graphic
News > Companies
Automakers in B2B pacts
January 13, 2000: 12:31 a.m. ET

Oracle, Commerce One run systems for automotive rivals' supply chains
graphic
graphic graphic
graphic
DETROIT (CNNfn) - The Internet was the hot roadster of the auto show here this week.
    Ford Motor Co. and General Motor Corp. announced alliances with Yahoo! and America Online, respectively. Automakers talked of plans to let drivers cruise the Web, get and send e-mail, all while behind the wheel. Ford even announced plans to sell corporate debt to individual investors online.
    But if these virtual offerings were the equivalent of the flashy, exciting concept car of the North American International Auto Show, then the automakers efforts to start to buy all their parts from suppliers over the Internet are the family sedan - staid, easily overlooked, but of far greater importance to the companies' bottom lines.
    How big? GM estimates that it can save 10 percent of the costs of its purchases through its' efforts, dubbed TradeXchange, which it established with Commerce One Inc.  (CMRC) Under the agreement, GM has an option to own almost 19 percent of the small Walnut Creek, Calif., company once certain revenue targets are met.
    Since GM (GM) spends $86 billion annually on parts and supplies, that means almost $9 billion in savings in a year, or 10 times the amount of net income that it posted in the third quarter of its recently completed record year. Ford (F) has similar savings estimates on its $80 billion in purchases. It has set up a service called auto-Xchange with Oracle Corp.  (ORCL) and owns a 55 percent stake in the service venture.
    

    
Photo tour of the auto show

    

    But neither company expects to stop with these savings. They're looking to have their suppliers use the online services for all their transactions - including sales to other manufacturers or purchases from their own supplier base. Commerce One, estimates that within five years, GM purchases will make up only a quarter of the business being transacted on TradeXchange. And both companies are also talking with their competitors around the world about coming on board in these ventures. Oracle President Ray Lane says Ford and Oracle have made offers to every major automaker to share in the equity of auto-Xchange, based on the total amount of their purchases.
    More immediately, Commerce One estimates that by the end of 2000, it will handle sales at a rate equal to $60 billion a year. That compares to $4 billion of goods that Forrester Research estimates that consumers bought online between Thanksgiving and Dec. 31, as e-commerce boomed. And Lane says that unlike the retailers selling goods to consumers online, they expect to make money on auto-Xchange the very first year.
    By the time Christmas 2000 roles around, if things go according to plans, GM and Ford will dwarf eBay and Amazon.com in terms of online business, even though franchise laws continue to stop either company from selling cars directly to consumers on the Web.
    Wall Street has noticed the potential of the efforts, even if they haven't gotten the attention of the automaker's consumer-oriented e-commerce iniatives. Both Commerce One and Oracle's stock have more than doubled in value since the agreements were both announced Nov. 2, although Commerce One's stock took a tumble in Thursday's trading, falling 27-7/16, or 15 percent, to 159-9/16 at the close.
    If the efforts are successful, it shouldn't be a surprise if GM and Ford try to make some more money the new-fashion way - with an e-commerce IPO of their own.
    "You'll see very shortly a plan to generate a currency that can generate that value for Ford shareholders," said Brian Kelley, president of Ford's global e-commerce unit.
    So while automakers were quick to hype how they're ready to turn their cars into "portals on wheels," as Ford announced this week, they are quick to admit the big dollars, and the plans that can transform the industry's entire economic structure, is their plans for dealing with suppliers
    "The real value is in business to business e-commerce," said Kelley.
    
Paperless profits

    The projected savings come from reducing paperwork, which can cost $100 per purchase order. But it also can be from suppliers and the automakers communicating quicker and more efficiently, cutting inventory needs on both sides. It may also mean reduced prices through auctions and a larger pool of potential bidders for goods.
    Not surprisingly, with so much potential money at stake, there is friction to go along with the expectations.
    The first is between the two automakers' partners. Ford's partner, Oracle, is not shy about questioning Commerce One's ability to handle GM's site. Raymond Lane said while he's talking to each of the major automakers about joining auto-Xchange, he hasn't given up on getting GM to leave Commerce One and join forces.
    "We'd love to get GM. Ford and Oracle would give up equity to get them," said Lane. "So far they've shut the door on us, but I've got a meeting with (Ford President and Chief Operating Officer) Rick Wagoner on Friday, and I'll be talking to him about it again."
    Lane suggests that Commerce One doesn't have the experience and capabilities to handle the kind of contract purchases required by the site. Commerce One officials say they are developing the systems needed, and that they are actually ahead of schedule, having already held a test auction on five metal presses. It is also handling purchases of items such as gloves, office supplies and other goods that don't go on the cars and trucks on the line.
    "We went live six weeks after we announced plans," said Kevin Schick, vice president of marketing for Commerce One. "In the first three days they executed $500,000 in purchases. In the scheme of things, that's a sneeze, but first place is still first place."
    But even greater friction and concern is coming from the supplier base. Suppliers are in the uncomfortable position of having two giant customers both wanting them to use the competing services for all other manner of transactions. They also don't know what the fee structure is that they will have to pay to use the service, and there is concern this is another way to force prices down.
    "They range from concerned to terrified," said Neil de Koker, managing director of the Original Equipment Suppliers Association, a North American trade group of car part suppliers. He said there is a concern there will be greater competition and downward pressure on prices. But he also can see the upside if it can cut transaction costs for suppliers and open the door to sell to foreign automakers if they can be brought on board.
    "If that happens, I think it'll give us a competitive advantage," said de Koker. "We've transformed the industry so much in the last 15 years, I think we're ahead of Europe and Asia."
    The other automakers are not willing to commit to any system, although officials from Toyota Motor Nissan Motors do admit to having discussions, the former with GM's service, and the latter with Oracle. But experts believe that all the major automakers, and their suppliers, will have to choose one service or the other, or be left at a competitive disadvantage. They won't be deterred by the fact that the service is run by a competitor, said David Cole, director of the office of the study of automotive transportation at the University of Michigan.
    "If you can save $5 on a transaction that used to cost $10, you'll do it, even if your competitor is going to make $1," said Cole. Back to top

  RELATED STORIES

B2B business boom - Jan. 11, 2000

Ford to bring Internet to drivers - Jan. 09, 2000





graphic


Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.