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While independent exchanges are stalling, industry-led trading hubs are gaining in popularity. Here's what we found when we examined E-marketplaces in four industries: metal, chemicals, paper, and energy.
Tim Reason, eCFO
April 15, 2001
The vertical-marketplace model seemed so simple. Pick any multibillion-dollar industry. Insert your Web site between the buyers and suppliers. Skim a small fee off each transaction they conduct. Retire to a life of truffles and witty conversation.
Unfortunately, the plan had one small hitch. Cash was required to get these independent exchanges up and running. With the Internet economy unexpectedly hitting the skids in 2000, many builders of vertical-market exchanges ran out of capital before they could establish themselves. Moreover, by midyear, buyers and providers started getting into the exchange game, determined not to let upstart middlemen take over their carefully built supply-chain relationships.
"By coming out visibly and with so much hype, the independents really put fear in the heart of the old economy," notes Leif Eriksen, research director of chemical and process industries for AMR Research. "But at the same time, they invited the old economy to come take a look."
The old economy did more than look. It came, it saw, it conquered. "If 2000 was the year of the independent exchange," says Eriksen, "2001 is the year of the consortium exchange."
Why We Wrote This
Given this changing of the guard, eCFO decided to take a look at the E-marketplace marketplace. Specifically, we wanted to rise above the hubbub and the hype; wanted to provide a little perspective on a sector in turmoil. We figured an aerial view might help CFOs currently considering moving their corporate procurement into cyberspace.
Apparently, that's a decision a lot of finance chiefs and senior executives are wrestling with these days. According to a survey of US businesses conducted in July by KPMG/EIU, 48 percent of the respondents reported that virtual exchanges would become very important to their own supply chains over the next 18 months.
This doesn't mean all exchanges are created equal, however. In selecting an E-marketplace, corporate shoppers are advised to stick to trading hubs that are well backed and financially stable. If the builders of an exchange repeatedly push back go-live dates, walk on by. Operators of most virtual exchanges issue glowing press releases about the launch of services. Dig into these releases, and you often discover they're touting the launch of pilot programs. Remember, the surest indication of a thriving trading community is, well ... a thriving trading community. Look for sizable transaction volume.
The best exchanges feature a long roster of suppliers. Top-drawer E-marketplaces also provide financing, as well as settlement and logistical support. That's important. After all, a great deal on 10 tons of pulp from Yakima isn't so hot if it costs an arm and a leg to get the stuff to your factory on Baffin Bay.
And despite the industry hoopla, not all E-marketplaces are cost savers. Some don't have enough suppliers to create a liquid marketplace. Some take too big a rake. Others, often strapped for cash, tend to skimp on services. In fact, in a recent poll of 348 companies conducted by the National Association of Purchasing Management (www.napm.org) and Forrester Research, two-thirds of purchasing managers said their virtual procurement programs had not generated any cost savings so far.
Of course, virtual procurement is still in early days. Trading platforms and search engines will undoubtedly get more sophisticated, shortening cash-conversion cycles for buyers and sellers. And industry consolidation should mean more suppliers on fewer exchanges, thus better deals.
The industry could stand a little consolidating. At last count, there were about 400 online exchanges scattered across dozens of vertical industries. That's a lot of exchanges. Therefore, we have fixed our attention on online exchanges in four major industries: metal, chemicals, paper, and energy. Why those four? Because there's something to write about. Mega sites like Covisint (autos) and Transora (consumer packaged goods) have garnered plenty of press lately, but the reality is that both sites are still getting up to speed.
What We Found
In putting together this roundup, we paid particular attention to three major issues for industry exchanges. First, we looked at survivability. We based this mostly on who's backing the exchange, what the exchange's cash burn rate is, and — most important — how much actual business the exchange is doing. By our lights, business-to-business exchanges should be doing some business — not just conducting beta tests. But to some exchange operators, that quaint notion is as revolutionary as Darwin's theory that man's early ancestor wore a 64 sleeve and enjoyed the occasional banana.
Beyond survivability, we examined the technopolitics of the exchanges. The simple fact is, B2B exchanges are all about supply chains. And the supply-chain business is a hotly contested battleground, with tech giants like Oracle, SAP, CommerceOne, and Ariba slugging it out for supremacy. We figure, given the ferocity of this battle, there's probably something worth fighting for.
Finally, we looked at the services these sites offer. If the only thing an E-marketplace does is bring buyers and suppliers together, the Web will never replace a trade show in Miami in March.
In researching this story, a few market trends stood out immediately:
If you're ahead, you're dead. This may stem from the fact that the independent exchange model was shaky to begin with. But as far as we can see, first-mover advantage in the E-marketplace business means you're at the front of the line when they open the doors at the job fair.
Newbies rule. Strangely, the more recent startups (typically, consortium models) own the dominant mind share of their industries. We use the term mind share advisedly — the lion's share of consortium exchanges aren't up and running yet. The big question: Have the operators of these new exchanges learned from history, or are they just late arrivals doomed to the same short lifecycle?
Reincarnation happens. Many of the first movers couldn't hack it as exchanges, but that doesn't mean all of them have disappeared. Some builders of defunct E-marketplaces have found new life as technology providers for consortium-led hubs and private exchanges.
Napster's coming, hide your heart. Few E-marketplace operators want to discuss it, but the Napsterization of supply chains could force all online exchanges — independently run, industry run, or do-run run — into early retirement. Peer-to-peer networking enables buyers and suppliers to hook up on their own, eliminating the need for intermediaries. Indeed, serverless data-sharing could revolutionize the way companies do business — not just the way they procure supplies.
But that's next year's model.
Tim Reason is a contributing editor at eCFO. Additional research by Erik Selakoff.
Big Picture: Two story lines here. First, consortium-led sites are struggling because their old-economy backers (namely, steel companies) are struggling. Second, a number of independent E-marketplace sites pulled a Houdini by altering their business models.
Details: Consortium. Went live December 1998.
Skinny: Original owners were Weirton Steel, Steel Dynamics, and LTV Steel (which declared bankruptcy in December). A large portion of Weirton's ownership in MetalSite was recently bought for $180 million by exchange provider Internet Capital Group. Ominously, ICG itself laid off about a third of its workforce last November ... Site offers commodities pricing directly from LME, as well as NYMEX and COMEX ... MetalSite operators are attempting to add logistics and credit services.
Details: Independent. Went live September 1999.
Skinny: Wins prize for being one of few independent exchanges still surviving in any industry. But there's a footnote. E-Steel builds and hosts private trading exchanges for its old-economy customers. Granted, those customers can also use public exchange on E-Steel's site. But that's gravy, not the meat ... Investors include Bessemer Venture Partners and Goldman Sachs ... Recently hooked up with DoveBid to provide auction capabilities. Big plus.
Details: Industry consortium. Went live October 2000.
Skinny: Whereas heavyweights E-Steel and MetalSite evolved from the steel industry, this consortium site handles multiple metals ... Exchange has plenty of big industry brass behind it: about 20 backers and investors representing the full metal spectrum. List includes Alcoa, Reynolds Aluminum Supply Co., North American Stainless, Allegheny Technologies, and Kaiser Aluminum. As far as we know, bandleader Kay Kyser not involved ... In September, executives at site announced technology-sharing alliance with MetalSite. Exchange officials insist two marketplaces will remain separate, however. Stay tuned on this one.
Metal Suppliers Online (www.suppliersonline.com)
Details: Independents. Metal Suppliers Online went live February 1997. MetalMaker slated for full launch in Q2 2001.
Skinny: Unrelated sites, both serve smaller distributors and fabricators in metals industry ... Metal Suppliers Online boasts network of 2,500 suppliers of specialty and nonferrous metals ... Chicago-based Metal-Maker — a molten metals specialist — backed by Lehman Brothers Venture Capital Group, as well as Portage Venture Partners and Mercury Ventures ... Recent rise of jumbo, industry-led, vertical E-marketplaces means such specialized virtual trading hubs as these two may prosper. Notes AMR Research's Eriksen: "If the independent B2B exchanges can find a niche segment that is off the radar screen of the bigger players, they can succeed."
Details: Independent. Went live April 2000.
Skinny: Aluminium.com backers include venture capitalists Divine interVentures, Dot Com Ventures, and DS Capital, as well as investment house Bear Stearns ... Smaller, multi-metal player uses UK spelling for site name. Operators also say, "What's for pudding?" when they want dessert ... Company inked deal in September with metals-Russia.com (www.metals-russia.com), virtual gateway to Russian metal industry ... Site was redesigned in October, just six months after launch ... When you type in aluminum.com, you get bounced to aluminium.com. It's a strange world we live in.
Big Picture: This $1.7 trillion global industry has everything: two consortium exchanges heading for a showdown, two independent exchanges in battle, and dead and dying exchanges littering the ground. What's more, neutrals like FreeMarkets (www.freemarkets.com) may be eyeballing the commodity side of the chemicals market. Trouble? Possibly. Vertical exchanges may provide useful services, but FreeMarkets is a powerful player.
Details: Consortium. Scheduled to go live around press time.
Skinny: Gorilla of chemical industry exchanges. Backers include Dow and DuPont. "They could walk away from this investment and it wouldn't even show up on their bottom line at year-end," says Eriksen ... Elemica's CEO came over from Paper-Exchange — more proof that independent exchanges are going out of favor ... With name like Elemica, site should remove unwanted freckles.
Details: Consortium. Launched March 2000.
Skinny: More dynamic than Elemica, Envera owned by — and serves — smaller chemical companies. But then, smaller than Dow includes most planetary objects ... Envera playing delicate game, says AMR's Eriksen. If site can lengthen its lead and gain more independence from partners like Enron, it could challenge Elemica and capture sizable market share ... Envera now supplies dry van trucking and other logistics services.
Details: Consortium. Went live June 1999.
Skinny: Users seem to like it. "We tested a lot of sites for global reach, suppliers, and so forth," says Angelo Brisimitzakis, vice president, global supply chain for Great Lakes Chemical Corp., which uses ChemConnect. "Except for a few strategic materials, every other material in balanced supply or long supply is posted on [ChemConnect's] World Chemical Exchange ..." Investors include SAP Ventures, part of giant ERP specialist SAP AG ... Since early 2000, site has operated corporate trading rooms — private auctions for customers. Focus remains all chemicals, though.
Details: Independent/consortium mix. Went live February 1998.
Skinny: Major backing from mix of Internet and industry investors. "It's a horse race between ChemConnect and CheMatch," notes Eriksen ... So far, CheMatch claims to have moved more than $400 million worth of product through exchange and auction platforms ... Operates sister site, PetroChem.net (www.petrochem.net). In late February, inked alliance with ChemCross (www.chemcross.com) — either the largest chemical E-marketplace in Asia or the guy who sang "Sailing."
Details: Independent. Launched June 2000.
Skinny: Began as a trading exchange. Now offers remote hosting of supply-chain services and applications for small to midsize chemical companies. Survival, if not greatness, can be found below the radar of the big consortia ... OneChem claims hosted approach can reduce transaction costs by 40 percent to 80 percent. Your mileage may vary.
Details: Independent. Launch date unknown.
Skinny: Auction specialist. One problem: During week eCFO monitored site, only auction posted was for 1 kilogram of capric acid. Starting bid? $2.99. In early March, site home page boasted: "0 items for sale in 6 categories!" They might want to consider removing the exclamation point ... As of press time, ChemicalBid.com appeared to be kaput.
Details: Independent. Launch date unknown.
Skinny: Organ donor at this point. January acquisition by Aspen Technology brought former ICG exchange back from death's door. Aspen now reselling site's technology for use by private online chemical marketplaces ... Moral? Many first movers developed valuable industry-specific technologies. Thus, some defunct exchanges may find life after death as technology providers to consortia — or as software companies that service them.
Details: Independent. Launch date unknown.
Skinny: No longer an exchange. With acquisition of MSDSonline (www.msdsonline.com) in March 2000, management discarded development of its ProSource raw materials procurement platform; now focused on selling material safety data sheets (MSDS) online. "Not a business model that will survive," claims Eriksen ... Since electronic MSDS is a service top chemical exchanges must provide, FOB's owners may be hoping for an e-Chemicals-like resurrection.
Details: Independent. Launched September 1997. Closed December 2000.
Skinny: B2B giant Ventro Corp. withdrew life support for Chemdex in December. Company went flat line in March.
Details: Independent. Launched April 2000. Closed November 2000.
Skinny: Consultant MarchFirst holds 50 percent stake in Bluevector, company that invested in Covalex. At the same time, MarchFirst charged consulting fees to build Covalex site. Nice work if you can get it ... Launched with fanfare in April 2000, quietly shut down in November.
Big Picture: You'd think a fragmented $500 billion global industry, rife with brokers, intermediaries, and middlemen, would be ideal for B2B exchanges. And you'd be wrong. There's not a ton of activity on paper exchanges yet. Consortium and independent exchange models are both alive — and won't collide anytime soon. Example: PaperExchange head Duane DeSisto claims his company has had friendly talks with rival ForestExpress to set industry standards. "It'll be a long time before we knock heads," he says. "I don't see us competing on a day-to-day business for a while." Managers at International Paper must agree. The industry giant has invested in both exchanges.
Details: Consortium. Launch plans announced March 2000.
Skinny: Spokesman describes site as independent exchange. But has $51 million in direct equity funding from paperweights Georgia Pacific, International Paper, Weyerhaeuser, Mead, Boise Cascade, and Willamette. Seems like a consortium exchange to us ... An XML site, ForestExpress's platform based on technology from CommerceOne/SAP, Corio, and Moai Technologies ... Supposed to go live in January. Didn't. As of press time, still in pilot phase ... Company executive says revenue will "probably" be based on subscription and/or transaction fees. Plans yet to be finalized. Your move.
Details: Independent. Launched 1998. Relaunched November 1999.
Skinny: Controlled by ICG, which acquired 83 percent stake in August ... Unlike potential rival ForestExpress, PaperExchange is alive. Has 5,500 corporate members; 7,000 individual members in 105 countries. Of course, becoming member not an ordeal — fill out online form and you're in ... Levies 3 percent sales commission on suppliers ... AMR's Eriksen, pointing to shelved IPO, claims site is struggling ... Business model seems to be morphing, but spokesman says strategy has always included nonexchange services, such as hosted applications. "You have to be more than an exchange to survive," he says.
Energy: Petroleum Exchanges
Big Picture: Thanks to deregulation and consolidation, the energy market defies neat categorization. Petroleum is often lumped with chemicals, The natural-gas sector sits between the oil and utility industries. Further, the market has a full array of supply-chain and commodity exchanges. For the moment, consortium and private energy E-marketplaces dominate the energy sector. But some hubs have managed to strike a nifty balance. That is, they have maintained their independent exchange status, and yet procured the backing of some heavy hitters in the energy business.
Details: Consortium. First transaction conducted September 2000.
Skinny: Trade-Ranger founded by 14 major oil players — including Shell, Amoco, and Dow. Those backers represent about a quarter of oil industry's annual supply-chain procurement ($125 billion) ... Currently, exchange owners have no plans to take Trade-Ranger public ... "Launched" last fall, site still hasn't gotten off the ground. NASA should have tried this. Would have gotten to the moon much sooner ... Technology providers for Trade-Ranger include CommerceOne and i2.
Details: Consortium. Went live July 2000.
Skinny: For our money, coolest of all new-economy monikers ... Founded by Ariba and Chevron, with additional investment from Texaco, National Oil Well, and private equity investors ... Petrocosm has huge market, but dominant customer for hub's 300 suppliers still company backer Chevron. To get to next level, site must earn stripes with other oil bigs.
Details: Independent. First transaction conducted October 1998.
Skinny: Backed by Lehman Brothers and Accenture Technology Ventures. FuelQuest's platform uses Broadview technology on front end, Oracle on back end ... Private marketplace, FuelQuest's revenue stream based not on commissions, but on $300 monthly fee for users ($2,500 for premium service) ... Site merged with Oilspot.com in September ... FuelQuest CEO Richard Cilento a real rocket scientist. Former Xerox executive worked seven years at NASA, including stint as space shuttle flight controller ... US State Department appears to think highly of FuelQuest. DoS brings in FuelQuest managers to brief foreign leaders on ecommerce.
Energy: Electricity/Gas Commodity and Equipment
Details: Consortium. Formed March 2000.
Skinny: Similar to Petrocosm and Trade-Ranger in oil space, this developing site facilitates buying and selling of equipment used by electric companies ... Founded last spring, hub's 21 investors and capital partners are major North American utility operators ... Pantellos offers Web-enabled "asset management and optimization," a nifty feature ... Initially, payment settlement will be handled via purchasing cards and direct invoicing. But Pantellos officials say they're working on electronic payment and settlement system.
Details: Independent. Launched July 1999.
Skinny: Originally conceived as a means of marketing power produced by Seabrook, New Hampshire, nuclear power plant. Now the independent site is a commodity exchange for electricity, gas, and oil ... Spokesman describes HoustonStreet as "hybrid of coalition models and independent plays." Industry heavyweight Enron recently agreed to run its exchange data on HoustonStreet's site, making life easier for Davids who don't want to deal directly with Goliath ... Arthur Andersen monitors the site for neutrality. Performs similar service for Switzerland ... Almost 2,000 individual traders, representing 250 energy companies, use HoustonStreet ... HoustonStreet's online credit-approval services support liquidity by taking burden off traders. But site operators must make sure participants don't use credit profiles to identify anonymous bidders. "There might be people who rig the system, and we didn't want any of that gaming going on," says spokesman.
Details: Independent. Launched 1996.
Skinny: Initially an exchange for natural-gas liquids, Altra now also handles gas, electricity, and crude oil for more than 7,000 traders ... Site competes with HoustonStreet as independent commodity exchange ... In 1997, Austin Ventures and Battery Ventures acquired complete control of company ... Altra revenues for trading platform business jumped 20 percent last year ... AMR named Altra best independent online exchange of all for 2000 ... In Q1, launched eGas. Better name than first choice, GasE ... Company founder and chairman left Altra in February.
Details: Consortium. Launched September 2000.
Skinny: Philadelphia-based UniGridEnergy.com designed specifically as E-marketplace for commercial and industrial energy buyers. That's departure from HoustonStreet and Altra, whose players are primarily energy traders ... unlike California, Pennsylvania's aggressive utility deregulation has generated few headlines, even fewer blackouts ... UniGrid spun off from Exelon, a subsidiary that grew out of PECO Energy in Philadelphia. In October, PECO Energy acquired Chicago-based Unicom and christened the new entity Exelon. Programs are available in the lobby ... Will be a long time before fragmented power market resembles single national grid implied by UniGrid's name. With pressure on utility stocks, and razor-thin margins for power, UniGrid walking a highwire.