News: Analysis & Commentary: The Internet Economy
B2B: The Hottest Net Bet Yet?
Business-to-business Web outfits may wind up having even more impact than e-tailers
Since early last fall, Internet stock pickers have been saying the next big thing would be business-to-business technology. Sure, Amazon.com, Yahoo!, and America Online are still the Net's stars. But for sheer potential, nothing could beat stocks in companies that teach General Motors Corp. and General Electric Co. how to be e-businesses. The feeding frenzy over B2B issues hit its peak--along with the Nasdaq--in December when FreeMarkets Inc. went public. The Pittsburgh software maker, which holds auctions for old-line manufacturers' suppliers, saw its stock jump fivefold on the first day of trading.
Now, the Nasdaq and FreeMarkets have both had a sobering setback. On Jan. 4, the same day on which investors began retreating from overpriced e-commerce stocks (page 32), FreeMarkets was dealt a huge blow: GM, the biggest U.S. manufacturer and the company that accounts for 20% of FreeMarkets' revenue, picked another horse to ride into the e-future. The carmaker chose technology from Commerce One, a FreeMarkets rival in which it has assumed an ownership stake. The Walnut Creek (Calif.) software house will create a vast network to handle procurement of everything from staples to steering wheels.
But the good news for those betting on B2B is that GM is still gung ho on the concept. And so are companies across the economy. In the middle of the Nasdaq's 229-point Jan. 4 meltdown, a startup called Appnet Inc. saw its shares shoot up 14%, to 51, after it announced a deal to market its B2B e-commerce software with MCI WorldCom Inc.EXPLODING. Whether or not B2B stocks fare any better than other Internet issues, the reason behind investors' interest remains valid: As more and more companies look for ways to do business on the Web, they will invest enormous sums into the technology to make it work. Total sales using B2B e-commerce have exploded from almost zero a few years ago to $114 billion today, according to Goldman, Sachs & Co. And Deloitte Consulting LLC estimates that 91% of U.S. businesses will do their purchasing on the Net by the end of next year. Some 31% do so now. By 2003, Deloitte projects B2B sales will be six times as large as the business-to-consumer market.
Behind the investment is the promise of a big payoff. A Federal Reserve Bank of New York study says that in general, the B2B boom could lead to lower prices, higher productivity, and reduced labor costs. David Pecaut, co-head of global e-commerce at Boston Consulting Group Inc., figures that, in manufacturing alone, B2B e-commerce will boost productivity by 9% within the next five years. And a recent Goldman Sachs study concludes that B2B e-commerce could slash processing costs by more than 20% in industries such as electronics and freight transport (table). Business costs overall could fall by as much as 12.5%.
How? Consider one small example. At Norfolk Southern Railway, Herman Ricker, an assistant contract manager, used to spend hours calling construction outfits when he needed repair work. The process took days, and he was never sure he was reaching all the best contractors. Now, he does it all on the Net. When he needed repairs on a four-span bridge in Buffalo, Ricker solicited bids over RailNet-USA.com, a Web site set up exclusively for rail contractors. Within days, he had 14 bids, far more than normal. Ricker also figures the process yields more competitive bids, and the time he doesn't spend on the phone he can devote to other projects.
At GE, where CEO John F. Welch Jr. has ordered a move to e-processes, B2B technology is being applied everywhere. At GE In formation Services, employees use a system called Trading Partner Network Register to order office supplies from pre-qualified vendors over the Internet. Gary M. Reiner, GE's chief information officer, estimates that making purchases offline can cost between $50 and $200 per transaction because of all the paperwork involved. The cost online? Only about $1.
Proponents of B2B say you can do this with all sorts of transactions and in all kinds of companies. The upshot: more productivity and the chance for companies to continue boosting profits without hiking prices. It could even force the costs downward. "The Internet represents the most powerful engine of deflation in the modern era," says Thomas F. Carpenter, managing director of ASB Capital Management Inc. in Washington.
No wonder money is flooding into business-to-business technology suppliers and services. In 1999, venture capitalists plowed $3 billion into 200 B2B companies in 1999, more than triple the amount they invested the previous year, according to Venture Economics Information Services. About $11 billion flowed into business-to-consumer Internet companies last year. The momentum is now with B2B, says Venture Economics."WIDE OPEN." Behind the accelerating investments is the suddenly rapid uptake of B2B technology. For two decades, companies have been using electronic networks to exchange orders and invoices. But until the Internet came along, such setups were costly and limited: You could deal electronically only with a business on your private network. By 1999, only 150,000 companies had adopted these electronic data interchange (EDI) systems, according to Morgan Stanley Dean Witter. Since the 1994 introduction of Web browsers, millions of companies have gone online and can connect to such B2B marketplaces as the construction industry's BuilderSupplyNet.com and the confection industry's CandyCommerce.com. "It's accelerated from a stodgy, closed club to a wide open market," says John Wenninger, a New York Fed economist who follows B2B.
Nowhere is the change more apparent than in Detroit, where EDI got its start. In November, Ford Motor Co. and GM unveiled plans to go online with their massive purchasing systems, which each year acquire $80 billion and $87 billion, respectively, in goods and services. Ford has forged a partnership with Silicon Valley powerhouse Oracle Corp. to create AutoXchange, a purchasing system that will use an online auction--a sort of heavy metal eBay--to fill orders.
Soon, companies that are not using online technology could be at a disadvantage. Norfolk Southern's Ricker says there's no turning back. He expects to use RailNet over and over again. "It's easier to work in this system," he says. "We're hoping to get more competitive bids." That's a better way to run a railroad--and to keep the U.S. economy on track.By Laura Cohn in Washington, with Diane Brady in New York and David Welch in DetroitReturn to top