At midnight, a FedEx cargo plane lands at New York's JFK International Airport. U.S. customs officers greet the crew with a list of packages they want to inspect. No problem -- all the boxes are ready and waiting near the door of the plane. The customs officers examine them and send the plane on its way. The packages reach their recipients, as promised, before 10 a.m.
Such smooth coordination comes courtesy of FedExNet, the overnight delivery service's e-commerce network. The system processes over 3 million transactions daily, providing customer service to more than 5,000 FedEx customers. FedEx estimates that the network has saved the company about $50 million since it was installed in 1996.
Credit for the system goes not only to FedEx but also to GE Global eXchange Services (GXS), which built the e-commerce network. GE (GE ), a software provider? You bet. GXS operates one of the largest B2B e-commerce networks in the world, with more than 100,000 trading partners in 58 countries. Annually, it handles 1 billion transactions, accounting for $1 trillion in goods and services.
Besides FedEx, GXS has provided exchange systems to customers including Kodak, Procter & Gamble, and DaimlerChrysler. Much of this business still happens over older private networks, not the Internet, but that's changing. And with once high-flying publicly traded B2B exchanges such as Ariba (ARBA ) and Commerce One (CMRC ) now nosediving, GXS is positioning itself as the natural player to bring electronic efficiency to Old Economy companies.
"Before, people believed that revolutionary business models would destroy existing relationships. They didn't. The market is coming back to us. People want to work with well-established companies," says GXS Chief Executive Harvey Seegers.
The dot-com downturn certainly represents an opportunity for GXS. The company expects annual revenues to double, from $500 million in 2000 to $1 billion by 2004. But GXS doesn't have the market sewn up. Market researcher Gartner Group estimates that B2B sales will reach $8.5 trillion by 2005, and analysts say GXS faces an uphill marketing battle convincing customers it's as nimble as younger competitors.
The GE subsidiary also will face stiff competition from more established software-integration players, such as IBM (IBM ) and Tibco (TIBX ), as well as software-infrastructure players, such as Microsoft (MSFT ) and Oracle (ORCL ). All of them are taking steady aim at the lucrative B2B-exchange market. The question now: Can GXS overcome an Old Economy image and become the dominant player?
GXS's best selling point is GE's own success using the Internet to wring efficiencies from its global trading network. The parent company expects to save $1.6 billion this year, before taxes, by digitizing old-fashioned workflows and conducting nearly $14 billion in online auctions, according to GE CEO designate Jeffrey Immelt.
GE's auctions set up an open marketplace among its suppliers, which reduces purchasing costs. A majority of GE businesses and 15,000 of their suppliers use the system -- and about 60% of the auctions are done through GXS. In addition to those cost savings, GE expects its own sales over the Internet to accelerate to more than $15 billion in 2001. That's more than twice the $7 billion it sold last year. In comparison, analysts expect revenues at No. 1 Internet retailer Amazon.com to reach $3.4 billion this year.
The huge number of transactions that GXS systems can handle deftly is another key selling point. Dell Computer sends several thousand FedEx shipments per day. Dell transmits a single file of all shipment data, regardless of the FedEx service being used, and, through GSX, FedExNet returns tracking information, which Dell then matches up internally with its purchase orders. The sheer volume GXS accommodates "should prove very valuable as a differentiator," says Michael Barnes, a senior program director at Meta Group in London.
Already, customers include more than 60% of Fortune 500 companies, most of which have used GXS's electronic data interchange (EDI) systems over the past 30 years. Built on private networks, EDIs are primitive versions of today's e-commerce information-sharing systems. Customers pay per transaction or based on the number of characters they transfer. GXS's brand name in EDI gives it a leg up on much of the competition since the company can try to upsell to current customers looking to squeeze savings out of transaction processes.
But the rise of the Internet and the tech world's embrace of XML, an information protocol that makes it possible for previously incompatible computer systems to understand each other, means EDI vendors are anything but cutting-edge. So GXS is left with the problem of redefining itself for the Internet Age. "Worldwide, [GXS] is the top dog in EDI. But what if you don't want to use EDI? It's not the 'modern, Internet way.' That's a major issue for some clients," says Ross Altman, a research director at Gartner Group.
ENTER THE INTEGRATORS.
Ironically, GXS's greatest strength is also one of its greatest weakness. Software is not a core business at GE, and CEO Jack Welch doesn't tolerate losses. So GXS cannot operate the way its competitors do. "GXS can't suffer the losses that they might need to gain early market penetration. The challenge is how well they can reconcile being part of a large organization where software is not the focus," says Meta Group's Barnes.
Barnes and others believe in the short term, integrators such as Tibco and Vitria (VITR ) will dominate the market. Tibco is the second-largest player in the application-integration space, with 11.2% market share, according to Wintergreen Research. It has succeeded by supplying a bevy of integration products for a flat fee -- not the per-transaction model that GXS still employs.
Over the next 18 to 36 months, software vendors such as IBM, Microsoft, Sun, Oracle, and BEA Systems (BEAS ) also will grab some of the market. These companies focus on internal application integration -- the natural next step is to start trying to sell B2B integration as well, says Barnes.
That said, expect GXS to fight hard to expand its market share, which, according to Wintergreen Research, now stands at 5.7%. "They're absolutely going to be a major B2B player. But the jury is still out on whether they will be the dominant one," says Gartner Group's Altman. Still, experience might count for something, even in the wired world. After all, GXS has been in the EDI business for almost 30 years. If history is anything to go by, it has a pretty good chance of staying on top of its game.
By Jane Black in New York
Edited by Alex Salkever