James Calladine: Wall St. Jour: GM selects AT&T ( Newbridge ).
:http://interactive.wsj.com/articles/SB944180090319833275.htm
December 3, 1999
How GM, Ford Think the Internet
Can Make Splash in Their Factories
By GREGORY L. WHITE
Staff Reporter of THE WALL STREET JOURNAL
Forget Amazon.com and eBay. It's General Motors Corp.
and Ford Motor Co. that are leading the charge to
transform Internet commerce from a blip on the
economic radar into the heartbeat of capitalism.
Sure, GM and Ford are icons of the Old Economy,
weighed down with New Economy no-nos like
unionized labor, big factories and huge networks of
tributary suppliers. But that's precisely why the nation's
two biggest auto makers have become e-commerce's
most potent players.
Within hours of each other last month, GM and Ford
rocked Silicon Valley by unveiling plans to set up
massive rival online bazaars for all the goods
and services they buy -- everything from paper clips
to stamping presses to contract manufacturing. "By
the end of 2001, we're going to expect all of
General Motors' purchases to go through this site, and
we would expect all of our suppliers to be as actively
engaged," said Harold Kutner, GM's purchasing chief.
Both auto makers hope to save billions by replacing an
elaborate network of personal contacts and triplicate
forms with a global electronic forum where deals can be
done almost instantly. And both want their suppliers to
use the Web sites to make their own purchases or sell
excess inventory. A company that provides suspension
parts to GM, for example, might use GM's virtual
marketplace to get a more favorable price on steel by
piggybacking on the auto maker's enormous purchasing
power.
Window on Performance
Mr. Kutner says GM can't dictate the prices suppliers
charge to other customers on its Web site, but he expects
them to be lower. He says his company will interpret
slow sales figures on its site as a sign that a supplier's
prices aren't competitive. If that's true, he says, "we may
be looking for a replacement supplier."
At a minimum, replacing some of their purchasing
bureaucracy with online links would allow the auto
makers to reduce the roughly $100 it now costs to
process each of the hundreds of thousands of purchase
orders they issue each year.
At GM, the supplier initiative is rooted in expanding the
global purchasing system it has used in recent years to
wrest discounts from its vendors. To Ford, the Web
represents a critical part of Chief Executive Jacques
Nasser's quest to make the company more responsive to
consumers by delivering information about what car
buyers want to each link in the supply chain.
Economic Side Effects
In the world of e-commerce, the GM and Ford ventures
are the shots heard round the world.
GM spends about $87 billion a year,
working with about 30,000 suppliers.
Ford's purchases are only slightly smaller.
Only the U.S. government is a bigger buyer, industry executives say.
By dragging their vast networks of suppliers online, the
auto makers will be plugging in a big chunk of the
nation's economy. That could help catapult e-commerce
from a roughly $200 billion-a-year business to at least
$1 trillion annually in just two or three years, says
market researcher Dataquest.
GM's Mr. Kutner estimates that his company's site alone
could be handling sales of as much as $500 billion
within a few years. In the world of Internet commerce --
where billion-dollar figures typically apply to
stock-market valuations, not sales volume -- that's a
staggering figure.
Not everyone in Detroit is as sanguine. DaimlerChrysler
AG says it is skeptical of how well the new ventures
will work; it thus far has limited its online purchasing to
a system that allows dealers to benefit from the discounts
the car maker receives from some suppliers.
The sheer size of the new online marketplaces will be a
rigorous test for the young technologies that support
them. In fact, some of the software GM and Ford will
need still is being written. Moreover, there is no
guarantee that suppliers will be able to adapt their own
systems in time, particularly since most deal with more
than one auto maker.
'Faster Than We Thought'
"This is all moving faster than we thought," says GM
President G. Richard Wagoner Jr. It's all the more
remarkable given that until about a year ago, he didn't
even have a computer in his office.
For Mr. Wagoner, the decision to embrace the Web
came slowly. Several years ago, when he had Mr.
Kutner's job as head of purchasing, an investment banker
pitched to him the idea of applying GM's cost-cutting
expertise to other businesses. But with the technology to
make it possible lacking, the idea languished.
Since then, however, the landscape has changed. Last
Christmas, Mr. Wagoner, who took over as head of
GM's world-wide auto operations about a year ago,
watched as the e-commerce phenomenon dazzled the
media. At home, he was hearing about the Net from his
teenage sons.
When the executive returned to work after the holidays,
he ordered Chief Information Officer Ralph Szygenda to
figure out whether GM was doing enough with the new
technology. The answer came back quickly: "We had to
go much, much faster," Mr. Szygenda says.
Mr. Wagoner assigned Mr. Szygenda to lead a task force
charged with producing specific recommendations
within 90 days. He was also to provide a crash course
on the Internet for the Automotive Strategy Board, the
senior managers who run GM. "We really opened eyes
up," he says.
Catching the Fever
By spring, the entire strategy board had caught Web
fever. Strategy board members had their thick briefing
books replaced with presentations delivered via laptop
computers. (Mr. Wagoner says one of them didn't know
how to open his laptop when he first got it.) GM even
decided to introduce e-business performance targets for
all its units.
By early summer, GM was
preparing several major Internet
initiatives, with Mr. Wagoner, as
well as Chairman John F. Smith Jr.
and Vice Chairman Harry Pearce,
solidly behind the effort. Their
long-term dream was to turn GM into a company that
could receive a customer's online order and use the
Internet to have his new car or truck built within a few
days, instead of several weeks. It's a vision that derives
from Detroit's envy of Dell Computer Corp., whose
Internet-powered, build-to-order manufacturing has
made it the nation's leading personal-computer seller.
In August, GM created a new unit, e-GM, to inject
e-commerce into its business from the consumer end, an
effort to be led by Mark Hogan, a veteran of several
high-profile, high-risk assignments at the No. 1 auto
maker. Mr. Kutner was given the task of putting GM's
suppliers online.
Mr. Kutner assigned two lieutenants to determining the
best way to communicate with suppliers online and in
real time, so they could react faster to changes in GM's
production plans. GM's existing Web site for suppliers
was a hodgepodge of reference information and data,
some of it outdated, and software changes would bring
the site down for days at a time.
Within just a few weeks, Mr. Kutner's duo realized that
linking suppliers online offered far greater possibilities
than just improving communications between GM and its
subcontractors. They told Mr. Kutner GM should think
bigger, creating a virtual marketplace where suppliers
could do business with each other. That way, GM could
drive down prices across its entire supply chain.
Pitching the Future
Once Mr. Kutner and his staff had framed the concept,
however, they had to sell it. At GM, getting approval for
major business ventures has traditionally required
navigating a maze of boards and committees, a process
that could have taken more than a year. But prodded by
Messrs. Smith and Wagoner, the company's bureaucracy
tried to move faster, emulating the ways of the wired
world.
Mr. Kutner's two lieutenants set about briefing key
members of the strategy panel, cajoling senior GM
executives' secretaries into squeezing in appointments.
They met Ronald Zarrella, GM's influential North
American chief, outside his suburban Detroit home at
5:30 one October morning, and gave him their pitch in
the back of a car as he headed to the airport.
Their efforts paid off. The strategy board approved the
initiative in late October. It helped that the project,
which required an investment of less than $10 million,
didn't qualify as a big-ticket expense, at least by GM
standards.
As they negotiated the internal approval process, Mr.
Kutner and his team also were vetting the software
companies they might choose as venture partners.
Meanwhile, across town, Ford was embarked on a
parallel course. The No. 2 auto maker had been using the
Internet to communicate basic information to suppliers
for almost two years.
In June, a Ford team that was studying Internet
opportunities presented a computer simulation of the
auto company of the future to Mr. Nasser, the CEO, and
his top managers. The vision was breathtaking: factories
that built to order, eliminating billions in carrying costs;
dealerships reporting warranty problems live from their
service shops so plants could correct any assembly-line
problems immediately; suppliers controlling inventories
at Ford's plants, much as discount retailer Wal-Mart
gives suppliers responsibility for stocking its store
shelves.
"We were mesmerized by the possibilities," says
purchasing chief Carlos Mazzorin. Mr. Nasser ordered
the team to push ahead.
Racing for Advantage
By late summer, Ford and GM were racing to line up
e-commerce partners, as well as suppliers for their
respective initiatives. For Silicon Valley, the auto
makers represented a huge opportunity. Executives at
Oracle Systems Corp. got wind of GM's e-commerce
plans in September and soon pitched their new online
trading-exchange capability to the auto maker. Later,
Oracle brought the same idea to Ford, packaging it as
part of a broader effort to Web-ify the entire
auto-production process.
GM ultimately teamed with Commerce One Inc., a small
Walnut Creek, Calif., company that had tried earlier in
the year to attract GM's interest, with little success. But
by fall, the auto maker's attitude had changed. "They'd
been all over our Web sites," says Mark Hoffman,
Commerce One's CEO. "They're very fast," he adds,
"You just don't expect that out of GM."
The e-commerce rivalry between Ford and GM broke
into the open within a few frenzied hours on Nov. 2.
Ford disclosed its plans at a hastily called news
conference early in the day, announcing its intent to start
negotiating a definitive contract with Oracle. Ford's
news release didn't even give a Web address for the new
site, originally to be called AutoXchange. As it turned
out, the Web address www.autoxchange.com was
already in use -- by an Arizona used-car dealer. Ford
insists it didn't rush its announcement, but it only recently
settled on its venture's final name: auto-Xchange.
GM, which had planned to hold a detailed briefing later
in the week, made its announcement within hours of
Ford's. By the end of the week, GM had changed the
name for its venture to TradeXchange, which officials
said suppliers liked better than the original moniker,
MarketSite. Until its official start-up early next year,
GM's site is operating in demonstration mode through
gmsupplypower.com., its existing site for suppliers.
The signs of haste and confusion surrounding both
ventures didn't seem to faze investors. In fact, Commerce
One's shares jumped 25% after its deal with GM was
announced. The company, which went public in July, has
pledged to give GM -- now by far its biggest client --
warrants for shares valued at $1.6 billion, provided the
venture meets revenue goals.
Now comes the hard part. "The race is in who executes
and makes this operational across the whole supply
chain," says Brian Kelley, the Ford vice president in
charge of most of the company's Internet activities. "It's a
dirty, difficult process," he says.
Ford's partner, Oracle, announced its trading-exchange
software in July and had expected to roll the system out
gradually over next year. Since the deal with Ford,
however, it has put another 100 programmers on the
project to rush out key features like auction capability in
time for debut early next year. Oracle also agreed to give
Ford a financial stake in the growth of its
trading-exchange products world-wide, although the
companies aren't saying how much that could be worth.
For many suppliers, the auto makers' push poses a
serious challenge. If both Ford and GM insist suppliers
do all their business on their proprietary sites, "we're
between a rock and a hard place," says Ray Campbell,
vice president for purchasing at Delphi Automotive
Systems Corp., the auto industry's largest supplier. Some
suppliers also worry they will no longer be able to
charge smaller clients higher prices to make up for the
discounts big auto companies demand.
For Ford and GM, however, the new Web ventures may
present opportunities beyond simply cutting costs. Both
expect the sites to be generating several billions of
dollars in transaction and advertising fees annually
within five years, and neither has ruled out the
possibility of selling shares in them to the public.
"You take one of these things public," says Oracle
President Ray Lane, "and the numbers are just off the
charts."
Write to Gregory L. White Greg.White@wsj.com
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