dealers, manufacturers, and rental-car companies access to vehicles across the United States 24 hours a day. Harrison says he saves money and time because he no longer needs to fly across the country to auctions to keep abreast of market developments. He uses the site to register his cars on line at their auctions, check his accounts payable, and purchase cars at live interactive auctions.
"If there's an auction today in San Francisco, I can walk into my office in the morning, hit the button, and immediately get the results of the sale," Harrison says. "I can find out now how cars are doing anywhere in the U.S."
Donald Foy, vice president of marketing and product planning, says that e-marketplaces are worth visitor's while only if they have a large volume of inventory available. To that end, Manheim plans to recruit subscribers by providing more services. In many cases, he says, they will have to teach new users how to get on line.
Harrison, who has owned his business for 36 years, is glad he did. "I can remember when everything was handwritten on a pad," he says. "They've taken us more than just one step, they've taken us ten."
The Hard Fax
Stories like Harrison's echo in the heads of those trying to bring the auto industry into line. The current system is costly and inefficient, especially for small suppliers and e-markets such as Napa Auto Parts, Auto Zone, and Car Parts Technologies.
Car Parts Technologies has been on line since October and aspires to connect all parts of the supply chain, including installers, manufacturers, and fleets, says chief technology officer Farid Ghalili. He says the error-ridden phone-and-fax method that independent garages or service dealers use to purchase parts from distributors produces a return rate of 23 to 27 percent. The Web site allows them to identify parts and place orders. Fulfillment is automated and suppliers can communicate directly with manufacturers. Ghalili hopes the site can help reduce the return rate to single digits.
Many in the industry are also hoping to eventually replace EDI with something better. The technology automates transactions for the carmakers and larger suppliers, but is often too expensive for small companies to implement. They instead resort to the "rip-and-read" method. "There's an awful lot of the supply chain where 'EDI' ends up being a fax," says Great Lakes Technology Group's Erickson. Still, he expects that older habits and technologies like EDI will stick around for quite a while, and everyone recognizes that Internet-based replacements aren't perfect either.
Part of Covisint's stated mission is to create new standards for transactions and design that can replace these older ones. That's no small task. "Our biggest obstacle is the human tendency to resist change," Jankowski says.
Lopez still has concerns about how private he'll be able to keep information on what he's charging clients for a given product. But he believes Covisint and its Big Three backers will sort out these problems, because it is in their interest.
"The big companies are at the point where they can't reduce their costs without some help from their suppliers," he says. "We will rise together." Smaller auto suppliers are crucial to this, and Jankowski says the site will woo them. "The offerings we have are very scaleable," he says. "Even a small Mom-and-Pop operation will find value."
Taking Things Slowly
It's not clear how the current economic climate will affect such streamlining efforts. "Anytime you have a downturn you have fewer funds," Erickson says. "But some of the best opportunities for cost savings are through e-commerce."
KPMG's Ambrose is more emphatic about the need for change. He says many CEOs are simply waiting to see what the other guy does. "The automotive industry can't afford to wait," he says. "Waiting to see what a competitor does is not a sound strategy in the e-business world. Leaders will be rewarded and followers forced to merge."
Lopez says he plans to continue his company's involvement with Covisint, but, for the time being, they'll take things slowly and be very deliberate. "In recent years, we've had average increases of 20 percent in production," he says. "Now we're getting back to the basics, controlling inventory, reducing our expenditures. Sometimes we get carried away in the good time, and waste creeps into our processes."
"I want to save my people," he says. "Whatever happens, I don't want them in the street." Lopez and many others in the industry are hoping e-marketplaces have hit just in time for them to save it.
They Built It. Nobody Came. Now What?
Some people watched the meltdown of the New Economy with barely hidden schaudenfreude. But the abject failure of most e-marketplaces can only provoke pity. Yet, the people who started them still believe they will be of great service to their industries, and it's just a matter of time.
"The biggest obstacle is just being new -- getting people to come and give you a chance to see if you're really viable," says Mitchell Hoffman, co-founder and CEO of IndexMedical, a major e-marketplace that launched in January.
The $300 billion-a-year marketplace for medical products is highly fragmented and paper-dependent, with sluggish buying cycles and complex, often esoteric products. IndexMedical seeks to link 32,000 potential customers who peddle 150,000 products ranging from sophisticated MRI equipment to Band-Aids. Potential customers include doctors, nurses, purchasing agents, and allied health care professionals. Vendors range from big companies such as Johnson and Johnson with a wide array of medical products, to small companies that make just one. "There are hundreds of companies that make one widget, one piece of latex, or one little spring," he says.
The users themselves tend to have less ambitious goals than the marketmakers. Stand-Eze owner Robert Neal, a custom furniture builder who makes and sells devices that help the elderly or disabled get up from a seated position, signed on when IndexMedical offered him a free one-year subscription. Neal doesn't really know what to expect from the exchange.
"I don't expect IndexMedical to do everything," he says. "I would be happy with a few phone calls from a large company that wants to put them in their catalogue."
"It's just another line in the water," says Daniel Bobrow, president of the American Dental Company, a tiny business that helps dentists find new patients. It is using the vertical E-Dental as part of a multi-pronged marketing approach that also includes other e-marketplaces and direct mail.
He maintains "guarded optimism" about the exchange's potential impact on his business, pointing out that "Web sites are great, but only if people visit them."
Apperel buyers need to personally evaluate the look and feel of fabrics and clothing designs. Computer monitors can't adequately convey the qualities of a fabric or the flow of an outfit. That's why buyers and sellers come together at fashion and trade shows and in showrooms to keep up on trends and make purchasing selections. That's also why e-marketplaces in the textiles industry must focus on other functions than simple buying and selling.
CyberMerchants Exchange (www.C-Me.com), launched in June 1996, provides the retail apparel industry with a Web-based system that manufacturers, wholesalers, and retailers are able to use to conduct negotiations. CyberMerchants claims its offerings can help retailers lower costs and make more timely business decisions while increasing sales volume, turning inventory faster, and improving profitability. But it doesn't even bother to offer an exchange.
"The buyer needs to touch and feel the fabric, there's no way the Internet can replace that," says CEO Frank Yuan.
E-marketplaces need to offer more than just searchable online catalogues or auctions, says Cap Gemini Ernst & Young's Christine Taylor . For instance, Covisint creates virtual project workspaces that allow multiple developers to work collaboratively on line. Likewise, CyberMerchants offers retailers an extranet for communication with vendors, a platform for handling orders and money exchange, access to information such as retailers' buying needs or vendors' product lines, and help with shipping logistics.
As of late January, however, only seven retailers had subscribed.
What's In It For Them?
E-Marketplace make their money in a variety of ways. The most common is taking a piece of every transaction that occurs on the site. Car Parts Technologies, for example, gets a one percent commission on every deal Doug Washbish makes.
IndexMedical.com has chosen not to charge transaction fees. Instead it charges for priority positioning, sponsorships, affiliate programs, banner advertising, and medical and regulatory consulting. The site was created by the high-tech company, Treksys, which along with Index-Medical launches an "Index" brand of verticals, and will eventually expand to IndexBanking, IndexBoating, and others.
As of January, the site had about 250 paying customers.