Desi business-to-business exchanges will have to offer more than an electronic forum if they are to flourish.

In the West, the B2B space is now reflecting business fundamentals. It is becoming increasingly apparent that there is little value in merely moving transactions on-line. For example, the NYSE makes $75 million net income on a transaction volume of over $7 trillion per year. The real economic benefit from B2B exchanges lies in services around transactions that enable 'real world' reductions in coordination and processing costs, cycle times, and inventory levels.

The winning exchanges will be those that leverage transaction volumes to support supply-chain collaboration. These will effectively be vertical industry collaboration 'hubs' instead of mere transaction facilitators. In fact, industry supply chains are likely to become infotech-enabled via the linking up of multiple vertical (for instance, in the auto industry, auto parts, steel, and plastics) and horizontal (for instance, hr, logistics, and payments) hubs. This will require alliances between technology players and providers of real-world services such as quality assurance, logistics, and payments.

This success formula of broad-ranging alliances will, in general, hold for India and other emerging markets as well. While the size of underlying transactions in markets such as India are lower than in the West, higher levels of inefficiency offer large and attractive savings opportunities in these markets.

The Indian Imperatives

But, there are three important differences. First, B2B in India will have a larger focus on direct inputs as manufacturers buy more direct goods than indirect goods. The US experience suggests that it is harder to trade online in direct goods than indirect ones, as direct goods must often be tailored to a particular production process. This makes buyers cautious about changing the way they buy them.

Second, Indian supply chains are less efficient and more fragmented. Indian firms lag in performance on other indicators of supply-chain efficiency. For example, the inventory in our automotive chain is 50 days, compared to 30 days in the US (See Supply Chain Savings & Price Discovery). Thus, supply-chain savings and price discovery are likely to be more important in India than the US.

Third, weak infrastructure is unable to support e-Commerce. Most Asian countries lack an efficient on-line payments system. Good third-party logistics providers are rare. And neither the mechanisms for managing supplier credit risks nor legal sanctions against bad debtors are well developed. The absence of such infrastructure will be a bottleneck to the development of B2B e-Commerce.

Apart from incorporating elements from the winning, Western B2B model, B2B aspirants should consider the following measures to make India-specific adjustments:

• Target direct goods early. Start with standard commodities, and aim for complex goods later, possibly offering digital asset-management software that allows transfer of engineering designs. Fortunately, marketplaces targeting direct goods can obtain huge savings for members in industries with few buyers. The volume and implied margins of resulting trade may offset the extra cost of targeting direct goods.

• Target supply-chain efficiency. To improve communications in supply chains, marketplaces must connect every link in the chain, using technology compatible with different information technology systems. This is a difficult condition to fulfill and no B2B marketplace in Asia has begun to do this yet. But some incumbents are using web technology to bring supply chains on-line. Transferring such technologies to B2B marketplaces would produce substantially greater savings for members than the automation of procurement processes.

• Target additional infrastructure roles. Marketplaces must play several roles beyond matchmaking buyers and sellers. They must aim to provide inventory-management, financial settlement, global-logistics-management services, as well as quality assurance checks on suppliers. Such additional services, which are best offered through alliances, will help capture more value without necessarily building new assets. To offer members logistical services, for example, a marketplace could ally with existing freight forwarders or eventually join forces with a B2B marketplace specialising in transportation.

The Road Ahead

The challenge in India will be to foster the creation of such services. A combine of industry incumbents and strategic investors will be able to build a complete, full-service marketplace. While the incumbents will provide the liquidity and industry/functional domain knowledge, the investors will provide risk capital to build key support services. Over time, these services can be leveraged to serve marketplaces from other verticals.

Indian B2B exchanges following these guidelines have a good chance of success. There is a lot of inefficiency waiting to be tapped from Indian supply chains. Net-based marketplace technologies provide some, but not all, the tools to address these inefficiencies. Indian companies will need to embrace a hybrid combination of on-line and off-line tools to capture value from their supply chains.

Asutosh Padhi is an Engagement Manager at the Delhi office of McKinsey & Company. Paresh Vaish is a Partner, and Ramesh Mangaleswaran an Associate Principal at McKinsey's Mumbai office.

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