Subject: Redherring.com - Big Three automakers face big B2B challenges- February 29, 2000
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Date: Thu, 4 Jan 2001 11:32:34 -0500

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Big Three automakers face big B2B challenges
By Julie Landry
Redherring.com, February 29, 2000
Plans by three giants of the auto industry -- Ford (NYSE: F), General Motors (NYSE: GM), and DaimlerChrysler (NYSE: DCX) -- to build an independent online parts exchange for $250 billion in annual parts procurement will carry a heavy burden: to consolidate a tangled, often fractious network of suppliers.
In creating a business-to-business (B2B) online exchange for auto parts, the Big Three will try to establish a new industry standard. Analysts see the initiative as a sign of increasing consolidation in the auto industry. As automakers step up their electronic commerce and online auction initiatives, they threaten to squeeze supplier margins by driving prices down.

Moreover, Friday's announcement means the Big Three are rushing headlong into new territory even as they try to balance a large segment of the auto industry on their shoulders. A Salomon Smith Barney report released Monday calls attention to this delicate balance: "It is important to understand that this company has not yet been formed, nor has it rolled out a formal business plan or pricing structure. Yet it already has set a path to go public on an accelerated schedule."

DRIVE DOWN COSTS
Ford and GM announced last October separate online procurement exchanges to be built by Oracle (Nasdaq: ORCL) and Commerce One (Nasdaq: CMRC), respectively. The automakers hoped that by moving parts transactions online, they could bring down inventory costs by analyzing consumer demands and placing orders accordingly. The new company, which is yet unnamed, combines the assets of Ford's AutoXchange, GM's TradeXchange, and DaimlerChrysler's purchasing network for a combined marketplace hosting tens of thousands of suppliers and nearly $500 billion in annual spending.

A giant online exchange, although touted as a cost-saver, is a kind of catch-22 for suppliers -- on the Web, customers may easily compare prices and switch vendors, which in turn can drive down prices and make long-standing customers flee in droves to competitors. Pricing at the Big Three's planned exchange hasn't yet been determined, but as the Salomon report points out, "if manufacturers force suppliers to bear the cost without offsetting savings, margins will be under pressure."

With business heading online anyway, any supplier worth its salt must link up with the Big Three's procurement network. Having one big network to tap is expected to save suppliers time, money, and energy, according to Forrester Research (Nasdaq: FORR) analyst Steven Kafka. "A truly neutral site will also provide the level of comfort necessary to entice suppliers to actively participate in the exchange," he adds.

FORMING A FLEET
For automakers, the new parts exchange company holds the possibility of enormous upside. By holding a majority of the equity in the new company, Ford, GM, and DaimlerChrysler stand to make a mint if successful in taking the new company public in early 2001. The prominence of the new exchange, enhanced by the prospect of IPO riches, will encourage other automakers to invest in the venture. France's Renault and partner company Nissan Motor (Nasdaq: NSANY) of Japan hopped on board the exchange soon after it was announced.

For perhaps the first time ever, automakers are finding that cooperation may fatten the bottom line for all concerned. "With this announcement, all of the major manufacturers can stop jockeying for position and focus on capturing the benefits of cost savings and collaboration throughout the supply chain," says Mr. Kafka.

Those cost savings could reach as high as $6 billion in reduced purchasing costs and another $500 million in lowered inventory, according to Salomon Smith Barney.

YOUR WAY, RIGHT AWAY
Some analysts peg the auto industry as the largest future B2B. Market researcher Dataquest estimates that moving auto procurement online could push overall B2B transactions from $200 billion in 1999 to more than $1 trillion by 2002. The vehicle manufacturers also plan to sell the new company's services to other industries after they've proven their mettle.

Ultimately, streamlining B2B procurement could enable the holy grail of business-to-consumer auto commerce: build-to-order cars and trucks. If automakers and their suppliers hook the assembly process up to the Web, consumers may be able to custom-order vehicles online and have them delivered within a few weeks. The main obstacle to build-to-order is logistics, according to Prudential Securities analyst Mark Bruynesteyn. "The auto factories actually build vehicles quite quickly once they have received the order and the parts are ready to assemble," he says.

Whether the auto industry's efforts have any effect on customer buying patterns is another matter, though. Mr. Bruynesteyn expects that the majority of customers will continue to buy from inventory at their local car dealer. He notes that, "despite the success of Dell Computer (Nasdaq: DELL) and Gateway (NYSE: GTW), 70 to 75 percent of all PC purchases are still made from inventory at traditional retailers."

Discuss B2B trends in the ongoing B2B Boom discussion in our Think Tank discussion forum, or visit the forums home page.

©1997-2000 Red Herring Communications. All Rights Reserved.

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