Exchanges Under Scrutiny

SAN MATEO (07/07/2000) - Although the U.S. Federal Trade Commission is urging business-to-business trading exchanges to think twice about antitrust issues, it is clear the government as well as the founders of these emerging e-marketplaces are only just beginning to understand how these new businesses will function.

Still, the specter of government intervention looms.

At a recent workshop in Washington, FTC Chairman Robert Pitofsky urged b-to-b exchange founders and others to more thoroughly address potential competition issues in their emerging industry.

The FTC is also investigating the Covisint auto industry exchange created by General Motors Corp., Ford Motor Co., and DaimlerChrysler AG.

The FTC investigation into the auto exchange may constitute a major roadblock for such ventures because it focuses on one of the key factors for the success of any exchange: the ability to provide secure integration between buyers and suppliers.

"I need to audit and take a look at the infrastructure with our [exchange] partners. But with the trade commission issues, we can't talk to the partners.

They are a black box to us. We need to give them requirements for security, but I can't talk to Covisint because of the Federal Trade Commission," said Mark Bugeaud, director of system engineering at General Motors, in Detroit.

From an IT standpoint, Bugeaud said he needs to assure GM executives that corporate security policies are adhered to in the exchange.

And once the FTC allows the automakers to work with Covisint it is not a foregone conclusion that the exchange will become the single thoroughfare for the procurement of direct and indirect materials.

No one seems certain about a final direction. So although Bugeaud and his boss Ron Shelby said that what happens with the exchange is a "business decision," Bugeaud ventured that GM will "always have some form of their own trade exchange with their suppliers," but that Covisint "is there to do this in the long run."

For the moment, the exchange founders appear more concerned about the complicated models that they will need to conduct business, said Lara Abrams, an analyst at Aberdeen Group Inc., in Boston.

"This isn't like selling bubble gum," Abrams said. The exchanges have to create liquidity, re-engineer supply-chain processes, select the core technologies, attract key players, and tap in to their insight into market dynamics, she said.

"This is also a huge behavioral shift for them," Abrams said. Understanding the complexities of this transition is a challenge for the federal government, which "faces a steep learning curve," she said.

In the meantime, the exchanges "are going to go as far as they can go until someone slaps their wrists," Abrams said. "There has been a lack of attention paid to the fine print."

The fine print is where the exchanges will have to balance the need for privacy against the need to share information. There might be times when the FTC and exchange members are on the same side of the issue, said Susan DeSanti, director of policy planning at the FTC, in Washington. "Some information sharing is fine and is pro-competitive, and some is not," DeSanti said. Judging where information falls, pro-or anti-competitive is "fact-specific," she said.

On a broader level, the FTC is also looking at openness in terms of the number of exchanges in a particular industry and if a company may easily participate within the exchange. If there is only one b-to-b marketplace with the results that a company needs access to that exchange in order to compete, then there potentially is an antitrust issue, DeSanti noted.

However, although DeSanti would not comment on the FTC's investigation into Covisint, she said that when it comes to exchanges the FTC is still "in a learning mode."

Big Brother is watching

The FTC's recent warning to b-to-b exchanges to steer clear of antitrust problems was not the first time exchanges have shown up on the government's radar.

* In May 2000, the U.S. Department of Justice began its still-ongoing investigation of a travel industry exchange, the former T2 -- now called Orbitz -- which is supported by five major airlines.

* In June 2000, the Federal Trade Commission looked into the Covisint auto industry exchange and the competitive issues raised by the involvement of its founders, major automakers General Motors, Ford, and DaimlerChrysler.

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More about Aberdeen GroupBlack Box Network ServicesCovisintDaimlerChryslerDepartment of Justicee-marketplacesFederal Trade CommissionFord MotorFTCHolden- General MotorsOrbitz

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