Online Extra: A Talk with McKinsey's John Lee
Samsung Corp. is the flagship trading arm of Korea's largest and most profitable chaebol, or family-run conglomerate. The trading business, which matches buyers and sellers in return for a cut, is in decline as companies use the Internet to connect directly. That's why Samsung started its own business-to-business electronic marketplaces.
Samsung reasons that if companies trade at its site, which charges commissions as much as 75% below offline rates, customers also will buy higher-margin services like shipping and financing. The company now has e-marketplaces that trade steel, fish, chemicals, textiles, and medical products.
Q: What are Samsung's chances for success? A:
Q: What are Samsung's chances for success?
A:Samsung is the most aggressive chaebol, but not always the most focused. They trade everything from noodles to nuclear reactors and have the advantage of building [new sites], given their resources, [but] it's going to take a lot longer than anticipated. [Still], the B2B market will ultimately transform business. In Asia, the power of the incumbents is much stronger than in the U.S. and Europe.
Q: What do you think of Samsung's choice of marketplaces? A:
Q: What do you think of Samsung's choice of marketplaces?
A:Samsung has a clear idea of where B2B fits in its future, but they have to make multiple bets and not overpay for the build-out. Where Samsung doesn't have a critical mass of buyers, they have to think like a regional player. A lot of infrastructure is underdeveloped in Korea, so Samsung thinks it can offer services. It's the economy of scales and economy of skills that will offer these.
Q: Samsung is moving as much as half of its offline trading onto its Web sites. That's bringing a lot of traffic to its exchanges. Will it work? A:
Q: Samsung is moving as much as half of its offline trading onto its Web sites. That's bringing a lot of traffic to its exchanges. Will it work?
A:Samsung may not be the best of class in every area, but it has the bargaining power to bring the right players together. Other chaebol might not trust Samsung handling its services, so they might have to spin off those sites to make it more neutral. There's a realization that the chaebol can't go out and build new services without figuring out where the gaps are in their existing systems.
Q: How has the B2B arena changed since Samsung and others entered the market in 1999? A:
Q: How has the B2B arena changed since Samsung and others entered the market in 1999?
A:Last year, it was "build it and they will come." Now, they are more thoughtful long term. Companies are cutting back on B2B expenditures and are more deliberate.
Samsung has taken lessons learned from the last two years and is sober now. Consortia in general want to deepen their existing networks and not push a one-size-fits-all solution. You need customized as you go more vertical now.
Q: Samsung's B2B exchanges are also focused on international trade, not the domestic market. Is this the right move? A:
Q: Samsung's B2B exchanges are also focused on international trade, not the domestic market. Is this the right move?
A:Given the size of the national market, a Korea-focused exchange would be too small. But the opportunity for B2B in Asia is actually larger [than in the West] because there are so many more inefficiencies.
Costs are already low, so procurement is less of an issue. Managing supply chains is more important because more than half of the world's manufacturing takes place in Asia. Commodity goods have the most potential.
Q: What happened to all the exchanges started by venture capitalists? A:
Q: What happened to all the exchanges started by venture capitalists?
A:The startups are dying. They often have no clue on branding, and one-third of them never complete a transaction, according to the Samsung Economic Research Institute. The VC wannabes starting B2B sites are like a bunch of bald men fighting over a comb. There's a last-man-standing approach going on because there are too many sites.
Money in this market is a commodity chasing after too few [good] companies. The reason traditional companies are pushing B2B onto the Web is to save money and push their existing network online. It's a channel switch.
Q: The biggest Japanese trading companies are two- to three-times larger than Samsung. Why haven't we heard much from them? A:
Q: The biggest Japanese trading companies are two- to three-times larger than Samsung. Why haven't we heard much from them?
A:Japan trails Korea in Internet infrastructure and penetration rates. Korea has taken a much more aggressive approach to IT spending. Koreans are the underdogs and the Japanese are cautious.
Korean corporations have always been more aggressive than the Japanese. The Japanese haven't had to be aggressive because they're the market leaders. Also, the Korean government put the right incentives in place and subsidized like crazy. If Japan's government did the same, their uptake would be higher.