The New Mark@place

Taking a leap into the era of electronic commerce, Lehigh Valley Safety Supply Co. recently put its work boots--a fashion staple in factories since the Industrial Revolution--for sale on the Internet.

After distributing the steel-toed shoes in only a six-state region over the last two decades, the Pennsylvania firm is now booking orders 24 hours a day from corporations as far away as Indonesia.

“I think it’s going to have a very significant long-term impact on our company,” said company comptroller James D. Codrea.

After years of false starts and unfulfilled promises, electronic commerce is entering a phase of massive growth as buyers and sellers begin conducting more transactions in cyberspace rather than on the showroom or factory floor.

The boom is coming not from consumers, who have remained on the sidelines, but from corporations, which are seeking to drive down the cost of doing business and expand their reach in the marketplace.

The growth of electronic commerce portends a huge reshaping of business, triggering another round of corporate restructuring that will create new winners and losers in the economy.

“We have only seen the tip of the iceberg,” said Ravi Kalakota, a professor of information systems at Georgia State University. “The impact of electronic commerce will be pervasive and significant. It will promote large-scale efficiency in business.”

The Clinton administration threw its weight behind the trend in July, declaring that “electronic commerce over the Internet should be facilitated on a global basis.” But some states have taken up legislation to deal with growing fears that sales made in cyberspace will be difficult to tax--a problem that grows worse as the boom continues. Under pressure from state and local officials, Sen. Ron Wyden (D-Ore.) has delayed consideration of a federal measure co-sponsored by Rep. Christopher Cox (R-Newport Beach) that would suspend state and local taxes on Internet commerce and services.

With a new generation of improved software for navigating the World Wide Web, potential buyers can now surf vendor sites and see descriptions and color pictures--even hear the sounds--of products offered. This is replacing massive industrial catalogs, which are costly to publish and mail, that are widely used by American business.

Many Internet sites allow buyers to purchase goods immediately with a few keystrokes that send information directly to a company’s computer, eliminating whole layers of workers.

Experts say such electronic ordering systems can be far more efficient and less costly for a business than hiring a procurement staff to peruse catalogs, field telephone calls and handle reams of paperwork.

Indeed, the U.S. Postal Service, wholesalers, procurement officers and other middlemen are already wrestling with how to remake themselves for an era when the Internet will provide an efficient and direct pipeline to suppliers and customers.

“There are perhaps 150,000 wholesale and distribution companies out there, and you are inevitably going to have winners and losers when a change of this magnitude is on the horizon,” said Ron Schreibman, vice president for strategic direction at the National Assn. of Wholesaler-Distributors.

The Internet, declared Microsoft Chairman Bill Gates in his book “The Road Ahead,” will become “the ultimate go-between” and, by cutting out the middleman, will nurture “friction-free capitalism.”

Two leading forecasting firms--Forrester Research and Yankee Group, both in Cambridge, Mass.--recently predicted that the value of goods and services traded over the Internet will grow from an estimated $7 billion to $8 billion this year to as much as $327 billion in 2002.

Already, dozens of influential companies, including Ford Motor, Home Depot, Microsoft and American Express, have climbed on board, embracing a new electronic purchasing system standard called “open buying.” The system aims to standardize the transmission of purchasing data, allowing businesses to dispense with a costly and confusing array of dedicated machines and special phone lines.

Most buyers and sellers arrange for the payment of goods through electronic fund transfers or credit cards--often over a private or secure electronic network designed to prevent fraud.

Companies already trading goods and services electronically say they are doing brisk business.

Since it began selling computer-networking gear on the Internet a year ago, Cisco Systems has seen its revenue from Internet sales jump from less than 5% to one-third of the company’s $6 billion in annual sales.

In the wake of that success, Cisco has moved its credit-checking, production-scheduling, product support and customer service operations to the Net. The benefits, Cisco officials say, are faster service, quicker production cycles and overall savings of more than $500 million a year.

The efficiency offered by electronic commerce will enable Cisco to handle a 50% increase in sales without having to add a single person to its 150-member sales staff, said Chris Sinton, Cisco Connection director.

Dell Computer, which grosses $2 million a day selling computers over the Internet, has likewise saved millions by doing business online. Dell says it saves nearly $10 on each sale over the Web compared with those handled by telephone. The cost savings have forced rivals such as Hewlett Packard and Compaq Computer to reevaluate their strategy of distributing computers through retail chains, experts say.

Similarly, VWR Scientific Products, a Westchester, Pa.-based distributor of laboratory equipment, says it will save thousands of dollars by publishing parts of its 2,500-page color catalog on its Web site instead of mailing thousands of copies to potential customers.

“The catalog is thicker than a phone book and weighs about 5 pounds. It’s a significant expense to print this thing every two years,” said Mark Robillard, vice president of electronic commerce for VWR.

As a classic middleman distributor, VWR is also attempting to use technology to protect its flanks from so-called disintermediation--a process in which producers attempt to gain a direct pipeline to consumers.

“We probably won’t get rid of [the catalog] altogether, but we are committed to electronic commerce,” Robillard said. “A distributor today that simply brokers large bulk shipments and adds no value in terms of efficiency or services is in danger of being disintermediated.”

General Electric expects to buy $1 billion worth of supplies this year using its electronic networks.

“As we move forward, if you want to do business with us, you better be electronically enabled,” declared Venkat Mohan, vice president for global marketing services at GE Information Services.

Not everyone, of course, is jumping on the bandwagon, particularly businesses that have invested heavily in older technology and are leery of the Internet’s security issues and libertarian sensibilities.

Executives are “constantly being pounded over the head” to hop on the Internet, said Jesse Goode, a senior computer systems analyst at the diversified oil refiner Ultramar Diamond Shamrock in San Antonio.

“They think it’s the cool thing to do and don’t want to get left in the dust,” Goode said. “But they don’t really know if it will help.”

Conducting business over the Internet certainly has been a comedown for Bob Reiman, an account executive at the Eastlake, Ohio-based machine shop Astro Model Development.

He says bidding on GE’s business was far easier the low-tech way--using a fax machine to send engineering drawings, rather than manipulating documents on a personal computer linked to the Internet.

Not that it was actually easy before: Reiman would spend about two hours using Scotch tape to assemble large drawings from standard sheets of fax paper. But now it’s taken him as long as three hours to download, analyze and bid on a dozen drawings from GE Lighting’s electronic network--even with his fancy plotter that reproduces large documents on a single page.

“I think the Internet, being new and all, still has a lot of kinks to be worked out,” Reiman said.

Business enthusiasm for the technology stands in stark contrast to the many failed efforts to lure consumers into the electronic fold. Failing to see the Internet as convenient and bombarded with cautionary news stories about lax security on the Net, consumers have been reluctant to open their wallets to online merchants.

Last year, MCI Communications closed its much-touted Marketplace MCI online shopping venture in the face of poor sales, and weeks later shut down its electronic music-retailing business.

And International Business Machines shuttered its World Avenue site this summer after an unsuccessful yearlong effort to lure shoppers to such retailers as the women’s apparel chain Express and the Canadian department store Hudson’s Bay.

Still, most experts agree, the stunning growth and global reach of the Internet has made it an increasingly powerful and efficient venue for transacting business.

The number of PCs connected to the Internet is expected to rise 71% this year to 82 million, according to San Jose research firm Dataquest.

High-tech industries in particular--struggling to meet increasingly short product cycles--see electronic commerce as a vast improvement over doing business the old way--trading telephone voice messages, faxes and letters.

“We are seeing tremendous opportunities for Internet commerce,” said Irving Wladawsky-Berger, general manager of IBM’s Internet division. “Up and down the line, the opportunities for doing business online have been exploding this year. . . . Our No. 1 problem has been satisfying all of the demand.”

Business appetite for online commerce has also been whetted by a huge improvement in the price and ease of setting up shop on the Internet, as well as the much-publicized “year 2000” problem.

Faced with making costly fixes to allow old computer systems to recognize dates after 1999, some firms are throwing out their antiquated databases and starting from scratch with new electronic commerce systems linked to the Internet, experts say. And there is a growing number of companies clamoring to help them.

Earlier this summer, for instance, Intel and a unit of German software giant SAP America announced plans to sell hardware and software for electronic commerce to small and medium-sized businesses for as little as $20,000.

As more firms embrace electronic commerce, “a very tough competitive environment” will evolve, said Esther Dyson, president of EDventure Holdings, a New York-based cyberspace consultant.

The balance of power will shift from sellers to buyers, who will have a wider universe of vendors from which to select. Moreover, the technology will also give an edge to nimble and innovative firms that can electronically collaborate and share information.

“It’s not about the vendor offering and the customer buying anymore,” Dyson said. “It’s about the customer specifying and the vendor fulfilling.”

The Postal Service, which last year derived most of its $48 billion in revenue from delivering business letters, is nervously watching these changes. It has begun to quietly explore ways to deliver time-and-date-authentication “stamps” for electronic mail to compensate for a potentially devastating loss of regular business mail, a spokesman said.

And Rob Kuijpers, chief executive of express mail company DHL Worldwide Express, recently acknowledged in a speech that his company is already feeling the heat from the rise of business-to-business commerce over the Internet. Kuijpers said DHL expects to lose as much as 18% of its transport business because of the trend.

Meanwhile, distributors, wholesalers and other middlemen will be faced with retooling for the Internet era.

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The Electronic Era

Leading forecasters predict that Internet business will balloon from less than $8 billion this year to more than $325 billion in five years. Projected revenue of U.S. Internet commerce, in billions of dollars:

2002: $327

Source: Forrester Research