Connectivity Becomes a Defining Business Model for Chemical E-Biz

22 January 2001 00:00  [Source: ICB Americas]

By Bo Glasgow

The emphasis in chemical e-business is now centering on connectivity, with the auction and exchange markets more relegated to the periphery of attention. Several companies, such as Elemica, Envera, Omnexus and OneChem, have opted for a business model that focuses on facilitating the links between customers and suppliers.

Analysts point to the shifting patterns in chemical e-business. It has become rather obvious that the need for and idea of an independent, third-party exchange proved a less viable mainstream proposition for both suppliers and customers, explains Mark Gulley, securities managing director and specialty chemicals analyst, Banc of America. The analyst points out that the trend has decidedly migrated in the direction of "collaborative commerce" centered around "consortia" of industry powerhouses.

Industry observers say that a so-called "hub with spokes," which adopts the business model of providing a central point of connectivity by linking the enterprise resource planning (ERP) systems of customers and suppliers is consistent within the transactional activity of the chemical industry.

An ERP-to-ERP hub seeks to service the roughly 85 percent of business that is tied to long-term contracts under long-standing relationships. This contrasts to auctions or exchanges, which target the spot market, which accounts for only between 10 to 15 percent of chemical industry sales.

The aim of ERP-ERP hubs or other dot-coms focused on the supply chain is to reduce costs. Supply chain costs account for roughly 20 percent of US, Canadian and European chemical industry sales, and analysts see e-business as a way of lowering those costs. Goldman Sachs estimates that eventually some 70 percent of all transactions will be processed by electronic commerce solution providers. Banc of America projects that e-commerce solution providers have the potential of reducing the industry supply costs by $15 billion to $20 billion.

It is these cost-savings that are the underlying target for several chemical dot-coms, such as Elemica, Envera, OneChem and Omnexus.

Elemica, which was founded last August by a consortia of chemical companies, conducted its first transactions in Europe and the Americas earlier this month, with 17 of the company's 22 investors agreeing to be part of the company's phase-one launch, according to Chuck Gruber, vice-president of Elemica. Elemica, which was founded last year by eight chemical companies, is an e-marketplace for the contract buying and selling of chemicals.

Participants in Elemica's beta testing of the chemicals e-marketplace scheduled for the second quarter are likely to include Air Products and Chemicals, Atofina, BASF, Bayer, BP, Brenntag, Celanese, ChemCentral, Ciba Specialty Chemicals, Degussa-Hüls, Dow Chemical, DSM, DuPont, Millennium Chemicals, Mitsubishi Chemical, Mitsui Chemicals, Rhodia, Rohm and Haas, Shell, Solvay, Sumitomo Chemical and Vopak. Mr. Gruber characterizes this founding investor group as "the ones, worldwide, and in different lines of business, which are testing the e-marketplace functionality before we roll it out more broadly." The goal is to end up with an industry "clearinghouse for transactions." Product cataloguing, browser access to service providers and links to spot hubs, such as CheMatch.com, or outside industry hubs, such as the auto industry's Covisint, are also in the offing down the road. Also, a public offering for Elemica may be in the near future. Elemica's Mr. Gruber says, "It's in our charter's governance, and the desired position of most of our investors, to go public within 18 to 36 months of the August 2000 inauguration."

Analysts are generally favorable on Elemica's approach. Robert Koort, specialty chemical analyst at Deutsche Banc Alex. Brown, says that Elemica's investor base certainly represents the "country club membership" of some of the largest and most global companies, and therefore has "both the incentive to trade and the incentive for return on investment."

Sergey Vasnetsov, chemicals analyst with Lehman Brothers, would add to Elemica's proclaimed three-prong principles of neutrality, liquidity and security, the need for independence and rapid decision-making, sounding a cautionary tone that the hub not become "a United Nations without the Security Council veto." He is taking a wait-and-see attitude with regard to execution success.

A common approach among the larger chemical companies is to diversify risk by participating in several e-business models. "Dow and DuPont don't just have one platform; they have multiple pathways in e-commerce. They're not stalling, but, for them, it's not the only game in town," says Mr. Vasnetsov.

The multiple option quandary is an issue many chemical companies are facing. John Aalbregtse, a partner in the chemicals practice of Accenture (formerly Andersen Consulting), heads up an "extended value chain" group that deals with both traditional and e-channels. Accenture is involved with Omnexus and Elemica from both a "business build or on-boarding" standpoint as well as in assisting clients with direct links.

Mr. Aalbregtse notes that on ongoing issue for companies is to "sort through their twin options of public and private marketplaces." With the marketplaces or hubs, he "tends to see an evolution because as separate stand-alone businesses, they need to grow and be profitable." They may find that "ERP-to-ERP connectivity alone isn't sufficient from a growth and financial return standpoint," and may consider "changing their business models to provide other capabilities."

A case in point is Omnexus, an online marketplace focused on delivering products and related services to the plastics industry by providing a single point of connectivity for plastics processors and suppliers. It was intially formed by BASF, Bayer, Dow Chemical, DuPont and Ticona/Celanese last year. "It started off as being just catalog, community and content, but then opted for connectivity," says Mr. Aalbregtse.

The consultant points out the merits of a business model based on connectivity. With the hubs, "execution, liquidity and mastering the complexity" will be crucial, he adds. On the other hand, the advantages to direct links are increased service and collaboration. Mr. Aalbregtse says that a direct connection "squeezes out excess working capital and inventories with collaborative forecasting, and other costs fall away. For instance, there's no ongoing transaction or subscription cost."

Currently, the high cost of direct linkage is "still an impediment, but future technological advances could lower the threshold." From the customer's perspective, however, weighing channel advantages centers around "cost or convenience, flexibility, breadth of variety, ease of use of one spot rather than proliferating websites," adds Mr. Aalbregtse. If, on the other hand, "the customer buys only a limited number of products, by contract, over and over again, he might value the more unique, direct relationship with and services offered by a single supplier," and the more reliable supply source of a private, direct-link marketplace, he says.

Envera, with 11 equity members in tow, including Ethyl Corporation, has been "live" since October. Other investor members include Albemarle, Solutia, Lyondell, Equistar, Mays Chemical, OxyChem, PhenolChemie, Borden Chemical, and Lubrizol.

Richard Chvala, vice-president of marketing for Envera, also asserts that "hub-to-hub connectivity" is inevitable since the object is to "facilitate business."

Another company seeking to improve connectivity is OneChem. OneChem's three-prong approach (application, connectivity and services) results in a sort of ad hoc hub and gives suppliers a practical e-commerce presence on the Web for executing transactions and fulfilling orders, according to Ralph Labarta, OneChem's technology director. For instance, "a customer can go to the Vulcan Chemical website (running on OneChem's software) to place an order off an already existing contract or transact via the hub directly from its ERP system, as in the case of Eastman Chemical to Vulcan. OneChem provides two e-commerce channels supported by the same solution."

Members of the various hubs see "the need for browser-based applications" in addition to hub functionality, in order to deliver "customer care" that may be an integral part of the follow-up to a hub generated transaction, explains Mr. Labarata. Although hubs deliver a highly automated solution, the human factor is still required. "What we're seeing now is a hybrid of traditional and e-commerce ways of doing business," he adds.

Despite an increasing emphasis on connectivity, many industry observers still say spot exchanges will have a role in the market. Envera's Mr. Chvala, along with others, says that there will always be a role for the spot exchanges for selling excess product or commodities via an auction. "ChemConnect has a good business model, and we expect to connect to the sites our members want to be connected to," adds Mr. Envera.

Deutsche Banc's Mr. Koort agrees that ChemConnect and CheMatch.com "have staked out a competitive position to provide a market for spot transactions, either on an auction basis or through a trading exchange." In his view, exchanges are "good for spot pricing, and eventually for trading and risk-management."

However, the recent fallout of some of the chemical or life science dot-coms points to the uncertainty now facing the marketplace, particularly with the exchange model. For example, last month, Ventro Corporation, announced plans to shut down both Chemdex, its life science marketplace and Promedix, it specialty medical products marketplace. Ventro expects to record aggregrate restructuring charges of roughly $380 million to $410 million in its fiscal year end results, which will include the costs of layoffs. Ventro estimates that future cash outlays for operating activities will be reduced by 50 percent after the restructuring is completed.

Chemdex, along with SciQuest, were one of two prominent life science e-business providers. "I wasn't surprised at Chemdex's demise, although a year ago I wouldn't have predicted it," says Lehman's Mr. Vasnetov. "Early in concept, but [it was] not broad enough in design and [was] unable to garner sufficient industry support."

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