Net Prophet

SAN MATEO (03/06/2000) - Does your company play well with others? It's a lesson kindergartners must learn, but not something businesses excel in. But in the emerging world of business-to-business Internet exchanges, it's a lesson every company must learn.

Seeing the finger painting on the wall, Ford Motor Co., General Motors Corp.

(GM), and DaimlerChrysler AG announced at the end of February a deal to cooperate in the creation of an auto parts buying exchange. The creation of this exchange signals one thing: It's time to make nice with the competition.

The next wave of I-commerce, the business-to-business exchange, is here, and your company's future depends on getting along with your rivals.

E-markets, or electronic exchanges, are a virtual marketplace of suppliers and purchasers, all housed under one roof. Exchange participants can buy and sell among any of the other participants, via mechanisms such as automated ordering, auctions, and reverse auctions. Think of an electronic open-air bazaar of buyers and sellers -- without the heat and noise.

According to the Gartner Group, the market for business-to-business electronic exchanges will skyrocket to $2.7 trillion by 2004 -- yes, trillion with a capital "T" -- fully 7 percent of all business-to-business transactions worldwide. Other analysts have different numbers, but they all add up the same:

Business-to-business exchanges will be big.

Brick-and-mortar players were slow to adapt to the business-to-consumer market; how many brick-and-mortar companies are the market leaders in any given business-to-consumer space? But the business-to-business world is a whole new game. Business-to-business I-commerce -- and exchanges in particular -- represent an opportunity for brick-and-mortar players to kick out the dot-coms who've been hogging the Net sandbox.

But business-to-business exchanges aren't likely to work in a fragmented market. If you sell bolts to the Big Three automakers, you don't want to participate in three separate exchanges. It's too much overhead. Suppliers and small companies want a single point of contact -- preferably one with a critical mass of potential customers. Welcome back, intermediation.

In this space, the brick-and-mortar players have a key advantage over dot-com rivals -- namely, their enormous purchasing power. Ford, GM, and DaimlerChrysler collectively purchase an enormous amount of auto parts, giving them a natural edge in establishing a business exchange. The advantage is theirs to lose.

For those keeping score at home, The Ford-GM-DaimlerChrysler deal amounts to about $240 billion worth of auto supplies -- every year. The stated goal of these three auto giants is nothing less than conducting all their purchases via this as-yet-unnamed exchange. Their exchange will be home to roughly 60,000 parts suppliers and partners.

Ford and GM were building their own separate exchanges, but suppliers squealed; now those projects will be rolled into the joint venture, with all the companies having an equal share. They've even invited other automakers to participate.

The Ford-GM-DaimlerChrysler exchange holds potential for significant cost savings, which will likely translate to more new car features. And it lays the groundwork for interesting forays into product customization. But these are not the point.

The real message of this deal is about business strategies, not technology.

Ford, GM, and DaimlerChrysler all compete against each other in the market. But it's to their mutual benefit to ally in creating a powerful exchange. Together, their combined might creates instant critical mass -- something no start-up can match.

Ambitious start-ups trying to establish B-to-B exchanges have an uphill battle, provided brick-and-mortar players don't blow it. Start-up success will be largely measured by the ineptitude of brick-and-mortar players.

The Internet is all about coloring outside the lines, and to take advantage of the business-to-business exchange opportunity, companies are going to need to learn to play nicely together.

Send your e-mail to Sean M. Dugan at No crayola, please.

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