In the fast-moving world of e-business, every second counts. So if you've only got 10 minutes, read this summary of the issues in business-to-business e-commerce (B2B) from Schroder Salomon Smith Barney analyst Stefan Burgstaller
B2B will transform the value chain in many industries
B2B provides many industries with greater freedom to streamline and optimise the entire value chain. The Internet in general, and B2B in particular, will create transparency and drive standardisation of business systems; processes and communications within companies and among enterprises will be greatly improved. In the long term, physical company boundaries of legacy commerce systems will be redefined along information boundaries, releasing new levels of efficiency.
B2B transaction volumes could be huge
We estimate that c890bn (£498bn) of European business-to-business purchasing will be done online by 2005. This is approximately 7.8% of our forecast total B2B trade for the 15 member states. We expect the European B2B e-commerce market to enter a phase of hyper growth during 2003.
Efficiency gains will force companies to participate
The promise of efficiency gains will drive the adoption of B2B e-commerce. Buyers will benefit from reduced production costs, lower procurement costs, reduced inventory costs and improved productivity. Suppliers will benefit from an extended geographical reach and lower sales and marketing costs. B2B will level the playing field, particularly for small and medium-sized companies. Both suppliers and buyers will benefit from collaboration and supply-chain integration efficiency gains.
Not all of the value will be captured by buyers and suppliers
There are three parties involved in B2B: the buyer, the supplier and the B2B company. We expect the majority of the value creation to go to the supply chain participants and customers. B2B companies will be able to capture a proportion of the value creation in the form of revenues. How much revenue will depend on the total value creation and the industry structure. The more fragmented an industry, the greater the share of value creation available to be captured.
B2B has the potential to transform fundamentally inefficient legacye-commerce systems. The Internet reduces the cost and increases the efficiency of communication and transactions. The result will be more transparency, less complex and labour-intensive workflows.
B2B enablers: owering the proliferation of new B2B marketplaces are multiple layers of enabling technology. B2B enablers provide the backbone of this technology infrastructure.
B2B companies: a B2B company is a company that uses the Internet protocol (IP) network to deliver products and services to businesses.
Horizontal B2B companies: these offer a specific functionality or business process which is scalable across a number of industries and market sectors.
Vertical B2B companies: these firms focus on particular industries or market segments. They aim to become "one-stop-shops" for a specific industry or market segment.
Industry consortia: in an attempt to remain competitive and not to be out manoeuvred by dot.coms, industry "gorillas" like General Motors, Ford, and other Fortune 500 companies are participating with B2B-enabling technology providers to create electronic industry marketplaces.
B2B business models
What will B2B companies get paid for? B2B companies are more than just exchanges. B2B companies provide a range of services including: information, aggregation, transactions, collaboration, business process, advertising and e-enabling services.
The B2B service platform: initially, most B2B sites were focusing on building a community, ie attracting traffic to the Web site. The next step was then to monetise this traffic through transaction services. This is the stage which most B2B sites have reached. We believe that successful B2B companies will have to create value for both suppliers and buyers. We expect successful B2B companies to combine all the required service elements to develop a service platform for specific industries.
B2B as an operating system: B2B companies and services can be compared to a software operating system. Microsoft Windows, co-ordinates the interaction of the CPU, the software applications, and peripherals. Similarly a B2B service platform could evolve into an operating system for an industry or market segment.
How will B2B companies get paid? One of the key concerns of investors is whether B2B companies are able to monetise their value proposition and, therefore, whether B2B companies are sustainable business models. As long as B2B company services create value for the participants, they will be able to charge an "economic rent" for their services. At the moment, B2B companies are experimenting with several revenue models: transaction fees, subscription fees such as advertising, licence fees and consulting fees. Most B2B companies will employ a combination of different revenue models appropriate to their services.
How much? The level of the "economic rent" depends on the level of value creation and how much of this value a B2B company is able to capture. This depends on the overall industry structure and power balance. The more fragmented the industry, the better.
Critical success factors
Industry structure: addressable market size, supply and demand structure, liquidity, market structure, intermediation intensity and supply-chain inefficiencies.
Product characteristics: some products are more conducive to e-commerce than others. The products that tend to be better suited to e-commerce are: excess or perishable goods, low-touch and standardised products.
Company: experienced management, commercial neutrality, strategic partnerships, a strategic plan and vision and, last but not least, indication of liquidity.
The empire strikes back: since February 2000, we have seen a tidal wave of more than 70 industry consortia announcements. Incumbent industry players got together and agreed to work jointly to develop a B2B exchange for the entire industry. The announcement by General Motors, Ford and DaimlerChrysler to form what is now known as Covisint in February marked the beginning of a series of such announcements across a wide variety of industries.
Implementation is key challenge: the formation of industry consortia validates the B2B value proposition. We believe that industry consortia will succeed and that they have a unique opportunity to fundamentally transform industry value chains. However, to make industry consortia work, participating companies, and the industry as a whole, have to overcome a number of key issues. Following the announcement phase in Q1, we have now entered the implementation phase. To make industry consortia work, companies have to overcome structural, operational and legal issues.
Industry consortia evolution: Industry consortia can choose between two contrasting models - a capital market model and a shared utility model.
Hybrids: A third scenario includes the marriage between industry consortia and independent B2B dot.coms to form hybrids. This would combine the better of both worlds - neutrality with instant liquidity.
B2B in 10 minutes is based on a 280-page sector report: [email protected] An Overview of Business-to-Business E-Commerce in Europe. To order your copy, tel +44(0) 20-7986 3949
Schroder Salomon Smith Barney's equity research department summarises the key points about B2B for each European industry sector (for full list see the full report)
Aerospace & Defence
Full history in electronic data interchange
Strong links with US key players
More opportunity than threat to banks - moving own business flows online, and potentially intermediating third-party transactions
Still very early days, and the role of banks - and likely pricing and profitability of the new services - remains uncertain
In time e-commerce should make a difference but more time is needed for companies to hone strategies
An industry with a huge cost base and low margins, it should benefit from B2B e-commerce
So far most companies have aligned themselves but no sites are trading; companies should benefit in the medium term from better buying on the building material sites and efficiency savings
A key issue is whether any costs saved are passed on to the clients; with client partnering now growing in importance it seems safe to assume that they will benefit from any costs saved by contractors
An early adopter of e-commerce
Cost savings likely to be offset by price pressure
Some value gains possible for early movers
Oil & Gas
After slow uptake, the industry is embracing e-procurement keenly
Trading initiatives are gaining pace, upstream and downstream
Potential to retain cost savings is higher in exclusively B2B upstream, while downstream savings will pass on to end customer
B2B could accelerate polarisation in the food market between large international manufacturing and smaller companies
Savings could get competed away if transparent to retailers
We see large potential benefits if the Web serves as an alternative route to consumers for the food companies
Purchasing exchanges to be key factor
Sales costs likely to increase due to Internet venture
COGS and R&D unlikely to be affected
Hotel - Leisure
Service sector usually operating multiple units
Principal costs are labour and capital
Hotel groups are setting up joint B2B purchasing operations
Industrial manufacturing companies generally have a multiplicity of raw materials and end customers
This generates considerable scope for cost saving which we believe in the main will be passed on to the end customer
Physical distribution is a key requirement of many aftermarket products so manufacturers must tread carefully when trying to develop strategies to supply end customers directly
B2B represents a major opportunity, particularly in work-site marketing of savings & protection products, and the specialist credit insurance market
Work-site marketing is already well developed in the US and will become increasingly important in the UK with the introduction of stakeholder pensions
Insurers with significant up-and-running B2B advantage include Legal & General, Skandia and the credit insurers Euler & Coface
B2B publishers surprised by pace and cost of Web development
Online B2B models as yet unproven
Internet has significantly lowered barriers to entry
Momentum currently behind European Steel.com build-ups
E-Steel Europe and Steelscreen seem to be the front-runners
Getting to the European customer base at large should be the greatest short-term concern
Limited opportunity for B2B in pharmaceuticals relative to the industry's size
Greatest potential presents procurement with an annual purchasing volume of approximately $6bn in Europe...
...but tight regulations for suppliers and patented manufacturing processes limit B2B potential
Pulp and Paper
Over 300 million tonnes of paper and board, and 38 million tonnes of market pulp consumed annually
E-commerce developed at some paper merchants, but hardly any volumes sold over exchanges
Very few paper companies have a distinct e-commerce strategy
Retail - Food
Two retail exchanges established
The largest, WWRE, has 32 members with c642m turnover - three times Wal-Mart's turnover
This new tool will be used more efficiently by some than others, leading to increased polarisation
Retail - General
The real opportunity does not lie in the core transaction functionality of B2B exchanges but in the value-added services offered alongside
Exchanges' Internet technology could enable general retailers to significantly improve their substandard supply chains, expanding margins and reducing costs
Margin improvements will probably be reinvested in price but sheer ability/choice to pass them on to consumers is powerful
Initiatives in European telecoms equipment have been limited to date
The obvious applications for Internet-based solutions are in supply-chain management for high-volume and repeat items - component sourcing and packaged product distribution
The economic benefits derived from Internet-based solutions in the delivery of one-off complex solutions, such as deployment of an entire network, are not easily quantifiable
Development of IP networks to be complemented by continuing roll-out of data-centric services
All fixed-line telecoms companies, both incumbent and new entrant, focus on capturing business customers' increasing requirements
B2B is core competence of this industry - question is how much of B2B transactions telcos can capture
Transport - Services
The growth and success of B2B e-commerce depends on the transport service providers' ability to offer integrated logistics services
Transportation companies are increasing their investment in information technology and systems to meet customer demand
A key question remains the willingness of the customers to pay a premium for integrated services over commodity products
Utilities have been quick to join B2B portals to minimise procurement costs
Some (Endesa, Enel) have gone further and are driving the development of sector initiative
Company estimates suggest cost savings of about 5%
Buyer and supplier benefits
Buyer benefits: for buyers, B2B e-commerce promises savings through reduced product costs, lower procurement costs, and reduced inventory carrying cost. Buyers will be able to optimise internal processes on the back of B2B e-commerce, increasing the level of self-service and purchasing policy compliance. The increased level of information and transparency in the digital world will allow buyers to make better-informed purchasing decisions.
B2B e-commerce will provide suppliers with an additional sales channel that will be particularly useful in highly fragmented markets with many potential buyers. In addition, the Internet allows companies to extend their geographical reach. This should principally benefit small and medium-sized suppliers. We expect B2B e-commerce also to help suppliers reduce the cost of order entry, management and execution, and improve customer service.
Collaboration benefits: B2B companies provide a platform that enables supply-chain collaboration. The benefits are reduced inventory costs, increased operational efficiency, reduced logistics costs and improved time to market. Supply-chain collaboration will aid production planning, capacity planning, demand forecasting, logistics and inventory management.
The European B2B sector
B2B e-commerce penetration and adoption will vary by industry segment. We have adjusted our base-case assumptions for B2B e-commerce penetration of 25% and adoption time of five years according to our assessment of the suitability of each industry sector for B2B e-commerce. We looked at four variables: industry fragmentation, IT adoption, number of steps in the supply chain, and product characteristics. We include a detailed overview of our estimates of B2B e-commerce adoption by major industry sectors in Europe.