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Chemical suppliers aim to balance B2B scales
By Julie Landry
Redherring.com, May 11, 2000
Whenever a new flock of large industrial buyers loudly trumpets its plans for an online exchange, suppliers whisper in the background about the pricing pressure that such a mechanism could put on their businesses. In the chemical industry, that fear is giving way to acceptance, as suppliers own up to the reality of online business-to-business (B2B) trading.
Despite the fact that online marketplaces have been around for years, "this is new to a lot of people," says Jesse Rocha, project manager at The Westlake Group, a maker of petrochemicals and plastics. "It does raise a big concern because it could cause prices to drop."

The same "disintermediation" that swept through the computer business is now looming over the chemical business. No fatalities have been reported yet, but analysts expect some smaller places to fall by the wayside, as larger suppliers -- with more efficient cost structures -- grab more business through online marketplaces.

When prices drop, it's often the companies supplying the goods that are forced to lower their profit margins. In the end, smaller suppliers feel the squeeze, so they're not sure they're ready to move their businesses to online B2B marketplaces.

SOUP TO NUTS
The $1.6 trillion global chemicals business is about as diverse as it gets. Chemical companies' products play a role in just about every industry under the sun, from manufacturing to food processing to pharmaceutical production. However, because chemicals are commodity items that can be easily described in an online format, they are ripe for online trading. AMR Research estimates that by 2004, 68 percent of chemicals will be sold through online trading exchanges, worth about $76 billion.

"A lot of times people have contracts in place where they have agreed on a price, and if someone comes along and advertises a different price, it can hurt both buyers and sellers," says Mr. Rocha. He buys some chemicals from vendors and sells others to larger buyers.

Mr. Rocha says The Westlake Group is still testing the waters of online commerce, having sold some products on an exchange he declined to name. However, he is concerned that some companies aren't playing fair. "We've seen some people who are using this as a test area [for prices] where they don't have a product to offer," he says. "Right now, we can't rely on these [marketplaces] for our everyday production needs."

SAFETY IN NUMBERS
In desperation, suppliers in some industries have considered teaming up, like many large buyers have, to build their own marketplaces. But that can only bide time, at best. Analysts say most of those plans won't ever materialize, since suppliers are often so fragmented that they would have trouble accumulating enough critical mass to lure suppliers to their site. So, suppliers have little choice but to participate in third-party or buyer-driven exchanges, and in some cases even invest in them -- as is the case with The Westlake Group, which joined Chemconnect's $70 million round of funding in March.

Whether online B2B marketplaces will level the playing field for smaller suppliers is up for debate. While suppliers have every reason to be concerned about short-term pricing pressure, price will be less of a competitive issue in future versions of online trading sites, says Forrester Research (Nasdaq: FORR) analyst Steven Kafka. "Suppliers should also look at the upside," adds Mr. Kafka. "Their cost of sales drops, and their reach increases dramatically with no additional marketing costs."

The level-playing-field argument could be one of the Internet's broken promises, says Leif Eriksen, a research director at AMR Research. "There are still such things as economies of scale and distribution networks at work on the Internet," he says. However, he believes that suppliers' pricing fears are overblown. "Buyers can't ultimately drive margins to the point where they eliminate suppliers' margins, because in that scenario their suppliers would disappear," he says. "There will be pricing pressure and suppliers will have to adapt, but ultimately the suppliers out there are still needed and are going to keep making money."

NO FEAR
At least one group of chemical makers doesn't appear to be threatened with disintermediation -- specialty chemical producers. Take Albemarle (NYSE: ALB), which sells additives and intermediate chemicals for several industries. It will limit its activities to specialty online marketplaces, says John McChesney, the company's manager of customer connect. "We have evaluated the marketplaces and know that some of those will have a role and some of them won't," he says.

Mr. McChesney says his company will probably avoid the buyer-driven commodity exchanges where sellers compete only on price. "In those cases, the power shifts to the buyer because the buyer says, 'I'm going to get the price down as low as possible,'" he says.

Albemarle is placing more effort on its own electronic-commerce site, as opposed to hitching its wagon to a large exchange. "We know who the audience for our products is, and there just hasn't been the demand for [us to be on online marketplaces] yet," says Mr. McChesney.

The biggest opportunity for exchanges, then, may be as a quality-assurance way station on the Web, says AMR Research's Mr. Eriksen. "If you're a buyer of a chemical, and you get it at the wrong time or get the wrong quality, that's a big deal," he says, noting that industrial businesses are less inclined than consumers to buy based solely on price.

"In the end, exchanges will integrate buyers and sellers, but the question will be whether the buyers and sellers find the exchange more efficient than linking up themselves."

Discuss B2B trends in the ongoing B2B Boom discussion forum, or visit the Discussions home page.

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

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