The estimates for the global business-to-business (B2B) economy have been staggering enough to give the most ardent skeptics pause. International Data Corporation, for example, predicts that $633 billion in goods and services will be exchanged online by 2003, while Forrester Research puts the number at $1.3 trillion.
Harvey Seegers, CEO of General Electric’s GXS (Global Exchange Services) division, thinks the money will easily top $2 trillion.
Much of this action is expected to go through B2B exchanges. And, while there is widespread agreement among analysts and executives on general parameters—they will be Web-based and cheaper than proprietary Electronic Data Interchange (EDI) systems—other major issues are unresolved.
In this article, we’ll try to determine who will control B2B exchanges, what advantages they offer businesses, and what their limitations might entail.
Who is in control?
One of the biggest outstanding questions is who runs the show? Neutral parties, third parties, or some combination of entities that the market serves?
“Initially, these things were run by entrants with no legacy, hence no built-in distrust,” says Andrew Bartels, senior research analyst with Giga Information Group in Norwalk, CT.
He is referring to Web markets such as GoCargo, an independent exchange for the transoceanic shipping industry in New York City. The GoCargos of the world plan to make their fortunes by attracting large volumes and taking a percentage of each transaction.
GoCargo is not affiliated with any players on the buy or sell side. This is the way most stock exchanges work. GoCargo CEO Eyal Goldwerger makes the analogy that “Cargo space on a ship is a commodity that can be traded in much the same way as stock.”
While trading exchanges such as GoCargo are popping up like weeds in every conceivable industry, everyone agrees there will be a shakeout.
“We predict that by the end of the year, there will be at least 10,000 announced B2B exchanges,” Bartels said. “But, of these, in less than a year only 2000 will be left.”
Will they remain independent?
There is less agreement, however, on how many of these will, like GoCargo, remain independent.
Deva Hazarika, founder and chief strategy officer of Moai Technologies Inc. in San Francisco, thinks the independents will dominate.
Of course, Moai supplies the technology that runs exchanges for GoCargo and a number of other independent sites, so it is essential to Moai’s business model that the independents not only survive, but thrive.
“We think the independent exchanges will win in broad markets where there are lots of buyers and sellers,” Hazarika said.
Scott Latham, an analyst with AMR Research in Boston, agrees.
“Industries that are highly fragmented and complex are where the independent exchanges will take root,” he said. “Exchanges such as PlasticsNet and GoCargo are good examples.”
The arguments for this are sound. In a fragmented industry, there are no dominant buyers or sellers to step in and run a Web market. And, presumably, all parties benefit from the fact that the independent Web market maker has no vested interest in a given transaction.
But here’s the problem: An independent exchange may very well be neutral with regard to buyers and sellers, but it comes at a price.
These exchanges typically plan to take a cut of each deal. Both GoCargo and Moai, for example, take 1 percent to 2 percent. Some other exchanges have been known to take a whopping 9 percent to 15 percent.
Cymerc justifies these high margins by throwing in value-added services. “We have a deal with freightquote.com to present buyers with a complete landed shipping cost,” said Mark Weidick, Cymerc’s president and CEO. “We also do credit scoring, authentication, and verification. Soon we will offer systems integration services as well.”
AMR’s Latham says that businesses will definitely pay more for value-added services like these. But he thinks the transaction fee model is fatally flawed.
He is not alone. Bartels says most industries will not support the kinds of transaction fees that neutral trading exchanges now charge.
“Investors have bid up the stock prices of neutral B2B Web markets on the assumption that they will be able to command fees of anywhere between 1 and 15 percent,” he said. “That’s a flawed assumption. Most industries will not tolerate fees over one percent.”
A new business model
Latham doesn't think this means the independent exchanges are doomed. Rather, he says, they will have to retool their business models and charge subscription fees and additional fees for value-added services.
GE’s Seegers takes a harder line.
“Most exchanges will be controlled by the buying power of a particular industry,” Seegers said. “And the buyers won't put up with a third party that takes a piece of the action.”
Seegers envisions a networked world of industry-specific exchanges: “These will be operated by a new company that is owned by the dominant buyers in that industry.”
This is precisely the direction in which the big three automakers are moving. GM, Ford, and Daimler-Chrysler have announced plans to build and run a Web market that will supposedly make the business of putting automobiles together a faster, better, and cheaper proposition for all concerned.
So far, however, this mega exchange for the car-making pipeline is all talk and no action.
“The big three don't even have a name for this thing yet,” said Ken Vollmer, analyst with the Giga Information Group. “And I have heard grumbling from some of the major parts suppliers like Delphi that they are not enthusiastic about a monolithic effort on the buy side. They are continuing with plans of their own.”
Vernon Keenan, Internet analyst with Keenan Vision in San Francisco, says the big three automakers are just looking for a way to preserve their dominance over the supply chain.
“In the past, these big buyers have been able to bully their suppliers by controlling EDI trading systems,” says Keenan. “But EDI and the proprietary networks that support it are obsolete. So the big three see this new mega-Web exchange as a way to kill two birds with one stone: they get to upgrade their technology and continue to be bullies.”
The B2B landscape
Clearly, it is too early to predict what the B2B Web exchange landscape will look like even a year from now. But even with the uncertainty, there are trends that give some clues:
- Don’t expect mega-exchanges to dominate the Web markets anytime soon. Consensus is building that smaller exchanges will dominate in the near term.
- Buyers are currently calling more of the shots in the B2B space, but don¹t expect sellers to remain passive. Loose consortia of suppliers may very well start banding together to counter the power of buyers in Web markets.
- B2B exchanges may remain truly independent of the industries they serve, but if they do they will have to rethink their business plans, since exchange participants will not tolerate high transaction-based commissions. It is likely that, in many industries, participants will form consortia to take ownership in the exchanges.
- Look to industries that are highly fragmented and complex for the most creative B2B action. Web markets in these industries are more likely to leverage the Internet’s potential.