SAN FRANCISCO (01/26/2000) - It's fun to ogle the sleek concept cars that automakers parade at auto shows this time of year, but every enthusiast knows that they are largely objects of fantasy. The economics of mass production will tone down the voluptuous lines and bold colors until something sadly subdued rolls off the factory floor.
Those cold and sobering forces could also tame automobile makers' grand visions of a future based squarely on the Internet.
Executives at Ford Motor Co., General Motors and other carmakers have been spending a lot of time talking about how they plan to transform their companies from icons of the Rust Belt to emblems of the Internet Economy. They are making admirable progress in both selling cars over the Web, and in making Internet access available in their vehicles. But the real payoff for the auto industry is in driving the Net all the way through their supply chains - linking through a single network the companies that make seat belts and the consumers who buckle up.
"This is nothing short of reinventing the automotive industry," says Ford CEO Jac Nasser. If Ford or one of its competitors pulls it off, it could add billions to its market capitalization and reduce the time it takes to build a car from a few months to several days.
Ford and GM have been racing to put their supply chains on the Internet by building online exchanges. Ford is expected to allow catalog purchases on its site starting Jan. 30; GM is aiming to be up and running in February.
Eventually, such sites could be the central information and trading nexus for the entire auto industry - which is a healthy slice of the U.S. economy. In the long run, the exchanges could handle most of the roughly $90 billion in parts and supplies used each year by Ford and GM. The companies believe Web-based purchasing can cut their spending on parts by 10 percent.
There are other financial incentives. The two auto giants have their eyes on another prize: taking their business-to-business exchanges public.
Ford's AutoXchange, which is a joint venture with Oracle (the automaker owns a 65 percent stake), was initially scheduled to go public within 12 to 18 months of its November launch. But Oracle President Ray Lane says that might be accelerated to nine months, which would place the IPO as early as the third quarter of this year. While issuing stock in a company that so far has no revenues or real operations is not unprecedented in the Internet world, the idea is causing stomachs to churn in the Motor City.
"Their treasury department is throwing up all over this," Lane says of Ford, which he adds normally wouldn't think about going public with a venture like this for 10 years.
GM also plans a stock offering for its wholly owned subsidiary, TradeXchange.
It's not hard to see why. Auto companies' stocks typically trade at less than 10 times earnings; Internet stocks often trade at far more than 10 times revenues.
David Garrity, an analyst at investment firm Dresdner Kleinwort Benson, says the auto-parts exchanges could add $15 billion to the stock market value of Ford and $18 billion to GM if they are valued at 30 times estimated first-year revenue of $1 billion, a modest valuation in Net terms.
Should those IPOs materialize, the first mover would have considerable advantage, which helps explain why the two firms are stalking each other these days. Both announced their exchanges on the same day in November. And on one day in January, Ford unveiled a marketing deal with Yahoo, while GM disclosed a pact with AOL.
"The first automotive company to do it, the first consumer company to do it, wins," says Brian Kelly, president of Consumer Connect, Ford's e-commerce unit, referring to wiring the supply chain directly to the customer online.
Both companies admit their public relations race will carry them only so far and that it's time to take their ideas to the proving ground, where they face serious obstacles.
The magnitude of those challenges is palpable in Detroit. Everything in and around the city reeks of the old economy. Its smokestacks, crumbling office buildings and sprawling industrial complexes embody the decades of capital investment and entrenched behavior that encumber the auto companies. Detroit may be the hometown of Microsoft's Steve Ballmer and Sun's Scott McNealy, but both now live light-years away.
Oracle's Lane admits that the auto companies, accustomed to taking five or more years to design and build a new car, face a huge cultural challenge in moving at Internet speed. But Lane contends they are more technologically hip than their reputation suggests.
They'd better be. Speed, independence and breadth of service will determine whether the auto companies are successful in their efforts, says Saul Rubin, an analyst at investment bank Warburg Dillon Read. "In order to be successful, the companies will need to show a great degree of independence from the parent company, because they will need to attract other [automakers] to the site," he says.
Both GM and Ford are talking to other carmakers such as DaimlerChrysler, Honda and Toyota, but they have yet to convince any competitors to work with them. So far, Ford has offered a clearer vision for its e-commerce strategy and made a stronger declaration of independence for its exchange. GM, owning 100 percent of TradeXchange, is still clinging to its baby.
However, there are serious questions about how far even Ford is willing to let AutoXchange stray from its protective domain. It faces a paradox in trying to create a slender and agile Internet company that also must convince its 30,000 suppliers to change their ways of doing business. If Ford doesn't flex its muscles, the suppliers won't fall in line. But if the company is too involved, its bureaucracy almost certainly will hobble its move to the Internet.
Whatever the venture is called, persuading suppliers to play ball will be critical. Also, they tend to resent the paternalistic attitude the big manufacturers have had toward them for years. With combined revenues of $300 billion, the two industrial giants are used to having their way with the companies that depend on them. And they claim partmakers will come running.
"Suppliers will love it because it will lower their costs and get them closer to their customers," boasts Ford's Nasser. Perhaps, but suppliers have good reason to doubt that the exchanges are, in fact, a good deal for them. After all, exchanges typically turn products into commodities, driving prices down.
That would benefit manufacturers, but not necessarily suppliers. Further, a supplier that buys materials through one of the exchanges would be exposing sensitive information to the automakers' customers that typically try to squeeze as much money as possible out of their suppliers.
"Everybody's got that concern," admits Ford's Miles. She contends, though, that Ford won't peek at the data as it flows through its exchange.
In the end, the exchanges will probably get built, but in a scaled-down fashion. "The vision is right," says Bill Walles, president of Internet Operations Center, a technology provider to the auto industry. He predicts the automakers will spend a lot of money, but will end up with only a subset of their grand plans.
A recent example of how that can happen is the ambitious Automotive Network Exchange, a consortium of auto companies and suppliers that was supposed to come up with a set of technological standards for the industry. Four years after being announced with great fanfare, the Automotive Network Exchange has had little impact.
The Internet exchanges of GM and Ford have a better chance of success, since they don't rely on a room full of technocrats to reach agreement. But like those seductive concept cars, the exchanges point to a vibrant and exciting future that will likely be a more mundane reality when we actually see the production model.