OT General B-to-B comments for Japan:
Monday, May 8, 2000
EDITORIAL: B-To-B Markets Threaten Japanese Traditional Practices
TOKYO (Nikkei)--Late last month, senior executives of Japan's largest trading companies gathered at the head office of ChemConnect Inc. in San Francisco, vying to become the principal Japanese investor in the U.S. operator of an Internet-based market for chemical products.
The rush by trading giants such as Mitsubishi Corp. (8058) and Mitsui & Co. (8031) to invest in this kind of firm symbolizes a trend that is likely to bring about a global pricing revolution and the demise of traditional Japanese business practices.
As business-to-business e-commerce expands in the U.S., new online marts for trading everything from gas supplies to electronic components have emerged. A bevy of newcomers have set up cyber marketplaces for B-to-B transactions in over 50 industries, with more than 30 trading sites in the chemicals industry alone.
These markets are quickly expanding into Japan. By the end of the year, Web-based exchanges will be created across the industrial spectrum. Japanese firms are scrambling to strike partnership deals with site operators, attracted by their market-grabbing power.
ChemConnect, established five years ago, launched full-scale operations of the World Chemical Exchange last year. Within one year, 4,000 companies, including 20 of the top 26 chemicals firms, joined the market, making it the largest of its kind in the world. Analysts believe 20% of all transactions in the 180 trillion yen global chemicals market will be conducted online in four or five years. ChemConnect, which currently handles 20 billion yen worth of transactions a year, is expected to be a leading player.
In the U.S., the proliferation of such markets has led to the destruction of sellers' pricing power. The exchanges enable buyers to quickly and easily compare products and prices, putting them in a superior bargaining position. This transparency eventually leads to cutthroat pricing. In the U.S., where markets were generally open to competition before the development of online exchanges, prices have dropped by 10-20%. Prices, which vary depending on time lags or regional differences, have started to converge into one.
The pricing revolution will have an even greater impact on Japanese industry because of the unique domestic practice of deciding on prices after delivery, usually at the end of the fiscal year. Under the system, sellers give rebates to troubled buyers to help them avoid reporting losses, in exchange for customer loyalty.
This is a long-established tradition in many industries. The very existence of most car dealerships depends on receiving rebates from automakers. The oil industry has been slowly abandoning the practice after suffering a prolonged price war in gasoline supply. Food processors have also begun reducing the amounts paid to wholesalers.
Net transactions are the direct antithesis of this cozy arrangement. They make everything extremely open and aboveboard, and permit no secret deals.
Moreover, the Internet is linking people, money and information around the globe, supplying not only more efficient and cheaper methods of procurement but also financing and information about manpower and logistics.
Industries such as steel, chemicals and construction materials want to launch cyber markets that do not interfere with traditional Japanese practices. But such marts can not be successful because they will only be domestic in scope.
Web exchanges bring together buyers and sellers from all over the world, and local companies can easily buy products from overseas suppliers if Japanese firms do not offer competitive prices. They will transform the way business is done in Japan, probably leading to lower prices, higher productivity and reduced labor costs.
(The Nihon Keizai Shimbun Monday morning edition)
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Copyright 2000 Nihon Keizai Shimbun, Inc., all rights reserved.
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