E-business: the new game in town

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With the initial formation of Covisint in February 2000, and with other online ventures established over the past couple of years, the automotive industry has thrown its chips into the B2B e-commerce game. The following is an update on how the industry is faring now that its cards are on the table.

by Ryan Gehm, Assistant Editor

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What e-business can provide to automotive manufacturers and suppliers has been well stated and has become a sort of mantra: improved product quality, reduced costs, and shortened time-to-market cycles. These gains can be achieved via the Internet's boundless architecture, which permits the free flow of information and ideas in real time among OEMs, suppliers, and dealers. The benefits of e-business are more than just a mere incantation, however, as Internet-based marketplaces, or exchanges, and other virtual technologies are being used more and more for procurement, supply chain management, product development, customer relations, and other business functions - and are proving to be efficacious.

Unlike Electronic Data Interchange (EDI) systems, which are limited to OEM-Tier 1 relationships, business-to-business (B2B) exchanges integrate all players (Table 1). The largest and most recognized automotive trading exchange is Covisint, members of which include DaimlerChrysler AG, Ford Motor Co., General Motors Corp., Nissan Motor Co., and Renault SA as well as technology providers Commerce One and Oracle. Until somewhat recently, several issues regarding the future of Covisint had been up in the air, most notably, when the exchange would be launched. However, this past September Covisint received pre-formation regulatory clearances from both the U.S. Federal Trade Commission and the German Bundeskartellamt. Later that same month, the joint-venture exchange began operations with a "soft launch," which allowed early supporters of Covisint to use its products without revenue generation for the exchange; in December, Covisint changed from a planning organization to a Delaware limited liability company.

In early October, ArvinMeritor - the Troy, MI-based supplier of integrated automotive systems and modules - conducted the first transaction on Covisint, an auction for various injection-molded plastic components. Reuters reported that top executives of ArvinMeritor expected Covisint to allow parts makers to save 10-25% on supplier costs and improve efficiency by accelerating the information exchange process. According to Dan Jankowski, Covisint spokesperson, Covisint held more than 100 events in the last quarter of 2000, with approximately $350 million going through the trading exchange.

Table 1. A comparison of electronic data interchage (EDI) and the internet. Click to enlarge

Covisint now has more than 250 customers in North America and Europe engaged in activities ranging from auctions, catalog postings, quote management, and collaborative design. "As the organization matures over the next few years," Jankowski said, "we expect to have upwards of $240 billion and more going through Covisint per year." Covisint also expects to establish offices in Europe and Asia. As of mid-February, the exchange was still in the process of naming members to its board (12 members of the 17-member board were elected in January), and its searches for a CEO and a permanent location for its headquarters - which is currently located in Southfield, MI - were ongoing.

Yet, with all the progress that Covisint has achieved in the past year, there are still advancements to be made, not only for Covisint, but for the automotive industry as a whole. According to a global B2B e-commerce study released in January by consulting firm KPMG LLP, the automotive industry is lagging compared with other industries in e-business progress and must overcome significant cultural, technological, and security issues to move forward in this area. The survey of automakers and Tier 1 and 2 suppliers in the U.S., England, Germany, and Japan revealed that the Big Three must do a better job of explaining Covisint because many suppliers do not have a complete understanding of how digital exchanges can benefit their businesses. Brian Ambrose, National Industry Director of KPMG's automotive practice, also said that it was important for Covisint to become operational to increase shareholder value; improve the efficiency of administrative, transactional, and logistical processes; and begin providing its expected benefits in areas such as car production and engineering.

The study also revealed that a major factor holding up e-business progress is companies' fear that their proprietary designs will not be protected in an Internet environment. Further, it found that suppliers were distrustful of OEMs with digital exchanges because costs will no longer be hidden. "There's no doubt that the cost of parts will be transparent in a digital exchange, enabling the OEMs to negotiate much more advantageous pricing with their suppliers. This can cause a lot of pain in the supplier ranks but ultimately lead to healthier, more efficient companies, which will lead to a healthier, more robust industry," Ambrose said. "One of the hallmarks of successful e-business is integration of the value chain," he added. "Instead of keeping all your cards close to the vest, share some of what you are holding with your value chain partners. It isn't a zero-sum game where your win is a value chain partner's loss. It can be a win-win game."

Similarly, automotive business-to-consumer (B2C) e-commerce, while making progress, still has some obstacles to overcome. Autohit, a UK-based automotive e-business service company, surveyed approximately 6500 potential car buyers who had conducted research on the Internet or had intended to purchase from an online supplier. The survey, released in January, found that 42% of those questioned actually bought a new car, with 76% of those consumers ultimately purchasing their vehicles from a traditional dealer. Though the Internet was used as a source for finding information, such as the best price and location to buy, the survey found that consumers were still wary of buying online for various reasons, including a belief that traditional dealers would still offer the best deal, reluctance to learn a new way to purchase, and fears related to making a large capital purchase online (e.g., security issues).

Steve Evans, Autohit's CEO, said, "While there is a clear indication that consumer confidence in buying online is growing, the vast majority of car buyers are using the Internet as a research tool and then going on to buy from a traditional dealer often associated with an Internet supplier." Evans added that "consumers appear to be loyal to (traditional) dealers, though in some cases only because the online offerings are still immature or because they haven't fully mastered building an online relationship. We (Autohit) recommended that dealers should take note of this and seek to build stronger online alliances to position themselves for the time when that deficiency is remedied and maturity sets in. They need to be part of the developing supply chain as well as being part of the historical one." He also noted that despite automakers desire to build relationships with Internet consumers, it will take time to do so because of existing distribution strategies and the dealers, adding that dealers may be reluctant to espouse online purchasing for various reasons, including a lack of recognition for the need to commit to the channel and a fear that the effort may ultimately circumvent them.

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