Auto Makers Plan Behemoth E-Business

Creating what may be the largest virtual marketplace in the brief but fiery history of the Internet, General Motors, Ford Motor and DaimlerChrysler announced plans Friday to open a single online store to handle the hundreds of billions of dollars in parts and supplies that the three auto makers buy each year.

The companies said that they will begin moving all their purchases--totaling nearly $250 billion a year and about 60,000 suppliers--to the new venture, potentially making it the largest Internet business yet created.

The online auto marketplace will allow suppliers and buyers to automate routine transactions and streamline the bidding process for everything from car windows and fuel injection parts to paper clips and paint through electronic sales, auctions and “reverse auctions,” in which buyers state their needs and receive bids from sellers.

Consumers aren’t likely to see massive price cuts because of the new system. But it should help auto makers keep a lid on retail prices as new features are introduced, such as electronic steering, computerized transmission systems and weight-sensitive air bags. It will also make it possible for customers to order more personalized vehicles and to take delivery of them faster.

GM, Ford and DaimlerChrysler will have an equal share of the new company, which is expected to be up and running in 90 days. They will also open their virtual marketplace to other auto makers and could eventually expand the service into other industries, such as aerospace, construction and office supplies.

Joint Marketplace a Powerful Sign

The joint marketplace is the most powerful sign yet of the migration of commerce from the old world of pavement-pounding salesmen and brick storefronts to the new, virtual world of electronic commerce.

“There are enormous implications for the global economy,” said Bruce Temkin, e-commerce research director for Forrester Research in Cambridge, Mass. “It’s going to eventually change the way businesses interact with each other by taking out the huge inefficiencies that have been built around the old methods of using the phone and mail.”

Temkin said that the GM/Ford/DaimlerChrysler venture is a watershed, not only because it brings three fierce competitors together, but because it’s the first major migration of an entire industry’s supply chain onto the Internet.

“The whole chain is moving to reinvent itself,” he said.

By using the speed of Internet communications and the power of large computerized databases to handle global sales and purchasing, the companies hope to control costs, slash production inefficiencies and reduce the logistical nightmare of tracking millions of parts--all of which could translate into a better deal for consumers.

“The Internet is transforming every piece of our company and our industry,” said Ford President Jacques A. Nasser in a prepared statement. “It’s exciting, it’s dramatic, and it’s only going to accelerate. We’ll push this transformation even further to bring sustainable benefits to our customers, our suppliers and our dealers.”

In one of the first purchases made by Ford a few weeks ago over its own online marketplace, the company bought $78 million in auto parts in an auction with bids from five suppliers. The company reported saving more than $10 million.

But even with just the three auto makers as customers, this new marketplace would be the 900-pound gorilla of the quickly expanding world of business-to-business e-commerce.

Ford and GM alone have more than 30,000 suppliers each that will likely be drawn into the online network. Alice Miles, president of Ford B2B, the auto maker’s electronic business-to-business unit, said there ultimately will be “more than 100,000” supply companies on the system.

And with a ready-made supply of users, the company could become that rarest of online entities--a profit maker--since it will collect a fee or commission for every transaction that takes place over the network.

The new marketplace will be powered by software from database maker Oracle Corp., based in Redwood Shores, Calif., and by Commerce One, a Walnut Creek, Calif., maker of e-commerce software.

“It’s a great opportunity,” said Raymond J. Lane, president of Oracle, which will also have an equity stake in the new company.

Ford and GM had actually started their own separate online ventures in November--AutoXchange for Ford and TradeXchange for GM. DaimlerChrysler had yet to start its own supply exchange.

Dealing With Two Separate Systems

A GM spokesman said the companies began getting complaints from suppliers that it was too cumbersome to deal with two separate systems.

“We quickly realized traditional individual stand-alone models weren’t the winning strategy for us . . . and, ultimately, our customers,” said GM President G. Richard Wagoner at a news conference in Detroit.

With surprising speed, the companies decided that they could merge their efforts into a single super site.

“That is exactly what we asked for,” said Neil De Koker, managing director of the Original Equipment Supplier Assn., which represents more than 200 members.

Suppliers and buyers will be given a secure method of entering the new computer network and could view requests for products or offers of surplus equipment.

Chuck Donchess, executive vice president of Commerce One, which created GM’s TradeXchange, said that an electronic forum will cut down both the time and expense of buying materials.

He gave the example of one recent GM auction in which the company wanted to buy millions of dollars’ worth of car window seals.

In the old days, he said, the process would involve having a purchasing agent calling up people he thought would be interested, sending out requests, then waiting for bids and evaluating them.

“It could take weeks,” Donchess said. “This auction took just two hours and there were 20 some odd bidders.”

Ultimately, the true test of the marketplace’s success is whether it will be efficient enough to bring cheaper prices and better products to consumers.

Most of the attention in recent years has been focused on Internet consumer stores, such as bookseller Amazon.com and eToys.com. But the online business-to-business marketplace is expected to hit $406 billion this year, 10 times the size of the consumer e-tailing market, according to Forrester Research.

Multi-Trillion-Dollar E-Commerce Business

Forrester’s Temkin estimated that business-to-business e-commerce will total more than $2.7 trillion by 2004--an amount that will tower over the estimated $184 billion in consumer sales that year.

The size of the auto makers’ network has raised some antitrust concerns, but Lehman Brothers analyst Darren Kimball downplayed the issue, saying that the car companies aren’t combining their purchasing, but rather their purchasing process. “This is just a tool for business,” he said.

Other companies have been racing over the past few months to bring about the same conversion in their own industries.

Toyota Motor Sales USA announced the creation this month of an auto parts clearinghouse, called IStarXchange, to help repair shops track down available parts.

Phone company BellSouth also announced this month plans to create a global marketplace for buying telecommunications equipment over the Internet. BellSouth plans to move its own $16 billion a year in purchasing to the marketplace, saving an estimated $1 billion over the next two to four years.

Japan’s Mazda Motor Co., which Ford controls, and GM’s three Japanese affiliates--Isuzu Motors, Subaru and Suzuki Motor Corp.--are all expected to participate in the new exchange. Renault and its Nissan Motor Co. affiliate in Japan also will join the system, according to Debra Sanchez Fair, vice president of corporate communications at Nissan North America.

But a Toyota spokesman said the company was undecided about joining, while Honda Motor Co. said it doesn’t plan to join the larger alliance. “As of right now, we remain to be convinced of the benefits of this,” said Art Garner, spokesman for the No. 5 auto maker in the U.S.

Industrywide participation in the exchange also should help keep a lid on retail car prices.

About 65% of the cost of a car is in parts purchased by the auto maker from outside suppliers, says Jim Mateyka, vice president of the global automotive industry practice at the A.T. Kearney Inc. management consulting firm.

“So buying on the Net not only makes transactions more efficient, it also opens the supply chain, so the buyer knows where all the potential suppliers are, and the suppliers all can get to the buyer,” he said.

Price Not the Sole Factor in Contracts

Price is not the sole determining factor in awarding an automotive parts contract--appearance, quality, speed and reliability of delivery and impact on safety and emissions systems are also considered.

By making the parts chain global, “the best suppliers will prosper and the industry will see which ones are operating head and shoulders above the others,” said David Cole, director of the University of Michigan’s office for the study of automotive transportation.

“Relationships built on old-school friendships and things like that will not work any longer,” he said.