E-Biz or Bust

Samsung bets big on online exchanges

Roh Sang Hong is on a roll. Since March, the president of online seafood exchange FishRound.com has snagged 271 of the largest fish wholesalers and retailers in the Asia Pacific region. In that time, FishRound has traded $94 million worth of frozen fish, and Roh expects trade volume to hit $250 million by year-end. He says FishRound will be profitable by March, 2002.

Not bad for a four-month-old Web site. But it's not so surprising, because Roh, 51, is no ordinary entrepreneur. He's a 25-year veteran of Samsung Corp., the trading arm of South Korea's largest chaebol. Samsung Corp. trades everything from semiconductors to steel--to the tune of $25 billion last year, netting it $366 million in transaction fees. It owns 70% of FishRound and sent Roh half his customers, who were lured by fees that are up to 75% lower than those Samsung traditionally charges.

FISHING. Samsung is fishing for other online business, too. Since April, 2000, it has launched four other e-marketplaces that trade steel, chemicals, textiles, and medical supplies--all products it trades offline. More are likely to follow. Samsung's goal is to reduce the tedious process buyers and sellers go through matching orders by letting them trade directly online. By yearend, Samsung expects its five e-marketplaces to handle $2.8 billion in trades, surging to $7 billion next year. At least half of those trades come from new customers, helping generate an estimated $45 million in fees for the sites this year. By mid-2002, Samsung expects all the sites to be profitable. "Samsung has a clear idea of where B2B fits in its future," says John Lee, an associate at McKinsey & Co.'s Seoul office.

It all adds up to what Samsung's Lim Young Hak, vice-president of the corporate planning team, calls a "10-year war" to become the world's most wired trading company. "We want to be among those setting business standards in the 21st century," says Lim, who expects cost savings and new cash generators to push Samsung Corp.'s profits up 160%, to $150 million, by 2003. To get there, the company will move its frozen fish products and textiles departments completely online.

The online strategy is not foolproof. Samsung risks cannibalizing its traditional business by pushing clients to trade online, where fees are lower. Samsung contends the lower fees will attract new customers who also will buy such higher-margin services as shipping, warehousing, and insurance. Yet analysts expect the burst of new online traffic to fall off as buyers and sellers set up their own direct Internet links and other trading companies get into the act. When that happens, online traffic will grow only as fast as the underlying market for the commodities traded there--5% per year, tops.

It's not as though Samsung has much choice. The role of middleman is steadily eroding. Trading companies act as intermediaries, making money by brokering sales, providing escrow financing to buffer clients from buyers who don't pay on time, selling insurance in case ships run aground, and handling the reams of paperwork tax authorities require. The last decade, though, has seen trading rules radically simplified, so fewer companies need go-betweens.

The Internet has connected Korean companies directly to assemblers overseas and helped them find the best prices, something Samsung charges thousands of dollars to do in the real world. In fact, Samsung Electronics Co., the world's biggest maker of memory chips, has built online links to its 2,000 suppliers, saving $3 billion in procurement and inventory costs and doing away with most of the tasks Samsung Corp. used to handle. That's one reason Samsung's trading transaction fees fell 12% in 2000.

The real wake-up call, though, was the 1997 Asian crisis. That's when Samsung Chairman Hyun Myung Kwan, then chief executive, asked Lim to study how others were using the Web and how Samsung might adopt the best practices. By late 1999, Lim had chosen five marketplaces that played to Samsung's strengths, could turn a profit in three years, and didn't compete directly with other Asian sites. Lim then pumped $50 million into building Samsung's e-marketplaces. To run the online markets, he insisted on recruiting managers with at least 15 years of off-line experience--to be sure they knew the ins and outs of international trade and had deep industry contacts.

To ensure a critical mass of trades on the exchanges, Lim pressured Samsung's partners to move a portion of their own business online. Their presence attracts even more traffic, which increases competition and forces down prices. At GSX, an e-marketplace for trading steel on the spot market, the founders--Samsung, Cargill, and European traders Duferco and TradeArbed--each committed $500 million in trades to the site over the next two years. Samsung expects its GSX to generate another $100 million in business for such services as shipping and insurance.

STREAMLINED. Samsung's partners wouldn't make such financial commitments if it weren't easier to do business online. At the steel exchange, for example, Samsung streamlined the auction process. Traditionally, a pipemaker in, say, Taiwan who wants 2,000 tons of steel will phone Samsung and ask for a bid. One trader then checks prices and availability with producers in Russia, where 40% of the world's spot steel is made. Another lines up transportation, stevedores, and warehousing. A third trader asks the finance department to organize a $500,000 line of credit for the buyer and several million dollars for the steel mill, since Russian manufacturers want to be paid up front. The finance department does a credit check, and Samsung faxes back a bid two days later, then follows up with e-mails and phone calls.

Buyers then comparison-shop by calling three or four other trading companies, a process that can take two weeks, quadrupling the time it takes to close a deal. Some buyers call more than one trading company at a time, hoping to use the bid from the first to gain leverage against a second. And with more than 100 types of steel, buyers often ask for additional quotes for other types of steel if they are unhappy with one set of bids. That generates dozens of faxes from traders to confirm prices and other elements of the contract.

By contrast, GSX users type in the product they want to buy or sell, when they want it, a target price, and how long they want the auction to last (often one day). Participants bid in real time. With lists of "bids" and "offers," the site looks like a foreign-exchange trader's computer screen. Each bid generates e-mail that's sent automatically to buyer and seller. According to McKinsey, GSX users save 8% per trade, which is typically priced at $400 a ton.

GSX earns a 1.9% fee for hosting the trade, about two-thirds less than the traditional fee the offline approach generates. That's O.K. with Samsung. Using the Web, it doesn't need to run credit searches, because clients are screened before they join the site. The instant bargaining eliminates dozens of faxes and phone calls. Better still, deals are closed in as little as a day, so traders have more time to sell insurance or tanker space, products that produce up to three times more revenue. "If the Internet is a success, there will be no room for traders to broker deals in 10 years. But buyers and sellers will always need people to arrange services," says James Hong, a GSX director.

The trick for Samsung will be staying relevant in a fast-changing landscape. Already, dozens of U.S. online exchanges have foundered. Their demise should be an added incentive to Lim, whose e-venture may well determine the fate of one of Asia's great trading companies.

By Ken Belson and Moon Ihlwan in Seoul

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