B2B: Riding the next wave

In 1999, business-to-business (B2B) exchanges promised to change the face of business as we know it and put in place unprecedented levels of cost savings and supplier competition. Now, two Nasdaq crashes later, the sector appears to be floundering.
Written by Thomas Chen, Contributor
By 2004, the B2B sector will
represent a whopping 88 percent of
all e-commerce revenues worldwide: IDC
In 1999, business-to-business (B2B) exchanges promised to change the face of business as we know it and put in place unprecedented levels of cost savings and supplier competition. Now, two Nasdaq crashes later, the sector appears to be floundering.

Vendor after vendor has reported huge quarterly losses. Worse yet, once promising exchanges such as US’s Chemdex and Dell Marketplace, have powered down to a halt. Not surprisingly, commenting on the closure of its B2B marketplace, a Dell spokesperson noted: "We have shifted our B2B strategy from operating an exchange to providing solutions for companies wanting to go online.”

B2B, however, is far from dead as ZDNet Asia found in a dozen interviews with software makers and exchange operators across the Asia Pacific region. Although much of the early marketing hype is gone, the underlying technology still remains strong and businesses will continue to find compelling reasons to move their operations online.

A lesson learnt
Much of today's B2B woes can be attributed to the hype of the early days which presented a business model that some vendors now say are unsustainable. And some of the earliest exchanges in the Asia Pacific region are quietly changing that model to better reflect the needs of the market.

It's not just about cost
Businesses across the region are still looking to invest in B2B technology and bring their operations online. Price reduction is just one reason for them to do so. More compelling reasons which have proved cost-effective are process efficiency and global connectivity.

Public versus private marketplaces
From macro to micro, from industry-wide applications to company-specific exchanges, market forces have shown that less is better when it comes to e-marketplaces.

•  Exclusive with Commerce One chief Mark Hoffman
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•  The human bottleneck in B2B
•  Molding new hope for B2B
•  B2B firms confident of long term survival
A telling sign of the times: As of June this year, Oracle Asia Pacific's Peter Burridge had his job title changed from vice president of exchanges to vice president of sales programs. "I think exchanges...the terminology is dead," said Burridge.

For Burridge and many others like him, the early exchange model of B2B is a failed concept. Living Systems CEO Kurt Kammerer was more explicit. “The early model of building an exchange and having buyers and suppliers convene and trade is too unsophisticated a model (for B2B),” Kammerer said.

Early proponents of B2B had envisioned "mega" exchanges where hundreds of thousands of suppliers and buyers interact simultaneously to enable trade. It was a model very much based on the business-to-consumer or B2C version of Internet transactions except that in the case of B2B, consumers are replaced by businesses. The price competition engendered by such an environment would drive purchasing costs down to an unprecedented level, it was claimed.

At the height of the frenzy, experts have predicted that as many as 100,000 of these online marketplaces would be operational by 2001. By now, it is clear that the number will never reach nearly as many and the mood has certainly been turned down a notch or two. Even market research firm Gartner has removed marketplaces from its watch list.

The value of B2B e-commerce
transactions that flow through emarketplaces
will rise to US$1.2 trillion by 2004: IDC
"For an open exchange, unless you are a company that does commodity management or strategic sourcing, get out of that business," said Oracle’s Burridge.

According to Burridge and others like him, large public exchanges as envisioned by the early proponents will only exist as a handful of aggregated exchanges around the world. The future of B2B will be a lot more scaled down in size while the role it encompasses will expand much further than what was previously anticipated.

On-going problem
By all accounts, building a B2B exchange can be a costly affair. A recent Forrester research estimated that individual enterprises will spend between US$5.4million and US$22.9 million each to integrate with online exchanges over the next five years. Other estimates place the cost somewhere between US$500,000 and US$150 million.

Building the exchange, however, is just the beginning. Maintenance is another big factor. According to some estimates, the cost of maintaining an exchange could hit a whopping US$450,000 a month.

"After you factor in the licensing and services fees, it could come up to US$500,000 per month just to maintain one of these exchanges," said Mach30 chief executive Fong Khai Yin. "And it has become clear that that is not a sustainable business model.”

Mach30, which started with a S$4 million, is the e-business subsidiary of Singapore Computer Systems Ltd.

Aside from these fees, B2B exchanges face other ongoing challenges that pose a constant drain on resources. Chief among these is the effort to get businesses or companies to participate in their exchanges.

"They have to spend another huge amount of money on their marketing efforts to get people to come into their sites to transact,” said Fong.

Despite this downside, marketing is necessary as any exchange that doesn't have a sizable marketing effort will not be able to survive, according to Oracle's Burridge.

Lack of participation
In Asia, the problem is exacerbated by the dearth of companies, suppliers or otherwise, "rushing" to get online. While exchanges are being built, local companies are showing a reluctance to adopt the technology, much less get online and trade in a digital environment.

This lack of participation has forced early adopters, which have banked their profits on transaction volume, to rethink their business models. One emerging trend sees exchange operator evolving into solutions providers and two notable examples of this shift are Taiwan’s Com2B and Hong Kong’s Global Sources.

At an earnings announcement early this year, Com2B chairman Rosemary Ho touted the company’s move away from being an exchange operator to a solutions provider as its primary accomplishment in the second half of last year.

Irene Her, Com2B vice president of marketing and alliance department admitted that the shift in its business model is a reflection of the needs of the market and pointed out that an e-business enabler or solution provider is precisely what the market needs now.

Com2B's plans, however, are contingent on a continuing need in the region for B2B technology, a need which Her believes to be very real and compelling for businesses in Asia Pacific.

<< Back="" to="" B2B:="" Riding="" the="" next="" wave<="" a=""> ="right">It's not just about cost >>

•  Exclusive with Commerce One chief Mark Hoffman
•  Beginning of the end for B2B? Hardly
•  The human bottleneck in B2B
•  Molding new hope for B2B
•  B2B firms confident of long term survival
B2B proponents have always claimed that online exchanges were going to save the buying enterprise an astronomical sum of money because of intense competition between suppliers.

It is uncertain whether such savings have materialized, or, if the amount is substantial enough to cover the initial investment the company has made on building the exchange. NTT Communications, in a Commerce One customer testimonial, claimed to have registered approximately 10-17 percent savings on MRO or maintenance, repair and operation as a direct result of “renegotiating” with suppliers in its B2B marketplace. But for the most part, cost saving seems to associate mostly with improved process efficiency as opposed to price reduction.

v ICTSI (International Container Terminal Services, Inc), a Philippines-based port handling corporation that controls about 70 percent of the country’s container cargo shipments, completed its implementation of Ariba’s Buyer platform in February this year.

Noting that the platform is only three months old, ICTSI purchasing manager Antonio G. Coronel admitted that the system has yet to register substantial savings from supplier price competition. Coronel, however, believes that there are other reasons for implementing the solution.

“If you look at ICTSI internally, you will know that we have very sophisticated backend systems,” said Coronel. "The next step was to find a front-end for our IT system...and we saw Ariba's Buyer as the solution."

After implementing Buyer, the company has seen tremendous improvement in its purchasing process, Coronel said. Processing time is said to have reduced from two days to about seven minutes.

Significantly, B2B vendors, when touting their wares, have been slowly moving away from the early rhetoric about huge price reductions. While cost cutting remains a crucial issue for any company in adopting a B2B platform, the paradigm for implementing a solution seemed to have moved from price-reduction to the role that B2B plays in the enterprise’s overall IT structure.

A Gartner research paper on B2B last year for instance said that as the industry evolves, “B2B e-markets will mature beyond the limited functions and numbers of customers they have today. However, as their importance to enterprises increases, e-markets' responsibilities will also increase while their scope narrows.”

And by end 2000, that expansion in role bloomed into a race for collaborative commerce capabilities among B2B vendors.

It began with Oracle’s launch of its e-business suite, which included both B2B platforms and collaborative commerce functionalities. Soon after, Ariba announced its failed bid to acquire Agile Inc--a software company known for its collaborative solutions.

Suddenly, it had seemed, anyone who wanted to seriously contend in the B2B space would have to have a collaborative solution. Commerce One got the solution earlier through its partnership with SAP, but it is uncertain how extensive collaborative functions go in the partner’s joint product.

Collaborative commerce technology encompasses a set of tools and features that allow enterprises to better manage their extended supply chains. These tools and features include specialized e-mailing, message board, online conferencing and chat rooms. The underlying idea is to allow trading partners to communicate in real-time so as to react quickly to each other’s demand and schedules.

While there are still some doubts about the depth and extensiveness of the technology, the rush of B2B vendors to incorporate the technology into their platforms indicates that the role of B2B has now evolved from providing a simple platform for trade to that of supply chain management. Today, collaborative commerce has become staple pitches for both SAP/Commerce One and Oracle.

“Customers will want to see value across the board. You have to be able to offer end-to-end solutions, full functionalities for both the buy and sell side,” said Emile Lee, Commerce One Asia Pacific spokesperson. “Most importantly, enabling collaborative commerce...that’s where the value is going to be in the future.”

But will customers bite? For ICTSI’s Coronel, it’s definitely something the company will consider implementing in the next phase of its B2B plan. For now, however, the purchasing manager will have to wait to see a product demo on ICTSI’s platform, as Ariba has yet to produce a collaborative component for its platforms.

<< Back="" to="" B2B:="" Riding="" the="" next="" wave<="" a=""> ="right">Public vs private marketplaces >>

•  Exclusive with Commerce One chief Mark Hoffman
•  Beginning of the end for B2B? Hardly
•  The human bottleneck in B2B
•  Molding new hope for B2B
•  B2B firms confident of long term survival
For any business starting out on the B2B path, there is a range of processes and technologies to choose from and an exchange is part of a B2B platform. There are at least two other kinds of platforms--procurement and auction/reverse-auction.

The exchanges themselves are not homogeneous. According to Gartner, three different kinds of exchanges that may become dominant by 2005 are:
•  Commodity e-markets: These support high-volume trade of products and services with commodity or near-commodity status as well as financial instruments (eg futures contracts).
•  Business service e-markets: These focus on supporting specific inter-enterprise processes, such as those related to logistics, financial services, and maintenance, repair and operations procurement.
•  Integration service e-markets: These will emerge with a focus on linkages and process definitions between trading partners to facilitate process-to-process integration.

A typical B2B adoption strategy begins with the building of an e-procurement platform that phases in exchange technology at later stages and the Philippines’ ICTSI is a prime example.

As the role of B2B expands, businesses will continue to invest in private platforms as they see it as a natural extension of the IT investment that they have already made. Furthermore, supply chain integration is still something that most enterprises would prefer to do within an environment where it has control.

“The trend that we’re seeing now is a shift to private exchanges and corporations and private enterprises are starting to say that they want to build an exchange of their own,” said Mayur Shah, president of SAPMarkets, “whereas we are getting almost none at all for public exchanges.”

The future of public exchanges, however, is not so certain. As of today, public exchanges such as iSteelAsia and Global Sources continue to post financial losses with Taiwan’s Com2B not far behind.

GlobalSources posted a US$68.2 million loss last year while Com2B said it posted revenues of US$1 million for 2000 but declined to reveal exact earnings.

According to Oracle’s Burridge, unless a public exchange is in a position to facilitate trade in the first place or is able to offer aggregated trade services to its customers, the exchange will not remain viable for long.

An exchange that may be moving toward that direction and is showing some positive results is iSteelAsia. The exchange has pursued an aggressive technology policy since its inception. It is among the handful of exchanges in Asia Pacific today that provides complete transactional capability to its users. The capability also makes iSteelAsia one of the rare exchanges which can report their progress by the amount of transactions that goes through the exchange.

Last December, iSteelAsia acquired a 3.5 percent stake in Stemcor Holdings Ltd, an international steel trader. The deal effectively gave the exchange an offline counterpart in steel trading. As a result, over 750,000 tonnes of steel are committed to go through the exchange in the first six months of the agreement.

In it annual report ending March 31, 2001, iSteelAsia reported a volume of US$192 million completed transactions through the portal but ran a loss of US$14 million.

iSteelAsia declined to elaborate on plans to be in the black but said: "Management’s objective is to efficiently utilize and expand our core competence as a steel e-distributor in the PRC and 'achieve a harmonious convergence of the new and old economy',” a company spokesperson said. “iSteelAsia is working very closely with a number of steel manufacturers in China to use us as a strategic trading partner.”

Industry watchers continue to see a role for public exchanges but many say that money is better spent on private exchanges.

So, is this the beginning of the end for business-to-business? Not so says one expert. "Projected benefits such as cost-savings, operational efficiencies, revenue generation and supply chain coordination that are associated with widespread adoption of business-to-business e-commerce, remain as sizable and tangible today as they were 18 months ago," said Derek Brown, a managing director and senior analyst in WR Hambrecht's research department.

<< Back="" to="" B2B:="" Riding="" the="" next="" wave<="" a="">

Exclusive with Commerce One chief Mark Hoffman
•  Beginning of the end for B2B? Hardly
•  The human bottleneck in B2B
•  Molding new hope for B2B
•  B2B firms confident of long term survival

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