Online Extra: What Happened to the Net's Borderless Economy?
By Sam Jaffe
Remember that IBM television commercial where a group of Japanese executives are sitting glum-faced around a table? Then a whippersnapper looks up from his laptop and says he has found a supplier for the widgets they need at half the price they had been expecting. Where's the order from, asks the suddenly cheerful CEO. "Mitchco," answers Wet-Behind-the-Ears. Cut to a chop shop in Texas where a greasy mechanic with the nametag Mitch looks up from his desktop, rubs together his oil-soaked hands, and says in a Texas drawl: "Domo arigato!"
IBM's vision of a borderless economy where suppliers across the globe compete instantaneously for contracts isn't here yet. In fact, it's still a long way off. But it's coming closer every day -- and already, the Web offers plenty of benefits as an international trading tool. "Even the Canadian-U.S. border, which is the freest in the world, is still a major impediment to trade," says Forrester Research analyst Matthew Sanders, who studies global trade and the Internet. "The Internet promises frictionless trade, clarity of pricing, and a medium where language problems are minimized. We're still very far away from that point, though."
IN THE VANGUARD.
That's not to say the Web hasn't already had an impact on how companies buy goods. According to Forrester's research, U.S. corporations used the Web to import $16 billion worth of goods in 2000. By 2004, Forrester expects that number to skyrocket to $379 billion. Worldwide, it estimates that goods worth more than $1.4 trillion will be sold over the Internet and then shipped across borders. The vast bulk will be raw goods and services sold to manufacturers.
Way out in the vanguard of this movement is U.S. conglomerate General Electric (GE ), which has probably expended more effort than any other company to put its corporate buying on the Web. As part of its "digitization" initiative, GE has already moved almost all of its commodities purchases onto its Web-based auctions.
The trend started on December 15, 1999, when GE launched its first eAuction by posting a request for supplies of that most mundane of industrial tools: safety glasses. Vendors had been alerted earlier as to the specifications of the order, which aimed to provide plastic safety glasses to every GE plant. The auction itself was scheduled to last two hours. It was in the form of a reverse auction, where participants were allowed to see the current lowest price offered. More than 30 suppliers participated, and over a hundred bids were placed.
TO THE BOTTOM LINE.
By the time it ended, a Chinese manufacturer had placed a bid that was 53% lower than GE had expected to pay, saving it $200,000. "When the boardroom saw the results of that first auction, they wanted to implement this across the company for every purchase that we could apply this to," says Lee Garbowitz, director of corporate initiatives for GE.
In 2000, GE used the reverse-auction process to buy $6.4 billion in goods ranging from office supplies to bulk aluminum shipments. It expects that figure to reach $15 billion this year, saving the company $600 million -- all of which, says Garbowitz, goes straight to the bottom line. He estimates that eventually about 60% of GE's purchases will be made using its online auction system. The 40% that won't include supplies that have only one source or are purchases from companies with which GE has a strategic partnership. By the end of this year, GE will be making about 53% of its purchases online.
At the heart of GE's system is a relatively simple browser-based piece of software that suppliers can reach via the extranet portal on GE's Web site. Some suppliers have resisted the move to online purchasing, but Garbowitz says that hasn't been a major worry for GE. "We just try to educate them as to how it works and why it's in their best interests to participate and make it clear that no matter what, this is the future for GE. We won't be going back to the old way of ordering," he says.
Despite the incredible success of GE's online buying program, it isn't necessarily clearing a path that all companies can follow. "GE operates on a scale that most companies don't," says Forrester's Sanders, who points out that 90% of global trade is accounted for by the largest 100 companies around the world. Suppliers who would bend over backward to get GE's business might not be interested in bidding at an auction to supply 10 lug nuts to Al's Auto Repair.
GE has another thing going for it: a pre-existing relationship with its suppliers. They are screened and ranked according to factors such as solvency, past execution, and capacity. Therefore, a bid can be accepted not just on price but on GE's knowledge of the bidder's ability to deliver. Most other companies don't have that luxury. For instance, that's one thing the buyers in IBM's "Mitchco" ad didn't address: They got a cheap offer, but how did they know that Mitch can produce, package, and deliver the product on time while paying the lowest possible customs costs?
Trust, says Forrester's Sanders, is the key to international trade and also the biggest roadblock to using the Internet as a trading tool. One startup, Amsterdam-based eCredible (a subsidiary of insurance company Swiss Re), is trying to provide an online version of that most ancient of trading contracts: a letter of credit. By providing online letters of credit to global suppliers, companies seeking goods and services can include those suppliers in auctions without having to expend resources on researching each company's solvency. Still, eCredible is a young company with little reputation, and it will take some time for such a system to become globally accepted.
Assuming that the problem of trust will be solved, two roadblocks to borderless Net trade remain. One is the thicket of regulations, duties, and tariffs that any cross-border product has to pick its way through. Traditionally, freight forwarders take care of that, thanks to their experience with local laws and their willingness to fill out all the paperwork. A number of startups are in the process of creating databases that will automate the shipping process. Vastera is the most prominent, thanks to Ford (F ) recently outsourcing its entire customs management process to the Dulles (Va.) startup.
Once a supplier has been deemed trustworthy and the customs process has been figured out, there's still the question of actually shipping the product at the lowest possible cost. Again, a number of Web startups, including Descartes and Logistics.com, promise to use the Internet to lower the costs of shipping industrial goods.
If these startups can get established, prove that they can save money for clients, and then make a profit themselves, the future of the Internet as a tool to erase borders is bright. After all, Sanders says, the companies that have the most to gain from such trade are those that aren't doing it today: He adds: "The huge benefit comes when the vast majority of businesses that don't trade internationally today are able to do so because of the Internet."
Jaffe is a senior writer for BusinessWeek Online