Believe All the Hype About B-2-B, It's the Real
Thing
Friday March 03 05:59 ET
By Pierre Belec
NEW YORK (Reuters) - The New Economy is changing at the speed
of light. The latest thing to set Wall Street spinning is the explosion of
business-to-business e-commerce.
B-2-B commerce -- in which companies buy and sell goods and
services to each other via the Internet, instead of over the phone or by
mail -- are turning the business world on its ear.
Companies are cutting the cost of doing business, slashing purchasing
and other administrative expenses. And, for those that get it right,
B-2-B will create a lot of winners and happy stockholders.
The nation's oldest names have seen the future and they don't want to
be caught with their bottom lines down. These giants have rejected the
notion that because the Internet is so young it's too early to tell how
important it will be for the economy.
The spread of business-to-business commerce is also a wake-up call
for Federal Reserve Chairman Alan Greenspan, who's scratching his
head, trying to figure out what's making this New Economy tick.
"If B-2-B efforts succeed, the fruits could be unprecedented heights of
profitability," says Greg Smith, chief investment strategist for Prudential
Securities.
The benefits are indeed huge. E-commerce allows the companies to
use up less of their precious capital to run their businesses while at the
same time saves them buckets of money when they buy stuff.
"Such a combination is pretty powerful and would go a long way
toward explaining why so many companies have been so highly valued
in the stock market, particularly in the B-2-B applications area," Smith
said.
Financial news wires have been buzzing over the last two weeks with
announcements of Internet deals by the richest U.S. companies.
U.S. car makers plan to build the world's biggest B-2-B online
marketplace, an Internet-based supply chain network with a critical
mass of buying power.
Ford Motor Co., General Motors Corp. and DaimlerChrysler AG
(GM.N) (F.N) (DCX.N)(DCXGn.DE) are setting up a super auction
site to buy the $250 billion worth of parts they need each year,
abandoning a 100-year old system of doing deals.
Sears, Roebuck & Co. (S.N) and Carrefour Supermarche SA
(CARR.PA), two of the world's largest retailers, and software giant
Oracle Corp. (ORCL.O) are launching the first global
business-to-business online exchange for the retail industry, targeting
the $3 trillion retail market.
The B-2-B exchange, which eventually will be opened to other
retailers, will dabble in apparel, food and other consumer goods. Sears
and Carrefour buy $80 billion worth of goods from 50,000 suppliers
each year.
USX Corp.'s U.S. Steel Group(X.N), the nation's largest steel maker,
has bought a stake in B-2-B steel exchange e-STEEL Corp. and will
sell a full range of products through the site, which has 1,300 member
companies in 65 countries.
"Many of our large customers are saying that they are going to
Internet-type purchasing and they're telling us 'You will do business
over the site or else we'll just mail in an order to you,"' said U.S. Steel
President Paul Wilhelm. "This is the way people will have to do
business in the future and they'll have to recognize that, and get about
getting it done."
Even oil companies are tapping into e-commerce to save billions of
dollars on pipes and engineering services. Chevron Corp.(CHV.N),
Texaco Inc. (TX.N) and Royal Dutch/Shell Group (RD.AS) (SHEL.L)
have each started e-commerce sites this year.
Andersen Consulting has estimated that the oil companies' profits could
jump between 5 percent and 20 percent for every 5 percent they reap
in savings.
The Boston Consulting Group estimates that one-fourth of all U.S.
business-to-business purchasing will be done on line by 2003, It says
between 1998 and 2003, American business e-commerce will grow by
an eye-popping 33 percent a year and reach $2.8 trillion in transaction
value, up from today's market of $2 billion.
Also, industry experts say e-commerce, which currently accounts for
some 0.2 percent of the nation's gross domestic product, could see
that number grow to 10 percent in five years.
Smith said the companies that have been quick to jump on the Web
will show results as early as the middle of this year.
And, the Web-oriented players are creating compelling stock stories.
The big winners will be software makers that crank out B-2-B
technology.
"This is not a one-year phenomenon," Smith said. "This is not like Y2K
that will burn out quickly one way or the other. It's a new agenda for
business to push the whole business model to a new level of efficiency
and ... the process could easily run five to 10 years."
He said the returns on investments from B-2-B are big, really big,
ranging from the mid-teens to as much as triple digits.
"With B-2-B, 20 percent of the cost reduction comes from lower
transaction costs," he said. "Instead of paper and people, it's electrons
recording the interactions between supplier and buyer."
The remaining 80 percent of the cost savings is shared by both the
buyer and supplier because the amount of inventory and cash needed
to do business is sharply reduced for both.
The car makers, for example, say the online marketplace will cut their
cost by at least 10 percent, chopping the price tag of building a car by
$1,000. Parts account for some $10,000 of the cost of slapping
together a $20,000 car.
The B-2-B revolution will also make it tougher for crystal ball readers
at the Fed to get a true reading on what's brewing in the economy.
Experts say the Internet will change the way the economy works and
inflation indicators such as the Consumer Price Index and Producer
Price Index may become less important.
"When it comes to inflation avoidance, the Fed will still have a lot of
indicators of inflation, but the central bank's impact through the
monetary tightening tool will have much less of an impact because the
economy is so much different," said Allen Sinai, chief global economist
for Primark Decision Economics Inc.
Inflation has been absent from the radar screens for the last couple of
years -- to the amazement of Greenspan and other central bankers.
But their lives could get even more complicated as e-commerce
explodes.
"This poses an interesting question for the Fed: What part will interest
rates play in the attempt to slow the economy if companies' spending
has such high rates of return?" Smith asked.
"So higher interest rates lose their sting," said Smith, one of Wall
Street's brightest investment strategists. "This phenomenon also further
reduces companies' interest costs and makes it more difficult for
interest-rate changes to control growth within the U.S. economy -- at
least on the business side."
Greenspan has been lobbing interest-rate increases at the economy
since last June to slow its remarkable growth, which set a record 107th
month of expansion in February.
The Street believes the Fed is not through raising the cost of
borrowing. The betting is the central bankers will kick up interest rates
a couple of more times this year to dampen consumer spending and
head off what they see as the threat of inflation.
The Fed may have been caught flat-footed by this B-2-B wave and the
bankers seem behind the curve in developing a system to track the
New Economy.
"The change that is going on in the economy is happening very quickly,
in fact, so fast that data cannot be collected fast enough to really give
the Federal Reserve the right scoop on how rapidly the economy is
reinventing itself," Sinai said.
"As a result, the Fed is having a tough time reining in this booming
economy," he said.
The government is starting to acknowledge the technological changes,
which are reshaping the economy. This week, the Commerce
Department unveiled an e-commerce index that will track the
fast-growing e-retail business.
The B-2-B revolution has not escaped the ever-alert stock investors.
They've priced the New Economy's stocks out of this world on
expectations there will of lots of earnings rewards.
"Wall Street, in its usual wisdom, has psyched this one out and, as a
result, money is moving to the technology companies," said Sinai.
"What the market is telling us is that a big portion of the economy is
now irrelevant to the dynamic future of the U.S. and world economies
and investors are reevaluating and pricing up the portion of the New
Economy that does matter," he said.
For the week, the Dow Jones industrial average soared 505.08 points
to 10,367.20. The Nasdaq Composite index jumped 323.27 to
4,914.77 and the Standard and Poor's 500 index gained 75.81 at
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Internet Capital Group (ICGE: news, msgs) had
gone as high as 156 1/16, up 37 points on
Monday.. Robertson Stephens upgraded the stock
to "strong buy", from a "buy" rating. The stock
ended the day up 23 3/16, or 20 percent, to 142
1/4.
"Now is the time to pay attention to the stock," said
Eric Upin, an analyst with Robertson Stephens.
"Valuing ICG is a function of how good is B2B,
how good is their portfolio, and how well they're doing with their
portfolio. It's timing, it's fundamentals, it's valuation."
The company on Wednesday will host an investment conference and
plans to exhibit some of the companies in which ICG recently has made
investments. ICG executives are expected to talk about the company's
portfolio of 50 private companies and also may talk about future
investment directions. ICG has about $1 billion to invest, according to
Upin. He says ICG is working to build relationships with existing industrial
companies.
In addition, the conference will be a chance for many investors to meet
chief executive Walter Buckley and ICG's entire management team. Upin
credits the company's executives for being managers, not just investors.
"You'll see that there's a lot of activity in the kitchen by really smart
people," Upin said.
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