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February 28, 2000

E-Markets Are Expanding
Online exchanges add more services and interconnections

By John Foley, Beth Bacheldor, and Bob Wallace

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irst came electronic marketplaces. Then those online exchanges for buying and selling morphed into more feature-rich E-marketplaces that layer on services such as online financing, supply-chain planning, and collaborative design. Now comes the latest iteration: the expansion-or in some cases consolidation-of E-marketplaces into interconnected hubs of online commerce that promise economies of scale that are greater than standalone exchanges.

A deal last week involving DaimlerChrysler, Ford, and General Motors to combine their online purchasing activities underscores this latest trend. The companies plan to operate a business-to-business exchange through which they and other automakers can buy materials for building cars and collaborate with partners. They're billing the effort as "the world's largest Internet-based virtual marketplace."

Just months ago, Ford and GM disclosed plans to build separate auto-industry exchanges, both of which are already operating. Ford's AutoXchange is based on Oracle software, while GM's TradeXchange runs on Commerce One Inc.'s platform. The competing technology vendors say they've already been working for several weeks on a "compatible architecture."

Ford and GM executives say suppliers pressured them into creating a single exchange so they wouldn't have to do business through multiple exchanges. "The exchange will provide greater value to the supply base by not having common suppliers develop one supply-chain process for AutoXchange, one for TradeXchange, and what might have been a third for DaimlerChrysler,'' says Harold Kutner, group VP of GM Worldwide Purchasing.

The trio is recruiting other automakers, which would also receive a stake in the as-yet-unnamed company. The exchange-integration project is under way and will be completed quickly, a GM spokesman says. The integrated exchange will offer all the services available on the Ford and GM marketplaces, and may be expanded to other industries. "I would not be surprised that, if the venture proves effective, it will bring in other industries," says Chris DeNove, director of automotive retail and distribution analysis at J.D. Power and Associates. "When it comes to the Internet, partnerships that were once thought to be unthinkable are not only doable, but expected."

There's a frenzy of activity in all stages of E-marketplace development-creation, renovation, extension, and aggregation. Last week, sites were launched to serve the auto-parts, telecommunications, and trucking industries (see story, p. 26), while existing E-marketplaces such as PlasticsNet. Com and Gofresh Inc. disclosed plans to add service-oriented functions. Chemdex, an E-marketplace operator in the chemicals and laboratory supplies industries, launched Broadlane Inc., a vertical marketplace for acute-care hospitals and their suppliers. Chemdex also restructured with the goal of creating even more online exchanges.

"People can't build these things fast enough," says Kirk Cruikshank, an executive VP at Ariba Inc., a maker of E-commerce software. "Nobody wants to be left out." Ariba last week said Kraft Foods North America has signed on to use its B2B eCommerce exchange for procurement of nonproduction goods.

E-marketplaces cut costs for business buyers through increased choice and price competition, while giving sellers a new and potentially lucrative channel for unloading inventory. But there's a growing consensus that E-marketplaces need to do more than simply bring buyers and sellers together. "With the proliferation of marketplaces, there is the issue of how you gain traction or critical mass," says Varda Lief, an analyst with Forrester Research. "The way to do that is adding services." Lief expects marketplace operators to increasingly offer services such as automated real-time credit, connections to shipping and logistics providers, and integration with enterprise resource management and inventory systems.

For companies that use them, that means E-marketplaces can become supply-chain hubs that bring efficiencies to many aspects of their business. "We'll offer the suppliers, the jobbers, the wholesale distributors, and dealers a way to do a better job of demand planning, a better job of controlling inventory, a way to reduce parts obsolescence, and a way to get real-time information," says Dave Illingworth, senior VP of planning and development with Toyota Motor Sales, which last week opened a marketplace called iStarXchange with partner i2 Technologies Inc.

AviationX.com Inc., an electronic marketplace for the aviation industry that will launch next quarter, plans to offer services in three areas: a marketplace for buying and selling goods and services; applications that facilitate workflow process management and decision support; and a resource center. "We felt that handling transactions shouldn't be our only core competency," says chairman and CEO Henrik Schroder. "It's much too narrow an application."

Software vendors are helping marketplaces add new features and services quickly. Oracle, for example, can add functionality to an E-marketplace it hosts faster than it can deliver the same functionality to businesses that use its applications, according to Lou Unkeless, senior director of applications marketing for the company. Oracle, which supplies the platform for AutoXchange, will introduce another vertical industry marketplace this week, says company president Ray Lane.

Like other E-marketplace infrastructure and service providers, Oracle sees great potential in networked E-marketplaces. It's about to open Oracle Exchange, a horizontal E-marketplace where companies can buy and sell nonproduction goods and services. Oracle will let businesses create their own "personal" versions of Oracle Exchange for buying and selling with business partners. Unkeless foresees a "spider web" of vertical and company-specific exchanges that tie into its horizontal exchange.

Rival Ariba is moving in the same direction. Already, the Chemdex and Ariba exchanges are connected so that buyers on Ariba's exchange can access Chemdex directly. As similar arrangements are reached, it creates a "multiplier effect," Cruikshank says. "The ability to capture buyers attracts suppliers. And more suppliers attract buyers."

Many vendors are hurriedly adapting products to augment E-marketplaces. Application-integration specialist Extricity Software Inc. last week rolled out software for Net marketplaces (see story, p. 88). And SynQuest Inc. introduced apps for linking order processing, sourcing, and customer service with supplier information. SynQuest customer Arborex, a Chicago startup, plans to unveil an E-marketplace for the paper-packaging industry by midyear.

Commerce One's MarketSite Portal, a cross-industry procurement marketplace for nonproduction goods, is expanding to support purchases of direct materials, those used to manufacture products. Commerce One will work with Extricity to deliver MarketSite Direct Material Services. Its first customers are Shell and GM.

Direct-materials purchasing has been the province of traditional ERP suppliers such as Oracle and SAP, but Commerce One wants to integrate ERP rather than supplant it. "ERP logically resides within the enterprise, but when it comes to communicating with trading partners, that breaks down," says Lane Kato, Commerce One's director of product marketing for direct material services. "We focus only on the intersection with trading partners."

The market is attracting some new E-marketplace platform-and-service providers. SBC Communications Inc. last week became a potential software supplier via a planned $3.9 billion acquisition of Sterling Commerce Inc. U.S. Steel Group, the country's largest steel producer, is buying a minority stake in e-Steel and will begin selling on that exchange. E-Steel will join USX Engineers and Consultants Inc., owned by U.S. Steel parent USX Corp., in E-marketplace integration and marketing.

E-Steel is developing services such as supply-chain management, credit, and logistics, which it expects to offer soon.

But unlimited E-marketplace expansion can't go on forever, and some observers predict an eventual consolidation. The combination of AutoXchange and TradeXchange seems to support that. But even there, Oracle's Lane says, the result will be more business-to-business commerce, not less. A megamarket for the auto industry "will accelerate and expand the number of users exponentially."

-With additional reporting by Chris Murphy, Matthew G. Nelson, Mark Roberti, Marguerite Reardon, and Clinton Wilder

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