Old economy set to drive growth as B2B market flops

Date: 19/07/01

By Bruce Barnard

E-COMMERCE is the jewel in the crown of the 'new' economy, but it's the 'old' economy which is turning the concept into reality. Top European companies such as Germany's Siemens and Swiss-based

ABB have embraced e-business as enthusiastically as their American counterparts. Europe's consumers, however, still need some convincing. Over 45% of West Europeans have access to the Internet but only one in five have used it to buy something online in the past six months - mostly books and CDs, according to a recent survey.

But excepting the select group of large corporations which are doing business online, e-commerce is clearly an idea whose time has yet to come. Earlier predictions of spectacular growth and huge savings through B2B (business-to-business) transactions and marketplaces have failed to materialise.

Four-fifths of Europe's 500-plus B2B market places will collapse, leaving fewer than 100 survivors, according to Jupiter MMXI, a research company. The US is not doing much better. According to a recent survey of US firms by the National Association of Manufacturers, 95% of companies polled achieved less than 5% of their sales via the Internet, or sell nothing online. International Data Corporation, a market research firm, says that only 100 of the 1,000-odd exchanges launched in the past 18 months are handling real transactions. While big companies are embracing e-business, the majority of electronic marketplaces and industry-led exchanges have failed to take off. The latter have the best chance of success because they have cash, access to customers and experienced management.

But they too are faltering with trading volumes way below expectation. Meanwhile, suppliers are reluctant to sign up to B2B exchanges, the main aim of which is to cut prices, and therefore squeeze their margins.

Some industry-backed exchanges have achieved lift-off and are cutting costs for their members. GlobalNetXchange (GNX), a €110-million forum backed by Sears of the US, Carrefour of France, the UK's Sainsbury's and five other retailers, held auctions worth €550 million in its first year.

But the rival Worldwide Retail Exchange set up by companies including the UK's Tesco and Marks and Spencer and JC Penney of the US at about the same time has only done €110 million of business.

Companies are also making savings from tendering contracts online. Ford Motor Company says it has made €75 million of savings from Covisint in 2000, which "easily" covers its equity investment in the Internet exchange for car manufacturers.

The company, which aims to carry out up to 10% of all its purchasing in Europe online, expects to make a further €385 million in savings this year but accepts the rate will slow once the bulk of procurement is online. It forecasts that potentially larger benefits will be reaped if the exchange is also used to collaborate on product design or rationalising production capacity. There is still a lot of upside in online business. Covisint, whose other members include General Motors, Nissan, Renault and DaimlerChrylser, expects to handle around €825 billion in annual purchasing when it is fully operational. Some of the biggest 'old' economy companies are the most enthusiastic supporters of the Internet. Siemens, for example, is investing €1 billion to transform itself into an e-company in an ambitious bid to knit together a sprawling conglomerate with 470,000 employees, operating in 190 countries with businesses ranging from medical equipment to lighting and transportation systems.

At present Siemens carries out 0% of its €35 billion annual procurement spend online and aims to boost this to 50% within three years. Its automation and drives unit already makes around 30% of its sales online, and is on target to do all its business electronically by 2005. The group, which has set up centres of e-excellence in the US, Singapore, and near its hometown Munich, aims to use the new technology to cut costs by 2% in the short term and 3%-5% in the medium term, most of which probably will be passed on to customers to sharpen its competitive edge.

General Electric was a relatively late convert to electronic business but it rapidly made up for lost time and is becoming one of the world's most wired companies. Last year GE purchased €6 billion of goods online, cutting transaction time from two weeks to 24 hours and reducing the average contract cost by 70%. It generated €12 billion of online sales in 2000, a figure it expects to double in 2001. Despite the slow start, most firms are starting to embrace e-commerce as a business tool. But the take-up will be a lot slower than predicted by the original forecasts during the height of dotcom mania just 15 months ago.

Article forms part of a survey on e-commerce.