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Vertical E-Markets and Marketplace Creators

E-market exchanges and electronic trading communities tend to be focused on either vertical or horizontal markets, so it might be worth looking at the distinction between the two. Vertical market trading communities tend to focus on one particular industry—steel, paper, electricity, paper, chemicals, home loans—and are usually sponsored, or at least supported, by one or several of the leading companies in that area.

There are hundreds of examples of vertical markets. The chemical industry, for example, has shown early leadership in developing online marketplaces, with more than 50 announced e-markets, which range from simple online auctions to complex virtual distributorships that service entire continents. They have an advantage over other vertical industries in that chemicals for the most part adhere to well-accepted international standards in terms of naming, quality, content, and quantities, thereby making online auction-type purchasing—where the buyer may have no personal contact with the seller and therefore must be certain of exactly what is being purchased—easier. Other vertical industry areas that have rushed to develop e-marketplaces include automotive, energy, high-tech manufacturing and electronics, communications, publishing, metals, aerospace, financial services, healthcare, and many more (see Figure 6.5).

Figure 6.5 B2B e-commerce forecast by industry. (Source: The Gartner Group as printed in "Electronic Trading Is Expected to Surge," The Financial Times, October 18, 2000.)

An interesting phenomenon has occurred in this area that has surprised many industry watchers and analysts. A testament to the radical changes that the Internet can bring about, many of these vertical e-market trading communities are now being sponsored jointly and collaboratively by large and powerful industry leaders. Often long-time rivals, these market creators, as they have become known, have—by virtue of their industry experience, extensive business connections, and financial clout—quickly risen to critical mass to become the dominant leaders within the vertical industry electronic marketplace.

The Covisint alliance between Ford, General Motors, Daimler-Chrysler, and Renault-Nissan is probably the most famous example. This massively powerful collaboration involves 750,000 tier-three and tier-four suppliers, 50,000 tier two suppliers, and 1,500 tier one suppliers, all tied to 14 vehicle manufacturers. As a reflection of the influence and power of this group, in return for installing the robust and sophisticated procurement platform, Commerce One will be paid not only a good amount of cash, but will also collect a portion of Covisint's gross revenues for 10 years, and get a 2% equity stake in the venture. In return, GM and Ford will share an equity stake in Commerce One worth $1.23 billion2.

In high-tech manufacturing, a group of 12 important industry leaders, including Hewlett-Packard, Compaq, NEC, Gateway, Hitachi, Samsung, and others, have joined together to form an electronic trading community that will focus on the estimated $600 billion high-tech components and parts market, and will offer open sourcing, auctions, and supply planning and logistics support.

In chemicals, giants such as British Petroleum, Dow, Shell, BASF, Bayer, and DuPont have formed an online chemical trading community that provides for exchange of virtually any chemical-related item, from broad procurement to key product areas such as plastics and laboratory chemicals. There are announced sites for agrochemicals, bulk chemicals, and custom-made chemicals, for shipping and logistics services, for trade of excess inventory, and for special geographical areas such as China, India, Singapore, and Europe. And although trading volume is still comparatively small, online transactions are growing rapidly, and these exchanges are already beginning to link with other online markets—such as automotive and aerospace—with which they share a large number of customers.

The retail industry has seen a similar scramble among long-time competitors to create consortium-sponsored exchanges. Sears joined up with France's Carrefour and five equity partners to set up GlobalNetXchange, and were quickly challenged by the WorldWide Retail Exchange, made up of 11 other prominent international retail firms, including Safeway, Target, Kmart and CVS from the U.S., Tesco and Marks & Spencers from the U.K., and Casino from France. Over 1,000 suppliers have been invited to join in the exchange, and although in real terms trade online is still very small, both groups have announced plans to provide members with services that include collaborative planning, supply chain, and logistics services. Similarly, giants such as Georgia Pacific, International Paper, and Weyerhauser have allied to form an exchange that is focused on the paper industry.

There are also any number of cross-industry alliances developing. DuPont, Cargill and Cenex Harvest are putting together Rooster.com as a vertical exchange to provide seed and equipment to farmers and to help them sell their crops online. Even professional services companies such as PriceWaterhouseCoopers have launched a B2B marketplace consortium that provides an exchange for purchase of ORM goods and services.

These enormously powerful industry coalitions—and there are already more than 60—have essentially overwhelmed the online marketplace industry, driving smaller sites out of business and making viable exchanges pause in their development, waiting to see where the intervention of these large market creators will take their particular industries.

In many ways, these vertical industry e-markets have an advantage over the horizontal or cross-industry trading exchanges, in that the sponsors, as both buyers and (if manufacturers) sellers themselves, will tend to reap a huge benefit from the efficient provision of supplies to their industry. Many industry watchers contend that vertical industry online exchanges, based on their combination of industry knowledge and collaborative organization, don't even need to make a profit in order for all participants to benefit.

In fact, the threat of future antitrust legislation still looms over these large consortium electronic markets. The idea of long-time competitors sharing not only part-ownership in an enterprise, but also sharing pricing and supply information, to many sounds off alarm bells in terms of price fixing bias and antitrust dangers.

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