New Phase for E-Commerce As Market Models Gain Complexity

03 July 2000 00:00  [Source: ICB Americas]

By Joseph Chang

The proliferation of chemical industry e-commerce entities over the past two years has made the landscape increasingly more complex and multidimensional. While there is tremendous cost savings and profit potential for chemical companies using e-commerce, a comprehensive and clear e-business strategy may be years in the making as the coming shakeout unfolds.

At stake is an estimated $170 billion in chemical industry transactions (10 percent of total chemical transactions) over the Internet by 2003, according to Principia Partners, an Exton, Pa.-based chemical and industrial consultancy.

Chemical companies have been evaluating and experimenting with a host of e-commerce business models and are just starting to develop and implement e-business strategies this year. Understanding all the different models and their benefits will be critical to success, as more and more business is conducted through the Internet.

"A number of models are available to reach the market and make producers more efficient and profitable," said Lou Rossi, director of the e-commerce practice at Principia Partners, at a conference call hosted by Chase H&Q analyst Frank Mitsch. "However, in the end, it will be the customers [of chemical companies] who decide which business models will win and migrate to those channels that meet their specific buyer needs and values."

The current e-commerce landscape can be categorized into four business models: e-distributor, auction/exchange, aggregator and e-marketplace (see chart).

The e-distributor approach was one of the early offerings and is centered around providing a catalog of standard products and a basket of value-added, buyer-centric services.

"A specialty product sold into a fragmented market allows the e-distributor model to create value to the buyer who may have smaller volume needs and value-added service requirements for technical support and even material handling issues," says Mr. Rossi. "Value is also created for the seller who cannot adequately cost-effectively serve fragmented groups of smaller customers."

The auction/exchange model is positioned to provide both forward auctions (many buyers, one seller) and reverse auctions (many sellers, one buyer), as well as a platform for completing transactions on a bid-ask basis. This model provides a dynamic trading platform for fungible commodity and intermediate chemicals and in effect acts as a spot market for buyers and sellers.

Both CheMatch.com and ChemConnect, who conduct auctions, filed for IPOs (initial public offerings) last March to raise funds. However, in light of the carnage that has taken place in the overall B2B sector over the last few months, Mr. Rossi estimates that the IPOs could be between six to nine months away.

The aggregator model involves getting many customers or suppliers of similar chemicals together to increase their buying or selling power. An example of an aggregator is fobchemicals.com, which enables its customers to form buying groups for similar chemicals, effectively aggregating their buying power.

"The aggregator model is ideally suited for the smaller volume buyer," says Mr. Rossi. "Here, order bundling gives the buyer pricing leverage and helps the seller manage production based on buyer purchasing patterns."

The most recent entry into the e-commerce landscape is the e-marketplace, which is comprised of chemical companies seeking to provide transaction capabilities throughout the entire supply chain as well as clearinghouse services such as financial backing and credit. Players in the e-marketplace include Envera (announced in March) and a yet-to-be named e-commerce company initially formed by 12 companies in May. Both companies plan to launch their platforms this summer.

"Many of the e-commerce providers blend a variety of each of these business models to differentiate themselves and deliver a complete package of services to both sides of the transaction," notes Mr. Rossi. "Each of these business models has its rightful place in the overall market."

While there is a place for each of these models, the big winner is likely to be the e-marketplace set up by chemical companies--"the 800-pound gorilla," according to Principia's recently completed study. He estimates two-thirds of all online transactions will go through this model. "In the end, the chemical companies hold the cards--product technology, manufacturing, logistics and customer relationships."

Chemical industry leaders in e-commerce include DuPont, Dow, Eastman, BASF, Rohm and Haas, Air Products, Geon and GE Plastics. However, the early lead may not be much of a lead at all. "It appears to be very early in the game to ascribe an investment decision as to who is in the lead and who is going to dominate in the next few years with the industry nowhere near approaching maturity," says Chase H&Q's Mr. Mitsch.

Indeed, the coming shakeout in chemical e-commerce could take between a year and a half to two years, according to Mr. Rossi. "There are about 60 to 65 players in the space focused on the chemical industry," he says. "That would tell you there are going to be a lot of casualties."

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