Exchanges grow amid fears

Online exchanges promise to greatly reduce costs for businesses, according to Sanjiv Sidhu, chairman and chief executive of exchange software vendor i2 Technologies

However, although many major industries, such as the aircraft and automobile sectors, have already converted to the cause, online business-to-business exchanges still face big challenges.

Online exchanges bring buyers and suppliers together. They are designed to replace complicated, one-to-one buying relationships by increasing the number of contacts that companies have while also offering additional facilities such as auctions. Exchanges may also simplify and standardise much of the buying and selling process. IBM, which announced a marketplace for computer components earlier this month, said it saved $250m last year by purchasing over the Web.

IBM is working with i2 and customer relationship management (CRM) firm Ariba to build its marketplace. The three companies, along with most major PC manufacturers, were in Vienna last month for i2's Planet 2000 conference. They explained their vision of how business-to-business marketplaces will change commerce.

According to analyst firms Forrester Research and Deloitte Research, online exchanges will boom to create a market worth over £915bn by 2003. Several major car manufacturers have announced rival exchanges, and the trend has extended to such industries as chemicals and metals manufacturing.

Deloitte believes the exchanges are so compelling from an economic point of view that they could ultimately be linked to traditional stock markets. "If the price of a company's major input declines and the price of a major output increases, then a logical result would be an increase in the value of the company as reflected in its stock price," said Deloitte in a recent report.

I2's Sidhu said that online exchanges will force companies to respond more quickly. He likened the changes to the experience of flying an aircraft. "You were flying a jet at 30,000 feet, but today you're required to fly one foot above the ground," he said.

One problem is that almost every major firm involved in online markets seems to have its own vision of where they are going. IBM's project is one example, following an announcement of a rival exchange that will include Compaq, Hewlett-Packard, Gateway, AMD and Infineon, although the two exchanges are expected to interoperate.

These exchanges could drive part prices down for manufacturers, but the plan could backfire. "You could see a supplier backlash," said i2 chief technology officer Jim MacKay. "The next thing is the suppliers are going to build a marketplace and tell everybody they have to join."

Some firms, such as Sun Microsystems, say public marketplaces like IBM's have a limited future, since participants must provide sensitive business information. "One guy told me, 'Look, there's no way I'm going to put my content on a public market,'" said Sun global account manager Julius Lukacs.

Sun plans to improve its own relationship with suppliers through a private exchange, an approach also recommended by i2's Sidhu. "You will have to work with the outside world, but the focus should be first to clean your own house before inviting guests to come into it," he said.

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