B2B e-commerce: The biggest gamble yet

After pledging to annihilate each other's Internet e-commerce exchanges, Ford Motor and General Motors in the US lowered their swords and decided to work together to build the world's biggest online bazaar. The payback could be enormous - but so could the problemsHarold Kutner, lord of the world's biggest supply chain, has received a few unexpected wake-up calls over the last few months. The first came last November 3 at 3AM local time in his Tokyo hotel room. Frantic General Motors PR people called to say that his main rival, Ford, had just announced a new business-to-business e-commerce Web site designed to wrest control over the automotive industry's 30,000 suppliers from GM.

Furious, and certain that Ford was simply trying to trump the announcement of his e-commerce site scheduled for later in the week, Kutner, GM's group vice president of worldwide purchasing, wiped the sleep from his eyes and ordered GM's PR troops to reschedule its press conference for that day. It was hyper-competitive business as usual in Motor City.

The second call came after Kutner had already spent millions on software, infrastructure and a technology partnership with e-commerce wunderkind Commerce One to build his supply chain juggernaut. Suppliers would piggyback on GM's purchasing power to save money on everything from raw materials to pens and pencils while he took a cut of the action. This time the call wasn't from headquarters, however, it was from frantic suppliers that did business with all of the Big Three automakers.

Why, they asked, were Kutner, along with his arch rival at Ford, vice president of e-commerce Brian Kelley, and DaimlerChrysler's Peter Weiss, project manager of E-Extended Enterprise, all building proprietary exchanges on the largest open network in the world? How would a supplier save any money by having to build three separate versions of the same commerce technology in order to do business with the Big Three? How, indeed.

Perhaps it was the clicking over of the millennium, or maybe it was the realisation that e-business is going to be different from old business. But in late February, Kutner and his rivals took a deep breath, adjusted their ties and sat down next to each other at a joint press conference to announce that they were abandoning plans to create proprietary trade exchanges in favour of a single trading sanctum. The sight of top managers from the most competitive companies on the planet holding hands and singing Kumbaya was startling, to say the least. Kutner even called the agreement an "unnatural marriage". And it wasn't just the rival automakers who were getting cosy. Execs from Oracle (Ford's technology partner) and Commerce One - sworn enemies just a few weeks before - were on hand to coo about newfound synergies in what will be a joint venture of the Big Three and their respective technology pals.

But such turnabouts are natural when so much money is at stake.

Covisint (formerly Newco) will have a potential market capitalisation of between $30 billion and $40 billion once it goes public, with annual revenues of about $3 billion, estimates The Goldman Sachs Group senior analyst Gary Lapidus.

The prospect of being part of the world's biggest Internet company quickly quelled the animosities, adds John Sviokla, vice chairman of Diamond Technology Partners, a Chicago-based e-commerce services company. Diamond was called in to help Commerce One and Oracle hammer out an acceptable technical architecture. "Everyone at the table understood that this is the largest deal in e-commerce history by a factor of about 100," says Sviokla.

But this wasn't just about getting in the record books. The economics of the tripartite exchange proved to be significantly better than going it alone. The sheer size of the exchange will help the partners attract an ever-widening pool of car manufacturers, as well as commercial vehicle manufacturers, to join in on the venture. "The three-way exchange is a big idea because it becomes the predominant exchange for the space. Other original equipment makers (OEMs) are just going to fall in line," says Lapidus.

Indeed, some other major car manufacturers have already taken the bait. Renault SA and Nissan Motor are among the first; Toyota Motor is in talks with the Big Three. Deals, alliances and inter-corporate ego smoothing that would have taken years not too long ago are taking weeks now.

This deal signals that e-commerce has truly arrived, and it's more about finding the best supplier for metal stamping presses than bidding for vintage Charlie's Angels posters on eBay. "The [auto exchange] is a watershed for all industries," says Bob Ferrari, senior analyst for supply chain management at industry analyst AMR Research.

And if the hype were to translate into a truly efficient new way for the vehicle OEMs to exchange goods and information with their suppliers, it would make the last computerised supply chain ‘miracle', electronic data interchange, seem like child's play.

That's a pretty big if, though. Whereas getting suppliers on board was the biggest challenge facing Ford and GM in their solo exchanges, now the greatest hurdle will be knitting together the disparate cultures of the three partners as well as the disparate technology solutions from Oracle and Commerce One. The details have not yet been worked out, but hooking suppliers' back-end systems to the exchange will be far from plug-and-play. And this great idea won't be worth a damn if the exchange is still being spoon-fed with manual business processes a year from now.

But even if the auto exchange stalls, the Internet's destiny as an online business bazaar will not. Exchanges are coming to your industry and will soon affect your life, says Diamond's Sviokla. "Every CIO needs an exchange strategy," he says. "Exchanges will have an influence on price, service and delivery in every industry. CIOs need to decide what role they're going to play."

Mining the brief but brilliant history of the auto exchange for clues is not a bad place to begin.

Swinging a bigger stick

The two-pronged goal of the vehicle trade exchange is to cut costs by streamlining the purchasing process while letting suppliers pocket savings by leveraging the automakers' buying power for additional discounts. That buying power is significant. GM spends $US85 billion a year with its suppliers, according to Kutner. Ford's tally is $80 billion and DaimlerChrysler's is $73 billion. Such clout should allow the Big Three's suppliers to save big. "[The exchange] is an opportunity for a lot of suppliers - both large and small - to have the ability to buy, sell and auction at volumes they never dreamed were out there," says Kutner.

The vehicle builders also want - and need - to get closer to consumers, sending information about their preferences (such as colour and options) to everyone in the supply chain in real time so that customers get exactly what they want - not just what's in the showroom. "We want to get into an environment of sensing our requirements versus ordering and stockpiling [supplies]," says Kutner.

"The key is we want to communicate requirements to our supply base much faster. That will let us provide our customers with more customised vehicles."

By 2001, Kutner expects GM to reduce the time it takes between receiving an online car order to delivery of that vehicle - from about 45 days to 10 days. The idea is that super-fast communication on the availability of and demand for parts will cut much time and money out of the process.

Ironically, the partners in the joint venture won't have to rejig their individual strategies to create the new exchange. Their plans, broadly different at the beginning of the exchange wars, had been rapidly converging for months. GM's TradeXchange initially focused on electronic purchasing - its choice of Commerce One, as a partner reflected that emphasis. Ford, on the other hand, originally envisioned its ‘auto-xchange' as going beyond procurement to broader initiatives such as advanced planning and scheduling, demand forecasting and design collaboration. Ford's partner, Oracle, was perceived as more adept at supply chain management.

But within a few weeks of the announcements, GM subtly altered its strategy to be more like Ford's. GM partnered with i2 Technologies to add the supply chain management piece. And GM quickly adopted Ford's goal of eventually Web-enabling the entire automotive production process, from ordering production materials to forecasting future demand to making cars directly to consumer specs. Suddenly, the exchanges appeared to be identical in scope. "As we came out of the gate and ran for the last couple of months, you could see that our strategies were becoming more and more similar. That was a factor [in combining the exchanges] too," says Ford's Mark Duhaime, director of program management.

In the short term, the most important objective for the common exchange is to reduce work-in-progress (WIP) inventory - that is, production materials waiting in the supply chain to be used. Today, vehicle suppliers and manufacturers are forced to stockpile materials - and pay the associated storage costs - to cover any sudden changes in requirements - such as a particular model selling much more than predicted, for example. WIP costs the North American vehicle supply chain $49 billion annually, which translates to an inventory carrying cost to the consumer of about $310 on every new vehicle sold, according to Goldman Sachs' Lapidus. The ability to communicate better information faster throughout the supply chain - the theory says - will go far in whittling that number down. In fact, Lapidus estimates North American vehicle builders and suppliers can reap a potential back-end cost reduction of $1065 per vehicle, or 6 per cent of the manufactured car cost, from these supply chain initiatives.

The potential for Ford, GM, and DaimlerChrysler to reduce internal costs and speed processes with the trade exchange is clear. What isn't clear is whether three large car companies have any natural affinity for becoming deal brokers and transaction managers. "[The Big Three have] never shown they can excel at anything other than making cars," says Laurie Orlov, research director for e-business applications at Forrester Research. "Being a buying service sounds good. But who's responsible if the transaction goes wrong? What if the suppliers' suppliers aren't online? Something this intergalactic will be very hard to make succeed."

The Big Three's gamble to corner the market on vehicle parts needs a supplier payoff to be successful. But the savings promised, through aggregated buying power, could easily be lost through increased computing infrastructure costs and bureaucratic snafus. As with trading exchanges in other industries - Sears, Roebuck and French retailing giant Carrefour's new joint exchange primary among them - Covisint's long-term benefit for suppliers remains sketchy.

"What we have is a bunch of me-too companies that think they can get something in return for providing aggregated buying power for their customers. But this is unproven," says Orlov. The three-way exchange exists today largely in the realm of press conference and press release. Most nitty-gritty issues have still not been worked out, Orlov says. These include who will be responsible for customer service for transactions among suppliers, as well as how suppliers will e-enable their catalogues and transmit purchase orders. There is a very real danger that the suppliers' purchasing process will remain largely paper-based, Orlov says. "I could see them saying they're trading online but then [the suppliers are] all faxing, calling and printing behind the scenes. There are so many technical details to be ironed out."

The financial details are equally unclear. One possibility is for the Big Three to take a cut of up to 1 per cent of any third-party transaction conducted on the exchange (though this could be problematic since many vehicle suppliers operate on margins of only 2 per cent). Another option is ‘value-based pricing', where Covisint gets a portion of any cost savings from the transaction. However if the fees work, they could quickly add up to some serious money.

Technology partners

The joint venture has clearly shaken up Commerce One and Oracle, which are no longer the top dog on separate projects but uneasy partners. According to Diamond's Sviokla, the new technical architecture will leverage Commerce One's exchange technology and Oracle's enterprise application software. (Additional architectural details have not been released.) The official word is cheerful, but Oracle officials must be smarting at this turn of events. Oracle, after all, has been pushing its own exchange technology for at least as long as Commerce One has been around, and now it is being relegated to the decidedly less glamorous world of supply chain forecasting and back-end processing.

Meanwhile, DaimlerChrysler has reserved the right to bring in its own technology partner - SAP - although DaimlerChrysler's Weiss declined to comment. One wonders how many large companies can be involved in this effort before it deconstructs into a bureaucratic morass. "The opportunity for conflict has been multiplied by an order of magnitude," Orlov says.

In any case, the companies are searching for a CEO for Covisint from outside the three organisations. This is critical, Orlov says, since the decision-making process must be clear-cut. "The third party will have to override dissension and make decisions. It's going to be very difficult. [Unlike most CEOs,] this CEO won't have a four-walled environment over which he has complete control," she says. Goldman's Lapidus likens the job of Covisint's CEO to "herding cats".

Establishing an autonomous organisation will not be easy. "Now we have to find a common rallying cry," says Ford's Duhaime. "It was nice having the competition, something to get behind, to tell you the truth. Now we have to figure out how to start swimming together as a team."

The road ahead

If the past few months are any indication, the OEMs will waste no time getting the exchange on its feet. However, in June the exchange filed antitrust-related documents the US Federal Trade Commission requested. The exchange will have advanced functions such as capacity planning, demand forecasting, production planning, supply chain transaction automation, financial services and logistics. In the meantime, Ford and GM will continue to offer catalogue purchasing, bidding and price quotes, online sourcing and auctions on their respective exchanges.

Like most pioneers, however, they are making most of it up as they go. Automotive suppliers may be the vanguard for the relentless commoditisation and pricing pressure that electronic commerce will eventually bring to many industries' now-comfortable profit margins. Meanwhile, delays, technology snafus and data incompatibility problems await all involved. This is the first step down a long, hard road for which none of the partners has a reliable map. Says Forrester's Orlov, "Everyone wins if they can pull it off, but there's a lot to pulling it off."

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