Forum Archive Index - March 2000

[Jane Holland <JaneHoll@netscape.net>]

I found this an interesting article on B2B commerce. Happy reading! RGDS

Believe All the Hype About B-2-B 
NEW YORK (Reuters) - The New Economy is changing at the speed of light. The
latest thing to set Wall Street spinning is the explosion of
business-to-business e-commerce. 

B-2-B commerce in which companies buy and sell goods and services to each
other via the Internet, instead of over the phone or by mail are turning the
business world on its ear. 

Companies are cutting the cost of doing business, slashing purchasing and
other administrative expenses. And, for those that get it right, B-2-B will
create a lot of winners and happy stockholders. 

The nation's oldest names have seen the future and they don't want to be
caught with their bottom lines down. These giants have rejected the notion
that because the Internet is so young it's too early to tell how important it
will be for the economy. 

The spread of business-to-business commerce is also a wake-up call for Federal
Reserve Chairman Alan Greenspan, who's scratching his head, trying to figure
out what's making this New Economy tick. 

``If B-2-B efforts succeed, the fruits could be unprecedented heights of
profitability,'' says Greg Smith, chief investment strategist for Prudential
Securities. 

The benefits are indeed huge. E-commerce allows the companies to use up less
of their precious capital to run their businesses while at the same time saves
them buckets of money when they buy stuff. 

``Such a combination is pretty powerful and would go a long way toward
explaining why so many companies have been so highly valued in the stock
market, particularly in the B-2-B applications area,'' Smith said. 

Financial news wires have been buzzing over the last two weeks with
announcements of Internet deals by the richest U.S. companies. 

U.S. car makers plan to build the world's biggest B-2-B online marketplace, an
Internet-based supply chain network with a critical mass of buying power. 

Ford Motor Co., General Motors Corp. and DaimlerChrysler AG (GM.N) (F.N)
(DCX.N)(DCXGn.DE) are setting up a super auction site to buy the $250 billion
worth of parts they need each year, abandoning a 100-year old system of doing
deals. 

Sears, Roebuck & Co. (S.N) and Carrefour Supermarche SA (CARR.PA), two of the
world's largest retailers, and software giant Oracle Corp. (ORCL.O) are
launching the first global business-to-business online exchange for the retail
industry, targeting the $3 trillion retail market. 

The B-2-B exchange, which eventually will be opened to other retailers, will
dabble in apparel, food and other consumer goods. Sears and Carrefour buy $80
billion worth of goods from 50,000 suppliers each year. 

USX Corp.'s U.S. Steel Group(X.N), the nation's largest steel maker, has
bought a stake in B-2-B steel exchange e-STEEL Corp. and will sell a full
range of products through the site, which has 1,300 member companies in 65
countries. 

``Many of our large customers are saying that they are going to Internet-type
purchasing and they're telling us 'You will do business over the site or else
we'll just mail in an order to you,''' said U.S. Steel President Paul Wilhelm.
``This is the way people will have to do business in the future and they'll
have to recognize that, and get about getting it done.'' 

Even oil companies are tapping into e-commerce to save billions of dollars on
pipes and engineering services. Chevron Corp.(CHV.N), Texaco Inc. (TX.N) and
Royal Dutch/Shell Group (RD.AS) (SHEL.L) have each started e-commerce sites
this year. 

Andersen Consulting has estimated that the oil companies' profits could jump
between 5 percent and 20 percent for every 5 percent they reap in savings. 

The Boston Consulting Group estimates that one-fourth of all U.S.
business-to-business purchasing will be done on line by 2003, It says between
1998 and 2003, American business e-commerce will grow by an eye-popping 33
percent a year and reach $2.8 trillion in transaction value, up from today's
market of $2 billion. 

Also, industry experts say e-commerce, which currently accounts for some 0.2
percent of the nation's gross domestic product, could see that number grow to
10 percent in five years. 

Smith said the companies that have been quick to jump on the Web will show
results as early as the middle of this year. 

And, the Web-oriented players are creating compelling stock stories. 

The big winners will be software makers that crank out B-2-B technology. 

``This is not a one-year phenomenon,'' Smith said. ``This is not like Y2K that
will burn out quickly one way or the other. It's a new agenda for business to
push the whole business model to a new level of efficiency and ... the process
could easily run five to 10 years.'' 

He said the returns on investments from B-2-B are big, really big, ranging
from the mid-teens to as much as triple digits. 

``With B-2-B, 20 percent of the cost reduction comes from lower transaction
costs,'' he said. ``Instead of paper and people, it's electrons recording the
interactions between supplier and buyer.'' 

The remaining 80 percent of the cost savings is shared by both the buyer and
supplier because the amount of inventory and cash needed to do business is
sharply reduced for both. 

The car makers, for example, say the online marketplace will cut their cost by
at least 10 percent, chopping the price tag of building a car by $1,000. Parts
account for some $10,000 of the cost of slapping together a $20,000 car. 

The B-2-B revolution will also make it tougher for crystal ball readers at the
Fed to get a true reading on what's brewing in the economy. 

Experts say the Internet will change the way the economy works and inflation
indicators such as the Consumer Price Index and Producer Price Index may
become less important. 

``When it comes to inflation avoidance, the Fed will still have a lot of
indicators of inflation, but the central bank's impact through the monetary
tightening tool will have much less of an impact because the economy is so
much different,'' said Allen Sinai, chief global economist for Primark
Decision Economics Inc. 

Inflation has been absent from the radar screens for the last couple of years
to the amazement of Greenspan and other central bankers. But their lives could
get even more complicated as e-commerce explodes. 

``This poses an interesting question for the Fed: What part will interest
rates play in the attempt to slow the economy if companies' spending has such
high rates of return?'' Smith asked. 

``So higher interest rates lose their sting,'' said Smith, one of Wall
Street's brightest investment strategists. ``This phenomenon also further
reduces companies' interest costs and makes it more difficult for
interest-rate changes to control growth within the U.S. economy at least on
the business side.'' 

Greenspan has been lobbing interest-rate increases at the economy since last
June to slow its remarkable growth, which set a record 107th month of
expansion in February. 

The Street believes the Fed is not through raising the cost of borrowing. The
betting is the central bankers will kick up interest rates a couple of more
times this year to dampen consumer spending and head off what they see as the
threat of inflation. 

The Fed may have been caught flat-footed by this B-2-B wave and the bankers
seem behind the curve in developing a system to track the New Economy. 

``The change that is going on in the economy is happening very quickly, in
fact, so fast that data cannot be collected fast enough to really give the
Federal Reserve the right scoop on how rapidly the economy is reinventing
itself,'' Sinai said. 

``As a result, the Fed is having a tough time reining in this booming
economy,'' he said. 

The government is starting to acknowledge the technological changes, which are
reshaping the economy. This week, the Commerce Department unveiled an
e-commerce index that will track the fast-growing e-retail business. 

The B-2-B revolution has not escaped the ever-alert stock investors. They've
priced the New Economy's stocks out of this world on expectations there will
of lots of earnings rewards. 

``Wall Street, in its usual wisdom, has psyched this one out and, as a result,
money is moving to the technology companies,'' said Sinai. 

``What the market is telling us is that a big portion of the economy is now
irrelevant to the dynamic future of the U.S. and world economies and investors
are reevaluating and pricing up the portion of the New Economy that does
matter,'' he said. 

For the week, the Dow Jones industrial average soared 505.08 points to
10,367.20. The Nasdaq Composite index jumped 323.27 to 4,914.77 and the
Standard and Poor's 500 index gained 75.81 at 1,409.17. 

(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com). 





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