Online marketplaces are sprouting like mushrooms, but pundits predict only 20% will survive beyond the next three years. Andrea Malcolm investigates the chances for New Zealand's pioneers.
In New Zealand we’ve seen half a dozen electronic exchanges (platforms which bring buyers and sellers together to trade products and services online) launched or announced this year.
Some, such as e://volution, SupplyZone and SupplyNet, are aimed at the broad MRO (maintenance, repair and operations) market. Others, such as Woolnet (for trading wool), Biolab (medical and scientific supplies), RD1.com (aimed at the farming community), eCargo (freight) and Woodnet (a timber trading exchange slated to go live this month), are chasing vertical industry sectors.
US venture capitalist Arthur Sculley, who, with his brother John (Apple Computer’s former boss) regularly invests in online exchanges, believes they will account for 40% of all B2B commerce in the next four years. At the government’s E-commerce Summit in Auckland last month, he said the number of exchanges worldwide would grow from 1200 to 3000 in the next 12 months.
But Sculley, who co-wrote the book B2B Exchanges: The Killer Application in the Business-to-Business Internet Revolution, also predicts a hard prune that will cut back numbers to 600 in three years. The survivors, he says, will be global exchanges.
Some analysts say consolidation and attrition will occur even earlier with a recent Deloitte survey reporting that 30 exchanges have already united with one-time competitors. So where does that leave New Zealand’s fledging online exchange players – buyers, suppliers and marketplaces themselves?
Some local organisations have gone global straight away. The New Zealand Timber Industry Federation has joined Lignus, a world wide timber exchange boasting members from 14 Pacific Rim countries.
Likewise Auckland-based seafood supplier Sanford is part of SeafoodAlliance.com, a B2B seafood marketplace with 12 members in North America, Europe and Asia Pacific.
Eric Barratt of Sanford says SeafoodAlliance is already integrating with complementary exchanges in areas such as MRO (maintenance, repair and operations), hospitality and food supply. The exchange’s guiding principles are to be open to the whole industry, independent, confidential, low cost, to focus on the seafood industry and to improve participants’ bottom line.
Sanford, which exports $300 million worth of seafood to Asia, America and Europe each year, gets major cost savings in aggregated purchasing of fuel, freight, fishing gear, and fishing vessel insurance.
Meanwhile local exchanges see some form of global participation as inevitable.
Carlos Martinez, who managed the setting-up of online procurement exchange SupplyNet (which moves out of pilot phase this month), definitely sees a time when customers and suppliers will participate in international trading.
Because SupplyNet uses CommerceOne as its e-procurement system, it can link to CommerceOne.net - an international trading exchange spanning 23 countries. Martinez envisages SupplyNet participants will eventually use this to do business in other countries.
Auckland-based e://volution aims to secure 10% of the New Zealand consumables e-procurement market, along with 5% of the Australian market, within the next five years. Clients include Sky TV, Southern Cross Healthcare, DB Breweries, Clear Communications, and Dairy Foods.
E://volution will cross the Tasman early next year and has also been asked to join Unifize, a Singapore-based meta-market focussed on Asia Pacific.
Managing director Henry Norcross says the company has not yet decided whether to accept the Unifize invitation but either way it will form international partnerships with other exchanges next year.
“We don’t yet know if they will own us, have a share or just be a trading partners but that’s really where it’s all heading.”
However Norcross thinks horizontal MRO exchanges will be limited to Asia Pacific due to the logistics of shipping the products. For the same reason he thinks international trading will be done on an annual or biannual basis. “A supplier will tender on a supply contract in Australia, Singapore and New Zealand and that will become the supply contract for that year.”
Greg Stone, e-commerce manager of Blue Star Group, which is a SupplyNet supplier, agrees that in reality global trading will be mostly limited to geographical regions.
“Until we get much reduced freight rates and better interconnectivity it’s not going to happen except between Australia and New Zealand maybe.”
But international trading is practical when the customer or supplier is a multi-national. For example Auckland-based consumables supplier Corporate Express, a subsidiary of Corporate Express Australia, has links to 40 exchanges throughout Australasia including e://volution, SupplyNet and Corprocure in Australia.
Corporate Express general manager Brian Rosenberg says the company, which does 18% of trading online and aims to get to 30% by the end of 2001, has yet to see much new business coming through e-marketplaces. “A lot of it has been existing customers migrating to marketplaces but most of the new business development has been through our own B2B website.”
He says the benefits so far are larger order sizes because Corporate Express can accumulate orders over a week. The challenge is getting customers used to a new method of ordering and getting them comfortable with the technology.
Survival of the fittest
So we know that exchanges will become global but what else will they need to be successful?
Obviously e-market survivors will be those that attract volume and to do that they will offer customers significant cost reductions - the average, says Sculley, is 15%. Improvements in business processes such as supply chain management will also be a must-have. But there are a host of other factors which will determine an exchange’s success.
E-market survivors, whether horizontal or vertical, will be commercially neutral, open and transparent, says Sculley. “B2B exchanges are like mini stock exchanges. They need integrity, regulations which must be posted, a membership structure, an ownership structure, transparency (when a trade is done it should be posted on the exchange so people can see price movement even if the parties are anonymous) and confidentiality. They should also have a system for handling complaints and disputes.”
Henry Norcross says neutrality is a major factor. “We push to be impartial and we’re supplier agnostic. We get buyers first and then bring in their suppliers.”
Norcross says buyers should go for the exchange with the best consultancy services, software, management, security, and content. Sellers don’t have to stick with one exchange. They’ll join the leading operations in their particular vertical or horizontal market.
“The aim for suppliers is to find out what exchanges are in their area. They should look at what value proposition there is for the buyer and support the strongest. Our value proposition for customers is that we are supplier sponsored and suppliers pay the transaction fee (3% to 1% depending on the volume) which covers cost and ongoing management. The value we give suppliers is that this exchange actively goes out and get them business.”
However Greg Stone from Blue Star Group says suppliers will rebel against transaction fees. Blue Star is a supplier on SupplyNet which spreads charges across the buyer and the supplier. However Stone thinks eventually suppliers will form their own exchanges and collaborate to cut costs. “We [suppliers] could then collectively look at different orders coming through from one customer, cross-dock and ship the items as a single unit.
”That will take huge cost out of the equation. They won’t be doing it to make a buck. It will be about sensible cost cutting. As the heat comes on and margins erode suppliers will be compelled to do this.”
However driving down costs and providing neutral trading platforms are not the end of the story. Successful exchanges will also add value. “Adding value to participants is what it’s all about when it comes to getting volume”, says IBM e-market expert Rand Littlestone. “Some think ‘if we build it, they will come’ but that’s wrong.”
Vertical exchange Woolnet, owned and operated by Wool Board subsidiary WoolPro, is striving to get the equation right. Woolnet connects New Zealand sheep farmers with markets world wide.
It began trading in January this year, has 900 registered users (a figure which is growing daily) and has traded several million dollars.
Key reasons for joining Woolnet are reduction of costs (some farmers say by 50%), improved information flows, 24X7 availability, and market access no matter what the location. It is neutral, information rich and transparent, says WoolPro managing director Lance Wiggins. Woolnet is seller driven and farmers can offer wool from their farm or use a broker or agent.
Lessons learned from setting up Woolnet are that exchanges must provide maximum flexibility for buyers, sellers and service providers; have robust management; secure financial transactions, processes and banking systems.
Wiggins says features include a fully integrated paperless payment system, integration with testing labs and back office systems of buyers and cost discovery – where sellers enter their product and get the nearest market prices.
Such analysis of the information going through an exchange will become a valuable service to members, says IBM’s Littlestone. “For example being able to see RFPs (requests for proposal) that are not satisfied is powerful information because you can then see demand.”
In order to provide such reporting and analysis e://volution has decided to concentrate on the top 100 corporates.
“There’s a lot of procurement support. People want to know what they’re spending, break downs on their urgent freight, trends. My point is we can’t afford to have hundreds of clients.
“We’re focused on the top 100 companies and the government. Our goal is to enable SMEs (small and medium enterprises) to trade with large companies. A lot of large companies are looking at reducing suppliers and a lot of small suppliers are being pushed out of the market. We bring them back into the hunt. Later on we’ll focus on a more open exchange.”
Markets will also add value by creating virtual communities. With this in mind they must make the right strategic partnerships, says Littlestone.
SupplyNet’s Martinez says through its major shareholder GSB Supplycorp, SupplyNet has relationships with around 2000 suppliers. It currently has about 50 online. He says SupplyNet’s other owners, Qixel and Advantage Group also bring strategic relationships with companies such as Blue Star and systems integrator Gen-i.
“When you’re looking at a marketplace you should ask what are the alliances? Critical mass is important but it doesn’t come to you over night. It comes because you have relationships you can leverage.”
Phillip Norcross says e://volution has also spent a lot of time building alliances with accounting, legal, education, training, distribution and logistics partners.
Another vital factor for e-exchanges is liquidity, liquidity, liquidity, says Sculley.
Financial muscle a point stressed by Martinez who says setting up the infrastructure for SupplyNet didn’t leave much change from $15 million dollars.
“That’s what you need to set up an infrastructure. Then you need to fund the business – staff, accommodation etc. This is something which costs millions of dollars, it’s not an overnight play.”
So if you’re interested in participating in an online exchange how should you get started?
According to Littlestone you should understand how e-marketplaces will affect your industry, determine the role you will play (whether it’s buyer, seller or both) and ask whether you’ll participate in one or more marketplaces.
The issue in places like New Zealand is that there are a large number of trading partners that haven’t got big systems, they’re mostly SMEs, says Gen-i managing director Garth Biggs . “They’ll never be able to afford an ERP system in which case you have to offer a web-based interface to a market place.”
To cater to the large number of small businesses in this country SupplyNet offers to rent the e-procurement software and host the trading site for both buyers and suppliers. Also most New Zealand’s exchanges offer web-based interfaces.
But if you want the maximum advantage that B2B exchanges offer you’ll need to go further.
“You’ll eventually have to e-business-enable your fundamental processes,” says Rand. ”You can get on an e-marketplace with a browser but for competitive advantage you will have to have the e-marketplace integrated into your supply chain.”
Norcross says that’s the tricky part - getting back-end systems tied into the front end that will interface with online trading. “Many large enterprises have legacy systems and only some have ERP systems. Not all have ERP procurement systems but they can buy procurement modules. They then have to decide whether to let their own e-procurement system handle everything or whether to use the e-procurement system provided by the marketplace.”
Biggs agrees – don’t underestimate the complexity of this, he says.