E Malls For Business

The new Web rush is from companies forming electronic marketplaces

The big job for J. Smoke Wallin last year was to get his family's liquor-distribution business, Indianapolis-based National Wine & Spirits Inc., on to the Internet. But Wallin, 33, discovered a raft of online upstarts was setting up much broader sites that could slice off big chunks of the alcoholic-beverage industry--leaving distributors such as National in the lurch. So instead, he formed eSkye.com Inc., a national marketplace for beverage makers, distributors, and retailers to buy and sell online. Spits Wallin: "I don't want some kid out of Silicon Valley with a nose ring to come in and take over my business."

Neither do thousands of other traditional companies under fire from cheeky dot-coms. By forming electronic marketplaces or exchanges on the Web, hundreds of upstart online sites are scrambling to make themselves the new commercial hubs of industries from aerospace to waste management. Operating as middlemen between suppliers and their customers, they charge a small percentage of each transaction. Now, like Wallin, the incumbents are firing back and staking their claims on the Net. And they're doing so with a haste that wows even dot-com rivals.

On Feb. 25, General Motors, Ford Motor, and DaimlerChrysler abruptly cast aside plans for separate online procurement sites to collaborate on a single exchange for auto-parts suppliers. The unnamed electronic marketplace could quickly become the Net's largest business, says auto analyst David M. Garrity of Dresdner Kleinwort Benson. Revenues in 2002 could be as high as $6.9 billion--more than four times e-commerce king Amazon.com's 1999 sales. Market value could hit $100 billion when it goes public, possibly in 12 to 18 months.

And that wasn't the only blockbuster announcement. On Feb. 28, after a scant three weeks of frenzied activity, Sears Roebuck & Co. and French retailer Carrefour announced an Internet retail exchange to handle the $80 billion they spend annually on supplies. They have invited other retailers to join. "Why wait for someone else to do it?" asks Sears Chief Executive Arthur C. Martinez. "Let's seize the opportunity ourselves." And on Mar. 1, two more marketplaces were unveiled. Cargill, DuPont, and Cenex Harvest States Cooperatives announced plans for an agricultural hub, while reservations giant Sabre and software maker Ariba formed a site for the travel biz.

Established companies from Honeywell to Chevron and W.W. Grainger have all started e-marketplaces in chemicals, aircraft components, oil and gas, and operating supplies. As these get rolling, they're bound to spur big companies in other industries to get moving. "We are going to have one global exchange," predicts Bruce Johnson, Carrefour's chief information officer.

CUTTING COSTS. These new creations go way beyond electronic data interchange (EDI) networks, which generally are set up individually by large buyers of goods and services. Instead, e-marketplaces parlay the Net's ubiquity to pull together multiple buyers and sellers into one virtual place, easily reachable through a Web browser. The instant communication afforded by the Web is expected to slash transaction costs by up to two-thirds, help companies locate new customers and suppliers, and even streamline design and production. As a result, more than two-thirds of online buyers and sellers polled by market watcher Forrester Research Inc. plan to use e-marketplaces within two years.

The new e-malls could disrupt decades-old relationships and ways of doing business--and fast. They might even reduce the advantages of scale and technological prowess that have helped some of the largest companies, such as Wal-Mart Stores Inc. and Citigroup Inc., maintain their dominance. A Wal-Mart spokesman insists that the retailer's established Internet technology will allow it to be more efficient than rivals, but clearly the competitive stakes are much higher--for buyers and sellers. Online, they can't hide behind geographic boundaries or personal relationships with customers. Says Forrester analyst Varda Lief: "These are massive business changes that are happening in the space of a couple months."

Why so fast? More than anything, fear. The second booming e-Christmas in a row didn't escape industrial execs-- and neither did high-profile flops by traditional companies such as Toys `R' Us. "Most large corporations missed the boat on the consumer Internet," says Arthur B. Sculley, author of B2B Exchanges and a partner in the investment firm Sculley Brothers LLC. "In business-to-business e-commerce, they don't want to be Amazoned."

They also want to get in on venture-capital and initial public offering riches that startups are raking in. Merrill Lynch Vice-President Henry Blodget figures B2B e-commerce companies could command a stunning $1.5 trillion in market value by 2003. But most of all, they are licking their chops over the unprecedented opportunity. Besides offering big savings on procurement costs, e-marketplaces take a cut of transactions. Such revenues are expected to grow from $55 billion, or 13% of all online trade this year, to $1.4 trillion, or 53% of business-to-business e-commerce, by 2004, says Forrester.

No wonder traditional companies are moving swiftly. For one thing, they know their businesses better than Net-savvy outsiders. And revamping complex supply chains is far more difficult than entering a consumer business.

INSTANT ACTIVITY. Moreover, traditional companies have longstanding relationships that won't vanish simply because they're moving to the Net. Indeed, those relationships provide the one crucial ingredient for e-marketplaces: instant commercial activity. Whoever can build momentum first will win--and that may not be upstarts from Silicon Valley, far from traditional industrial centers. Says Mark Hogan, president of GM's online unit, e-GM: "Generally, the first guy in is the winner."

Maybe so, but the old boys now must deliver on their grand promises, and that won't be easy. GM, Ford, and DaimlerChrysler, for instance, have widely varying technologies that insiders say have yet to be sorted out. Then there are antitrust issues: The feds may cast a wary eye on the joint ventures if the upshot is to squeeze suppliers. Unlike the upstarts, moreover, ventures in which big players have substantial investments may scare away rivals who doubt they can be neutral marketplaces.

And some cynics wonder what all the fuss is about. "This is EDI in drag," sniffs Mark L. Walsh, CEO of the online trading community VerticalNet. "They're just using the Internet to force suppliers' prices down." Indeed, some observers think the purpose of the recent announcements is to boost share prices of the participants, or let them cash in on the IPOs they're planning for their new creations. Says Stephen Usher, an auto analyst at Jardine Fleming Securities in Tokyo: "I think this is as much about supporting auto makers' capitalizations as it is about cost-cutting."

MARGIN SQUEEZE. E-marketplaces won't be unalloyed goodness for everyone, either. Suppliers--from small manufacturers to large distributors--could benefit from exposure to more potential customers and perhaps save on sales costs. But pitted against one another online, they could also see their thin margins squeezed. "It will allow some suppliers to gain market share with aggressive pricing, and it will hurt others who have relied on relationships," says Michael Blicher, director of e-business integration at auto component maker Magna International Inc. That could accelerate consolidation already happening in a broad swath of industries. Says Carl Bass, CEO of the construction marketplace buzzsaw.com: "The weaker players will get weeded out."

For the e-marketplaces themselves, it will be a Darwinian new world. Many experts believe that there won't be room for more than one or two players in each industry. They point to the consumer exchange eBay Inc., which had only a year's head start in auctions on rivals as Yahoo! Inc. and Amazon.com, yet still holds a 70%-plus market share because buyers want to stay where the sellers are and vice versa. Declares Walter W. Buckley III, CEO of Internet Capital Group Inc., which holds stakes in 55 B2B companies: "There will be a shakeout." In biology or business, evolution isn't pretty.

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