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November 8, 1999

Exchanges Get Into Gear
Ford and General Motors are preparing to open E-commerce marketplaces, bringing new questions--and opportunities

By Alorie Gilbert

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usiness-to-business electronic marketplaces shifted into high gear last week, as auto-industry powers Ford Motor Co. and General Motors Corp. formed automotive trading exchanges. Partnering with Oracle and Commerce One Inc., respectively, Ford and GM will open Internet commerce sites in the first quarter that let the automakers and their suppliers buy and sell parts and coordinate production online.

Do huge manufacturers such as Ford and GM make good online marketplace operators? For that matter, do enterprise software suppliers such as Oracle and SAP, which are also moving into this rapidly evolving area? Will startup specialists be more adept? Businesses are about to find out.

The role of major companies acting as intermediaries of public online exchanges is relatively new. Ford will own a majority share in its marketplace, AutoXchange, as will GM in GM TradeXchange. Both companies have enormous clout, lending credibility to their efforts. Ford plans to conduct transactions with most of its 30,000 production suppliers--with which it does $80 billion in business annually--through AutoXchange. It also plans to solicit the participation of the entire automotive supply chain, a $300 billion market. "The scope of the project is immense," says Bob Ferrari, an analyst at AMR Research. "This is something we've never seen in business-to-business commerce on the Web."

The Ford site will let the automaker and its suppliers share more information--and do it more quickly--about demand forecasts, design requirements, and production schedules. "If we're able to use the Internet to supply real-time information, there could be inventory reduction across the chain," says Alice Miles, president of Ford's Business-To-Business division. "That will take days and dollars out of the supply chain." Ford and Oracle forecast savings of 10% to 20% for exchange participants.

The need to reduce cycle times resonates with Tower Automotive Inc., a $1.8 billion supplier to Ford. "We have to figure out how to be part of a value chain that delivers a car in two to three days," says Dugald Campbell, CEO of the Grand Rapids, Mich., company. "The implication is if you're not prepared to do that, Ford will find someone else."

GM's TradeXchange has signed up auto-parts firms Delphi and Magna, as well as 3M, Compaq, and Bethlehem Steel, among others. GM's goal is to handle all procurement over the system by the end of 2001 and to slash purchase-order costs from $100 per order to $10. Federal Express Corp. will handle logistics for TradeXchange.

Oracle and Commerce One will operate the sites and provide the underlying software. Commerce One said last week it's buying CommerceBid, an auction-services vendor, to help drive the GM project. As with most online exchanges, the cost of doing business on AutoXchange and GM TradeXchange will be tallied in transaction fees. Ford has not determined its fees. GM will reportedly take up to 0.5% of each transaction.

The software suppliers bring expertise--and biases. Mark Jarvis, Oracle's senior VP of worldwide marketing, says it's not necessary to run Oracle software to participate in AutoXchange, but adds companies using Oracle applications will derive greater benefit. And transaction fees may not be the only opportunity vendors are chasing. "There will be a lot of aggressive reengineering throughout the supply chain," says Bill McCreary, CIO of Pilkington Holdings Inc., a supplier of automotive glass to Ford and GM in Toledo, Ohio. "I'm sure that's one thing they see in it for themselves."

Because exchanges run by major industry players have little precedent, the benefits remain unproven. Among the questions: Can Ford attract other automakers to its site? Analysts think that's unlikely. "I'd be surprised if other carmakers would expose that kind of data to a competitor," says Joshua Greenbaum, a principal of Enterprise Applications Consulting. GM has no pretense about attracting other automakers to TradeXchange--it won't even try.

That sticky situation is not unique to the automotive industry. Supply-chain management software provider i2 Technologies Inc. launched an online marketplace for electronics distributors in June, with Hewlett-Packard as a partner. But the joint operation has yet to name any HP competitors as participants. "That's a challenge," admits Melanie Metzger, director of marketing for E-business ventures at i2.

Still, some supply-chain participants will partner with big "anchor companies"--and SAP, among others, wants in on that action. SAP's mySAP.com is a cross-industry marketplace, but the software developer is expected to put more emphasis on vertical markets via partnerships with market leaders. This company-centric model is a reflection of many industries, where a few large buyers call the shots, says Vernon Keenan, an internet analyst at Keenan Vision.

Of course, if competitors create their own online exchanges, their trading partners will have to participate in multiple systems, each with its own costs and technical requirements. "That's the reality of the business," says Mostafa Mehrabani, VP and CIO of TRW Inc., a $11.9 billion industrial supplier to Ford and GM in Cleveland. "It's unreasonable to expect our customers will use a single system to make it easier for suppliers."

Commerce One, i2, Oracle, and SAP all say that to participate in a marketplace, all that's needed is a Web browser. But they concede that for true efficiency, users must build electronic links between their systems and the marketplace. "The value of these marketplaces is whether you can pull accurate planning and forecasting data from your own systems," says i2's Metzger. "Otherwise, it's just garbage in, garbage out."

But there may also be limits to the level of supply-chain collaboration that marketplace operators should expect. "There's more to it than being connected," says McCreary. "The information is available now, we just don't share it for competitive purposes. That's a human issue, a matter of trust, and my feeling is it won't change a lot."

Other issues include security and reliability. McCreary says that while he's confident the marketplaces will employ encryption, authentication, and firewall technologies, security is always a concern in Web environments.

Some industries seem content with general online marketplaces that connect buyers and sellers. Last week, software veteran Autodesk Inc. unveiled Buzzsaw.com Inc., a hosted extranet and, eventually, a transaction site for the $670 billion building and construction industry. It competes with several startups, including Bidcom Inc.

Swinerton & Walberg, a 112-year-old construction company in San Francisco, manages 15 building projects using Bidcom. The Web enhances collaboration among clients, architects, designers, and contractors, says Charlie Kuffner, VP and northern California division manager. "It makes the whole process much more transparent," he says. "We're involved in each other's business more than ever before."

Despite the challenges, analysts say the developments portend change for many businesses as online marketplaces continue to grow in size and number. Says AMR's Ferrari, "When the Fords and GMs of the world are doing this, clearly businesses have to sit up and pay attention."

--With additional reporting by Gregory Dalton, Bob Wallace, and Clinton Wilder

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