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BT DOTCOM: COVER STORY
The B2B Sweepstakes

Indian B2B sites are heading for a shake-out, with technology, relationships, and margins acting as obstacles on the long road ahead.

By Rakhi Mazumdar 
with Additional reporting by Aparna Ramalingam and Vinod Mahanta 

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The Indian B2B space teeters between hype and a distant, uncertain, reality. The hype is plastered on every statement proclaiming a B2B e-xchange tapping a global market-size of, say, Rs 30,000 crore or Rs 1,50,000 crore or whatever. New B2B sites are popping up every day, all promising to inform, deliver platforms, disintermediate, and yes, change the way business is done forever. One business consultant (a breed that is feeding, and feeding off, the boom) put it well: ''B2B is about more efficient business processes.'' Another put it well too: ''Building a successful e-xchange is like putting a man on Pluto.''

Somewhere in between, and far ahead on the horizon, lies the enormous potential that e-business presents. Yes, the 'e' in e-business will soon occupy its rightful fifth position in the alphabetical order. And no, it's probably (read: standard escape crutch) not going to redefine the way business is transacted. In the US, Ver. 1.0 of B2B is being punished severely by the markets. ''The laws of gravity, marketing, physics, and economics are not going to change,'' says Mohanbir Sawhney, the McCormick Tribune Professor of E-Commerce and Technology at the Kellogg Graduate School of Management, Northwestern University.

Despite the frenetic activity, the Indian exposure to B2B space is limited. At most, it's a concoction of vortals and e-procurement sites. Vortals have a mix of industry content, besides entertaining request for quotes (RFQs). The next logical step, e-procurement sites, promise multiple bids, approvals, and purchase orders. Sites within an industry (like clickforsteel.com) and across industries (like seekandsource.com) have also emerged. Private e-procurement e-xchanges-a cobbling together of major industry players-are marking their presence, specifically in automobiles and steel.

So, the B2B scenario in India consists of players who have started off with the simplest of models-a catalogue service of requirements and availability of items, that bring buyers and sellers together. Hence, they act as a powerful infomediary, but have limited auction-and no reverse auction-services. Of course, sites like matmanage.com, and steelrx.com are gearing up to offer reverse auctions. Says Amit Bhatnagar, 30, Managing Director, indiaelectricmarket.com: ''We believe that reverse auctions really work when the marketplace matures, that is the entire community is available.''

While some feel there is potential for reverse auctions in India-as it places the burden squarely on the shoulders of suppliers-it's still early days. In the interim, most sites offer homegrown variants of the auction process, keeping in mind infrastructure considerations. For instance, teaauction.com conducts on-line auctions for a few hours on specified days of the week and matmanage.com offers services like sealed bids. And so on and so forth.

Back To The Basics

THE ISSUES

Nature: Fragmented industries ensure better chances of success, per se. In non-fragmented industries, the support of the industry big boys is vital for success.
Culture: Relationship with suppliers is more likely to evolve from that of a trader to a service provider. Some middlemen are at risk. A big question mark for Indian B2B sites.
Technology: To get all this to work, different ERPs need to 'talk' to each other. A common industry standard is needed. Building this backbone right is crucial.
Governance: Collusion is an overriding concern, as is democratic functioning. To ensure transparency, a neutral, third-party management is touted as a long-term solution.
Margins: Ensures visibility and enhances reach for players in the lower rungs of the value chain; there are fears that margins will get affected.

But these broadbased e-xchanges must tackle some basic questions first. Do procurement managers want to trade on multiple platforms with unknown entities, on an adhoc basis, whatever be the savings? By initial reactions to the B2B models in the US, it looks as if firms are concerned about dealing more effectively within existing parameters, relationships, and services, like quality assurance and logistics. ''Specialised sites are a mistake. Companies need one uniform platform,'' says Kellogg's Sawhney.

Such extensions of a company's extranets are already marking their presence, with the dominant players in an industry building e-xchanges on their own. Think metaljunction.com (TISCO, SAIL, and Kalyani Group). Think clickforsteel.com (Essar Steel and others). Think automobiles (where a clutch of eight players, from Maruti Udyog, Telco, and Bajaj Auto to Hindustan Motors, have got together). Apart from automobiles, to an extent, the other industries could hardly be described as oligopolies, though the players are dominant ones.

''By the year 2003, 20-30 per cent of the chemical industry business in India will be done through company-owned sites or B2B portals,'' predicts Chemindia's Aggarwal. Anurag Saraf, 29, CEO, steelrx.com, appears less certain: ''I don't understand how it will work. It's a utopian concept to sell together and still have a happy relationship.''

Saraf has a point. Corporate governance of these e-xchanges is a major issue. If these e-xchanges identify themselves as enablers alone, then they don't have to worry about revenues and governance. But if they do plan to emerge as separate companies, all these issues rise up like surf on a stormy day.

A possible solution is offered here by a breed called the market-makers. Most are managed by third-party firms that play the role of the objective broker. Like satyamplastics.com, Satyam's plastic industry exchange, or steelexchangeindia, built by the steel traders. Satyam Web Exchange is pushing on the pedal, with the objective of hosting 30-odd portals with an investment of Rs 100 crore in the next couple of years. ''We want to do the verticalnet.com model in India. We have designed a platform called netbuilder and we want to be the definitive e-marketplace,'' says A.V. Ram Mohan, 48, President, B2B e-Commerce, Satyam Infoway.

However, most stockexchanges start off as clubs and evolve into democratic bodies. That's a distinct possibility, if the B2B exchanges stay focused on mediating buyer-seller transactions. They will eventually grab volumes, but low revenues and margins. Warns Sawhney: ''There simply is not much value-addition or margin in simply matching buyers and sellers. The real value is in services that are wrapped around the core transaction.''

Technology Trauma

Of course, down on the ground, technology is the core issue. How do you get these e-xchanges to work? Fragmented supply-chains mean the links don't talk to each other. But the problem in compatibility between different legacy infotech systems is not that acute in India, because suppliers are yet to automate their processes. To integrate members, B2B players are designing templates for creating and exchanging documents and developing off-line software. The asp model is also catching on. On the other hand, companies with legacy systems need to get onto a common standard to talk to the exchange directly. Some exchanges are even planning to acquire 'XML convertor engines' to facilitate the process.

Technology enables (on-line) relationships that are linked to the nature of the industry. In theory, e-xchanges should function most effectively in a fragmented industry structure. But it is difficult to imagine a situation in which relationships down the value-chain are scrapped overnight. Take steel exchanges, which industry players feel will work better for buying and selling scrap, or in the case of semi-finished items like billets. After all, nearly 52 per cent of steel trading takes place through long-term contracts. The remaining 48 per cent comes from spot trading. In the long-run, then, these e-xchanges face the tough task of ensuring deals that involve long-term contracts between large plants and buyers.

Real-World Relationships

The first movers

STEEL: Large industry players and intermediaries are getting together. Nearly half of all the steel sold is traded through intermediaries and price arbitrage opportunities vary between 5% and 20%.
AUTOMOBILES: Large players and also component suppliers are joining hands. Significant and diverse procurement needs and an inefficient multi-layered supply chain present good prospects.
CHEMICALS: Large and diverse trade across a number of products and categories presents opportunities for demand aggregation and dynamic pricing.
AGRO-COMMODITIES: Huge inefficiencies and existence of middlemen are prompting large traders and stockists to cut down intermediaries and provide value-added services.

The very nature of B2B e-xchanges examines the role of the middleman. In some industries, the middleman is more than a broker. He often carries inventory by taking the stocks on his books and thus takes credit risk. In India, such relationships are built over time. Why, as transparency is not a virtue in the business process, there is a vested interest in keeping these relationships in place. That's why most e-xchanges insist that real world industry structures stay put. Says Vivek Jhamb, 36, CEO, matmanage.com: ''We are yet to see any buyer-supplier relationship being drastically altered. Both parties still prefer to deal with old customers. The real factor at work here is mutual trust.''

Moreover, as margins get slimmer at each successive level of the value-chain, is an e-xchange an attractive option for suppliers at the low-end? Says Jhamb: ''For people at the lower rungs of the value-chain, the Net provides another marketing channel, and an opportunity to generate a lead at a minimal expense. Hence, it is all the more necessary for them to get onto a platform that ensures visibility among the players at the subsequent higher levels of the value-chain.'' Adds Ram Mohan: ''It's a phenomenal opportunity to reach a large number of buyers at a lower cost. It will be advantageous for the SMEs and will drive the market costs down.''

So, what will work? Sophisticated use of trading communities will only emerge when buying can be integrated into back-end systems. Indian companies have a long way to go in terms of setting up technical platforms. The silver lining is that starting on a clean slate is much easier. Globally, the thinking is moving towards hybrid exchanges-vertical B2B firms providing a complete portfolio of solutions and services to their customers, the established companies linked to horizontal e-procurement sites. Whatever the case may be, the sea of B2B sites in India must be ready to change, and change again-or die.

 

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