Trade exchanges put automakers in the driver's seat by tapping the Internet to form a new business model.
On February 25, 2000, three automakers made history. On that day, General Motors, Ford, and DaimlerChrysler agreed to form Covisint, a global, online, business-to-business marketplace dedicated to the auto industry.
The Big Three have been joined by partners Nissan Motor Co., Renault SA, Commerce One Inc., and Oracle Corp. in an effort to provide procurement, supply-chain, and product-development services to the auto industry. Although it is still ramping up, industry observers estimate Covisint eventually will handle global purchasing of as much as $300 billion for the five automakers alone.
And this is just one of many auto trade exchanges taking shape. The idea behind such an exchange is to leverage the Internet to drive cost and waste out of business processes.
Models for success
According to Marc Halpern, research director at Gartner Inc., Stamford, Conn., Covisint is an example of a "public marketplace." This type fosters a community of users that collaborate with one another and transact business online.
According to Halpern, a public marketplace is not run by any one channel master, or a lead company that is responsible for selling the product at the top of a value chain. (A value chain is a group of suppliers, partners, and customers anyone that contributes to the business process.) A public marketplace sometimes referred to as an exchange provides an environment for procuring indirect material and offthe-shelf parts as well as for engineering cooperation. A private marketplace, on the other hand, is established for the exclusive use of a channel master and its value chain.
Halpern says public marketplaces typically take longer to ramp up. That's because they are more complicated to set up than private exchanges, and what they are trying to achieve is difficult.
"We see private marketplaces taking off more rapidly than public ones this year," says Halpern. He explains that companies need the private exchanges so they can work better, faster, and more reliably, thus reducing iterations due to miscommunication.
Karen Peterson, also a Gartner re-search director, notes that there are a number of public and private marketplaces under development. The auto industry, however, is just an early adopter of the exchange business model, for several reasons.
First, automakers develop products with a relatively short life cycle compared to other industries. Second, they require a fast response time. Third, automakers are early adopters of outsourcing, a process that supports collaborative design activities. According to Peterson, "One of the main reasons the auto industry is an early adopter is their drive for change from a push model to a pull model their desire to achieve a make-to-order business model." The Internet plays an important role in these.
Dan Jankowski, spokesman for Covisint, explains that it offers a portfolio of services including procurement, supply-chain management, product development, and portal services. "We have made it our mission to help the auto industry get stronger by providing a common platform for it to work through," he says. "We differentiate ourselves from other exchanges with a depth of industry knowledge among the Covisint builders."
The procurement element of Covisint is simple to implement because there is a history of processes, approaches, and rules that are universal to the auto industry. According to Jankowski, it was easy for the founders to apply the use of catalogs, buy-and-sell auctions, and quote management to Covisint. These services will let members of the supply chain lower costs, streamline business practices, and increase overall efficiencies.
Covisint is more than a procurement site, however. With regard to product design and development, it helps engineers remove time from their processes by being able to collaborate in real time, regardless of geographic location and system architecture.
Jankowski notes that the product-design component is perhaps the most strategic offering of Covisint. "A car program is lengthy and costly," he says. "It can take up to three years and cost $3 or $4 billion. If you can take a year out of the process and save $1 billion, that is significant. If you speed the process, you get your product to market faster and respond to consumers' tastes."
Can any supplier participate in Covisint? According to Jankowski, each automaker has its own qualification process, so if suppliers want to do business with each manufacturer, it must meet each one's qualifications.
Covisint is not the only auto exchange under development. In April 2000, Volkswagen, IBM, i2 Technologies, and Ariba signed a strategic partnership to build a private, global, digital marketplace.
According to Volkswagen, its e-market place will make it simpler to order groups of auto parts and other business supplies over the Internet. The Volkswagen Group consists of nine independent brands Audi, Bentley, Bugatti, Lamborghini, Rolls Royce, Seat, Koda, VW Commercial Vehicles, and VW Passenger Cars.
Other auto manufacturers are also developing private exchanges. For example, Johnson Controls announced in January that it will partner with technology provider MatrixOne to offer Internet software that lets auto suppliers collaborate and manage supplier performance, quality planning, and minority sourcing.
Independent auto supplier Dana Corp. reports it has selected Ariba Inc. and Aspect Development Corp. to develop its own global online procurement system. According to Dana, it expects to reduce transaction expenses, consolidate information on supplier performance, and reduce inventory requirements.
Besides developing its own private exchange, Dana will participate in Covisint. Gartner's Halpern says it's not unusual for companies to be part of multiple trade exchanges.
Online reality check
The automakers and other industries are after greater operating efficiencies, and they believe online exchanges can help them get there. But the newness of the business model presents several challenges.
For example, Gartner analysts say trust is often an issue. According to Halpern, suppliers are often reluctant to share their product information online. They are concerned about their competition gleaning too much information from online data and performing their own strategic planning. Buyers have less of an issue with trust than suppliers. However, buyers want to know the track record of the sellers with whom they are dealing.
Peterson reports that another challenge deals with the online business model it-self. "Traditionally, our business model has been one supplier to many customers," she says. "We have not done a many-suppliers-to-many-buyers business model before. We have not worked out the rules of that road yet."
Another challenge is technology itself. Halpern and Peterson agree that it takes a lot of work to set up the appropriate infrastructure for online marketplaces. "Companies must consider elements such as messaging, workflow, integrating various systems, protocols, security, and applications," according to Peterson.
That's where Web-technology companies come in. Public and private exchanges rely on experts including Ariba, CommerceOne, i2, IBM, Oracle, and NexPrise to provide the toolsets to power their marketplaces.
Despite the challenges, many companies are convinced that online marketplaces are destined to drive costs down, reduce time to market, and deliver a vehicle to better manage the design process.
In the high-tech arena, Converge (formerly eHITEX) and e2open are setting up shop as public exchanges. According to Converge, it will offer trading services, e-procurement and order management, supply-chain planning and collaboration, transport and logistics services, design collaboration, and financial and member services. A few of its members include industry leaders Agilent Technologies, AMD, Compaq, Gateway, and Hewlett-Packard.
e2open formed by Acer, Hitachi, IBM, LG Electronics, Lucent Technologies, Matsushita Electric, Nortel Networks, Seagate Technology, Solectron, and Toshiba intends to provide design and supply-chain collaboration.
Although the auto industry is an early adopter of online exchanges, the aerospace industry is not far behind with its private and public marketplaces. Large companies such as Boeing and GE Aircraft Engines already have private exchanges in place.
The public aerospace marketplaces typically don't address design issues. Aeroexchange, for example, deals with aviation parts, component machinery, electronics, and services. MyAircraft focuses on aerospace aftermarket products and supply-chain services.
A recently formed public exchange, called Exostar, joins BAE Systems, Boeing, Lockheed Martin, and Raytheon. Its goal is to use the Internet to bring together manufacturers, suppliers, and service providers along with airline and government customers into a secure e-marketplace.
The four participants do business worldwide with more than 37,000 suppliers, hundreds of airlines, and nearly every national government for a total procurement outlay of $71 billion. The aerospace and defense industry has total sales of more than $400 billion worldwide.
Exostar's products and services include auctions for purchasing, general procurement of indirect materials, sales of spare parts, and access to technical publications and data. Over time, Exostar will provide general procurement of direct materials and other services such as supply-chain management tools, hosting services for configuration management, surplus-item sales, and shipping assistance. Exostar recently selected PTC's Windchill ProjectLink Software to provide design project collaboration among participants.