The Trillion-Dollar Secret

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Bayer AG, the global chemical and drug company, is set to move from procuring around 25% of its supplies electronically to 75%, a shift that is expected to slash 5% off its annual $5 billion procurement bill. For Bayer and other companies there is no choice. The Internet's transparency is eroding sales margins in all sectors. To offset this, companies are streamlining procurement, bringing together global supply and demand in a radically different way. "We have to be fast on procurement to increase our profitability," says Christoph Schulze-Berge, manager for strategic development of procurement at Bayer.

Bayer, which has been steadily moving more of its procurement to electronic trade, is an early adopter of what the digerati call the Web's trillion-dollar secret. More than a few millionaires have made their fortunes from high-profile Web companies that sell products to consumers, but silent commerce, a new way for businesses to trade with each other, will eventually have a far more profound economic impact than all of the Amazon.coms or eBays combined.

Internet commerce expert Arthur Sculley says that the real volumes of buying and selling over the Internet--and the real money--will be generated by sites that few people have ever heard about. These business-to-business, or B2B, exchanges facilitate direct trading between corporate computer systems. For example, a B2B exchange created for the chemical and pharmaceuticals industries by German software provider SAP and used by Bayer serves as a virtual marketplace where businesses can buy and sell to each other at dynamic prices. By 2003 e-business is expected to generate global revenues of some $1.3 trillion, with 85% coming from B2B transactions and only 15% from business-to-consumer sites like, according to a recent study by tech consultancy IDC, commissioned by Nortel.

Industries such as steel, paper, chemicals, insurance and plastics have already set up their own sector-specific B2B electronic exchanges where businesses can buy and sell to each other under a set of agreed rules. According to Sculley, since the average sticker price for B2B procurement contracts is around $30,000, the potential for cost savings and bigger profit margins in the middle are much higher than for low ticket items such as books or CDs.

At the heart of the secret is an Internet standard called Extensible Mark-Up Language (XML) which allows computers to express business messages and exchange business processes, cutting out paperwork and other forms of human intervention. Developed by researchers and adopted in 1998 as an open standard by the World Wide Web Consortium, which helps set global technical standards for the Web, this method is already slashing procurement costs at European companies such as Swisscom and Bosch by up to 80%.

XML-based trading is also helping European businesses streamline operations from one end of the supply chain to the other. British supermarket J. Sainsbury uses software developed by U.K.-based Eqos to generate real-time information on what consumers are choosing from the supermarket shelves. The data goes directly from Sainsbury's cash registers to suppliers like Nestle, which not only instantly know how many candy bars to produce but also how many tinfoil wrappers to order from its own supplier. "Silent commerce is more than just an Internet strategy," says Stephan Schambach, founder and ceo of Intershop, a German-based software company specializing in the development of silent commerce. "The first wave of computing automated internal business processes [like payroll and inventory]. This new method of trading effectively automates the external processes as well."

Swisscom, Switzerland's largest telecommunications company, also claims impressive savings. "We typically reduce purchasing costs of office supplies by three-quarters using the online marketplace," says Jochen Schneider, Swisscom's head of logistics. "Even the smallest purchase of a few pens would cost $100 to execute. Silent commerce reduces this to at most $30." Swisscom currently carries out 5% of corporate procurement through silent commerce and soon hopes to raise this to 15%. After seeing the benefits of silent commerce at German electronics company Bosch, Uwe Schneider, the company's IT e-commerce and e-business manager, quit his job to help start a new Germany-based B2B exchange called BusinessMart, which will launch at the end of March.

A European equivalent of U.S. trading hubs like VerticalNet and FreeMarkets, which offer applications and support for diverse industries, BusinessMart will run Intershop's software and host clients such as Bosch. Companies accessing the marketplace will be able to use BusinessMart to trade such goods as power tools and auto parts. "If a dealer has 200 suppliers and each dealer uses a different system, then this means that the dealer has to learn 200 different systems before he or she can trade," says Schneider. "BusinessMart will provide Web solutions for order entry, which will mean that a uniform system will be available for any business wanting to buy or sell on the Internet."

But some analysts say industry-specific exchanges have the most chance of succeeding--and reaping the profits. Christoph Ladanyi, a managing director in Goldman Sachs International's investment banking division, points out that industry-specific B2B exchanges which have had initial public offerings in the last year are each valued between $1 billion and $9 billion. Although like many Internet businesses none will show earnings this year, they have projected growth rates of up to 240% per year.

Along with Intershop, German software giant SAP is playing a major role in setting up such B2B exchanges. SAP sells the building blocks to companies that want to start up their own exchanges, and it is also constructing and helping run platforms for industry-specific B2B exchanges, such as the one it launched with chemical and pharmaceuticals companies last December. That exchange relies in part on infrastructure and services provided by Industry to Industry, a Boston, Massachusetts-based company in which SAP holds minority equity stakes.

That American connection is not unexpected given the fact that the greatest economic impact of e-commerce has been in the U.S., where Net commerce and IT industries together accounted for one-third of real economic growth over the last three years. But Europe is catching up. In a 1998 survey of European companies by Andersen Consulting, most used the Internet only for sales and marketing. By 1999, more than a third of the European executives surveyed by Andersen said they consider the Internet crucial for the procurement of goods and services from suppliers.

Take the case of Statoil, the Stavanger, Norway-based oil and gas conglomerate. It is working with SAP to build a B2B exchange for the gas and oil sector, but it is also collaborating with other oil companies to create a common catalog that can be accessed across different systems, says Peter Tronslin,

Statoil's vice president for procurement and industrial relations. Shell and Chevron are each using different suppliers of B2B exchanges. "It is a fact of life at this stage that we have different solutions," says Tronslin. "Our idea is that parallel developments shouldn't prevent us from developing a common base."

There are a number of B2B exchanges competing for business in most large industry sectors. For example, in the chemical sector Industry to Industry's exchange competes against established B2B exchanges such as Chemdex. The advantage of Industry to Industry's site is that out of the top 1,000 chemical companies 957 already use SAP software, so procurement will automatically be compatible with the rest of a firm's software, says Michael W.G. Fix, Industry to Industry's president and ceo. His company is trying to help businesses trade both within their own sector and across industries over the same trading platform. Soon, for example, a chemical company will be able to purchase surplus inventory from a computer retailer as easily as it can sell chemicals--with just a click of a mouse. If only it were that easy to solve other world trade issues.

With reporting by Tony Glover/London