InformationWeek
Defining The Business Value Of Technology
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September 18, 2000 |
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Electric Shock
Nearly 50 E-marketplaces are trying to reshape the volatile market for electronics components. They've still got a long way to go.
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ewin Edwards hates talking to electronics distributors. Digi-Frame Inc., the digital photo album company where he works as an engineer, isn't a big-name company that distributors bend over backward to help. So when Digi-Frame recently began running low on an essential component--flash chips--Edwards turned to the Web. With the supply of flash chips getting tight and prices rising, Edwards went to QuestLink.com, one of several online marketplaces for electronics components that he uses to research and find parts. QuestLink.com offers information about parts and the ability to buy them online. Within minutes, he had generated a short list of potential suppliers and used the information to strike a deal with a supplier in Asia, where the Port Chester, N.Y., company does all its manufacturing.
Edwards liked everything about the deal: The price was $8 a chip, about $5 cheaper than Digi-Frame's regular suppliers, and it spared him weeks of phone calls and faxes to distributors. "If you go to a local distributor, you're assigned a very junior salesperson who doesn't know anything and isn't interested in your business," he says. "For any company that isn't a household word, it's hard to get a response out of them."
Edwards' experience shows why the electronics components industry has been flooded with nearly 50 online marketplaces. It's a volatile, cyclical industry served by a complex web of thousands of manufacturers, suppliers, distributors, and brokers. Products must be developed quickly and can become obsolete just as fast. It's a broad market that serves computers to consumer electronics, home appliances to telecommunications, automotive, to aerospace equipment--where shifting market demand causes frequent shortages and surpluses of supply.
That makes it an ideal laboratory to look at the different online marketplace business models that are emerging. The potential is there: Forrester Research predicts that by 2004, the high-tech industry will sell $593 billion of goods via the Internet, with nearly three-quarters of that funneled through high-tech E-marketplaces. Those kinds of numbers mean it's more than just startups like Digi-Frame that are taking notice. Some of the world's largest high-tech companies, including Compaq, Hewlett-Packard, and IBM, are using and building online marketplaces, as are major distributors and brokers. The virtual land grab has created one of the most crowded and competitive online marketplace arenas. How it shakes out will not only reshape the electronics industry, but also offer a clue as to what marketplace business strategies will work in other industries.
Infomercial And Matchmaker
One vision for E-marketplaces is equal parts infomercial, Webzine, and digital matchmaker. Called ChipCenter, it was founded by distributors that recognized they didn't do a good job serving small companies like Digi-Frame. Commission-based systems tend to reward salespeople for closing large deals and taking care of large accounts. To better serve the smaller end of the market, two major electronics distributors, Arrow Electronics Inc. and Avnet Inc., last year formed ChipCenter as an online resource for electronics engineers, focusing on original editorial content and information about products available through participating distributors.
ChipCenter doesn't hide its affiliation with distributors. In addition to technical information about products they offer, it provides links to their inventory and refers all purchase inquiries directly to distributors. The site doesn't offer auctions, requests for quotations, or other negotiation tools that might pit distributors against each other in an open, price-crunching situation. "For the franchise distributors, we serve as a center of demand creation," says Ron Mabry, chief marketing officer at ChipCenter. "Small users may grow up to be larger customers."
ChipCenter has added distribution partners since its launch, including Nu Horizons Electronics, Pioneer-Standard Electronics, and TTI Inc., as well as investments from software provider Aspect Development Inc., and technology publishing company CMP Media Inc. (publisher of InformationWeek). With more emphasis on lead generation and less on commerce services, ChipCenter depends on advertising it sells to electronic component manufacturers, as well as a commission on the sales referred to distributors.
Hank Wallace, an independent consultant and designer of embedded microprocessors, is a typical ChipCenter customer. He uses it to find information about parts, how much they cost, and which distributors have them in stock. For a small operator such as Wallace, ChipCenter can slice weeks off the time it takes him to design new components for his clientele of communications equipment manufacturers. For distributors, it may offer a way to affordably cater to a neglected market segment.
"This whole method of doing business is a blessing for small shops like me," says Wallace. "I talk to a salesperson once every six months, whereas I used to be on the phone every day chasing down parts."
Focus On Rare Goods
Another emerging business model addresses the bane of electronics companies: shortages and surpluses of parts. Thanks to innovation, a fast-growing market, and poor supply-chain communication, manufacturers often find supply and demand out of whack.
Consider Matco Electronics Group, a $400 million manufacturer of electromagnetic devices used in telecommunications equipment and fuel pumps. On a given day, it can have trouble finding 10% to 20% of its supplies. "Our challenge is the allocation of components," says Dana Pittman, chief operating officer of Matco Electronics. "We've enjoyed a glut of inventory in the telecommunications industry for the last six to 10 years. This year, demand increased and manufacturers haven't kept pace. Nobody predicted the economy and consumer demand would be so strong."
The problem of allocating scarce components has given rise to a community of brokers who specialize in locating obsolete, excess, or hard-to-find parts. Two traditional brokers, PartMiner and NECX.com, see the Web changing their industry and are using a hybrid of Internet and traditional brokerage services to avoid being left behind.
The first piece of their offering is fairly predictable: databases cataloging millions of standard electronics components. PartMiner's Free Trade Zone, which opened in June, and NECX.com's Global Electronics Exchange, launched a year ago, each let users search by technical parameters, compare products, and incorporate data about the products into their designs.
To purchase, an engineer is referred to a distributor or broker who finds the part and fills the order, charging a markup on the sale. It's a traditional broker business model dressed up with a Web front end, and both companies know they need to offer more. "Our challenge today is to create online services that are faster and easier than the phone," says Kramich of NECX.com.
Photograph by Chriss Wade
Photograph of Pittman by Michael Greenlar
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