Auto Exchange Hits Potholes

FRAMINGHAM (05/08/2000) - Major automakers are driving hard to channel $240 billion worth of procurement transactions through a still-unnamed business-to-business exchange formed two months ago. But according to a new study, key automotive suppliers see a pothole-filled road ahead for the automakers, and streets paved with gold for the technology firms hired to set up the online purchasing exchange.

According to a survey of 19 large auto-parts suppliers released last week by Merrill Lynch & Co. Inc. in New York, suppliers contend that the planned Internet marketplace, tentatively called Newco, will take at least a year to get in gear because of the contractual complexities inherent in the collaboration of competitors.

And while the automakers are promoting the exchange as beneficial to the parts suppliers, who are being encouraged to channel their own procurement through the exchange, the suppliers aren't toeing that line. The exchange won't improve their profit margins overall, the suppliers said.

The suppliers said consumers and technology firms like Commerce One Inc. in Pleasanton, California, and Oracle Corp. stand to reap the greatest benefits from the endeavor.

Analysts said technology firms are charging premium rates and seeing high stock-market valuations from building Web-based exchanges, but the trend is unlikely to last.

"The huge equity stakes and transaction fees that technology companies are getting are not likely to continue long term as suppliers and buyers look at their options more rationally," said Bruce Temkin, an analyst at Forrester Research Inc. in Cambridge, Massachusetts. The buyers and suppliers "don't want to be trapped into deals with vendors that extract all the savings that they could gain by participating.

"What you're seeing now is a very immature market, and the technology vendors are extracting a fairly large premium for their services," he said.

Yet more than half the suppliers surveyed said they plan to create their own online exchanges, despite the cost. For example, Dana Corp., an automotive driveshaft and piston ring maker that conducts $3 billion in business with Ford Motor Co. in Dearborn, Michigan, and DaimlerChrysler AG in Stuttgart, Germany, plans to trade on the exchange. But the Toledo, Ohio-based manufacturer still intends to develop a separate procurement exchange for its 86,000 suppliers.

The automakers had hoped such suppliers would channel their $500 billion in annual buying through the exchange.

Analyst Barbara Reilly at Gartner Group Inc. in Stamford, Connecticut, said that by creating an exchange for their own suppliers, big automotive suppliers get a chance to participate in the revenue generation. But "it's starting from scratch, and [the suppliers] will go through the same hurdles as the automakers," Reilly said.

Two months after the historic agreement by automakers to form the exchange, integration hurdles remain. The exchange still lacks major working parts: a top executive, an official name and Web address and a definitive agreement among the major participants.

It is also the subject of a Federal Trade Commission (FTC) investigation into the antitrust implications of a single trade exchange for automotive suppliers and dealers.

David Barnas, a spokesman for General Motors Corp. in Detroit, said the investigation has stalled efforts to accelerate the rollout of the exchange.

Still, the Big Three automakers were able to draw Nissan Motor Corp. in Tokyo and Renault SA in Boulogne-Billancourt Cedex, France, which holds a 37% equity stake in Nissan, into the exchange.

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