InformationWeek

Hewlett-Packard last week led a group of vendors, including Advanced Micro Devices, Compaq, and Gateway, in launching an E-marketplace for computer and component companies. "This will be an open, high-tech exchange that will transform the way our industry manages its supply chain," HP president and CEO Carly Fiorina said at a news conference in New York.

It didn't take long for an alliance with similar plans to come to light. IBM officials acknowledge they're creating an IBM-led industry exchange, and sources say build-to-order giant Dell Computer is a likely participant. Intel, for now, is standing on the sidelines.

As has happened in other industries, PC makers and their suppliers may be forced to choose sides or participate in multiple exchanges.

Despite the potential for friction between the exchanges, observers say businesses and consumers could ultimately benefit through lower-priced PCs, servers, and mobile systems. Fiorina said the exchange should let technology manufacturers better predict supply and demand, helping them avoid the component shortages that have plagued the industry.

The steady drop in PC prices has been made possible, in part, by supply-chain optimization, says George Devlin, Compaq's senior VP of supply-chain operations. "What you see in street prices and price/performance costs reflects the efficiencies we've gained," he says. Compaq and its exchange partners estimate that the new exchange will help them wring as much as another 7% out of procurement and manufacturing costs.

"Ultimately, you'd expect lower prices because they're driving costs out of their supply chain," says Jupiter Communications analyst Tim Clark.

IT managers are watching with interest. "If they eliminate the shortage of components and ship to users with more reliability, that's great," says Philip Holden, a senior systems analyst at American Airlines Inc. "The last thing we want to be told is that a company has only 500 PCs for us after we correctly forecast the need for 1,000."

The marketplace will launch within 90 days as a joint-venture company. Initially, it will offer auctions, dynamic pricing, spot purchasing, and browsable catalogs. Later, it will be expanded to include supply-and-demand matching and parts-design collaboration between buyers and suppliers. HP says the venture's management will decide what technology will underpin the exchange.

IBM says it has attracted nine vendors as partners for its in-the-works exchange. IBM won't disclose names, but Dell has signed a letter of intent to participate, according to one source. There's reason to believe it: Last year, Dell agreed to buy $16 billion worth of IBM components. A Dell spokesman would say only that the company isn't joining the HP-led exchange.

Like HP, IBM already participates in limited electronic auctions with some suppliers. Now, it plans to extend that "into an exchange that involves a lot of other companies," says Steve Ward, general manager for IBM's industrial sector business.

IBM in March inked deals with Ariba Inc. and i2 Technologies Inc. to develop E-business bundles that combine IBM's hardware, middleware, and E-commerce software with Ariba's network-services and procurement applications and i2's supply-chain planning and collaboration software. IBM's marketplace will run on i2's software, says Mark Jensen, executive VP at i2.

But i2 won't get a cut of transaction fees on IBM's exchange. And HP has scotched plans to participate in i2's nascent Hightechmatrix.com marketplace, which serves any industry that uses electronic components. "It's the same thing we saw in the auto industry. Ford, GM, and DaimlerChrysler decided they were better off taking this back from the vendors and keeping the transaction money," says C.V. Ramachandran, VP for the operations practice at Booz-Allen & Hamilton.

But the HP and IBM initiatives both face hurdles. "For these companies, logistical infrastructures are a key source of competitive advantage," says U.S. Bancorp Piper Jaffray analyst Ashok Kumar. The computer industry marketplaces, he says, "will have the half-life of a fruit fly."

Another possible hitch: The Federal Trade Commission is looking closely at online exchanges to ensure that no antitrust laws are violated. "The concept of business-to-business marketplaces is positive," because they create efficiencies that can benefit consumers, says antitrust attorney Peter Ward, at the Nashville, Tenn., office of law firm Baker Donelson. "But if the details foreclose the market to competition, that could be a problem."

And to what extent can either exchange succeed without Intel? The chipmaker is conducting pilot online-exchange programs with its suppliers, and "whatever we do, we'll have to be able to interoperate with other marketplaces using open standards like RosettaNet," says a spokesman. The RosettaNet consortium promotes the use of the same computer language among organizations transacting business in the global IT supply chain. HP's exchange will adhere to some RosettaNet standards, as well as XML; IBM promises a similar commitment to standards.

Exchange participants are undaunted. Keith Melbourne, general manager of HP's trading community unit, says big vendors that don't sign on will be at a disadvantage. In Intel's case, he says, "If we need an x86 chip, we can go on the public market. Many brokers can source Intel chips." In any case, HP and other PC vendors will maintain private source arrangements with key vendors such as Intel.

Officials for the HP exchange estimate that by 2004, more than $600 billion worth of components will move through the network. Says Matt Massengill, president and CEO of hard-drive manufacturer Western Digital Corp., a participant in the exchange, "This is one of the most meaningful events our industry has seen in years."

--with additional reporting by Aisha M. Williams