IBM links with tech giants for industry exchange

As first reported by CNET News.com, the companies, including IBM, Hitachi, Nortel Networks, Seagate Technology, Solectron, Toshiba, LG Electronics and Matsushita Electric (Panasonic), plan to create e2open.com, a new online marketplace that will be developed by IBM and software providers Ariba and i2. The marketplace is expected to open by mid-July, the companies said in a statement.

Gartner analyst David Hope-Ross says the Federal Trade Commission and other regulatory bodies represent only one of a number of uncertainties for the new business-to-business exchanges. see commentary

The participating companies claim they account for approximately $700 billion of goods and services bought and sold in the electronic components industry.

In recent months, a number of rival companies have linked arms to develop industry marketplaces in fields such as autos, aerospace, steel and chemicals. Participants are hoping to eliminate inefficiencies in the purchasing process by combining their buying power to drive down costs when dealing with suppliers. Proponents of these massive marketplaces, or trading exchanges, claim that companies could save millions of dollars by moving their supply chain online.

While giants such as Boeing, DuPont, Ford and General Motors were some of the first companies to form an industry marketplace, the business model is still in its early stages of development and raises concerns about the potential need for government regulation.

Industry analysts and government officials are debating whether the Federal Trade Commission should establish some form of oversight of business-to-business marketplaces. Those in favor of regulation argue the expected size of the market requires that some guidelines be established to prevent collusion or other anti-competitive practices. Any oversight legislation is likely to meet with resistance from the technology industry, however, which has vociferously opposed government regulation.

Andrew Bartels, an analyst at Giga Information Group, said the FTC inquiry in some of these vast business exchanges will have a greater impact on those exchanges owned by suppliers versus those created by buyers.

"The FTC is clearly looking at these exchanges from the point of view of the anti-competitive impact, " said Bartels. "The (anti-competitive) concern is greater by exchanges owned by a consortium of sellers--that creates more collusion among companies."

The FTC is looking into exchanges developed by a consortia of buyers as well, but "not necessarily with the intent that these are bad per se, but to really make sure that they, in fact, don't become anti-competitive," said Bartels.

The largest exchange announced so far--but still not operational--is Covisint, a 5-month-old automobile industry consortium formed by General Motors, Ford and DaimlerChrysler to connect the world's top automakers and their 30,000 suppliers. The marketplace is expected to have annual transactions valued at more than $300 billion.

In February, database software giant Oracle unveiled a venture with retail giant Sears Roebuck and French retailer Carrefour to build an online marketplace serving the retail industry. Sears and Carrefour will initially share a majority stake in GlobalNetXchange, which will link them to their 50,000 suppliers, partners and distributors over the Internet.

Despite such grand announcements, few marketplaces have started operations. Roughly 85 percent of all virtual marketplaces that have been announced in the past year--typically with a blast of marketing and public relations bombast--are not yet operational, industry insiders said.

Today's news comes on the heels of a similar consortium led by IBM rivals Hewlett-Packard and Compaq Computer. Last month, HP and Compaq, along with 12 other PC and semiconductor companies, said they will create a separate company to manage a marketplace where high-tech companies can buy and sell components, completed computer systems and other electronic products via the Web.

"This is a game right now where lots of people are coming out with similar ideas," added Bartels. "Arguably, this (new marketplace) is closer to availability over some others (that have been announced) because IBM is building on their own purchasing network that it has already been using. It's not starting from scratch."

The founders of e2open.com intend to contribute up to $125 million in equity capital to the new marketplace. The companies said the new marketplace will launch with more than $200 million in financing, which was partly raised by financial partners Crosspoint Venture Partners and Morgan Stanley Dean Witter.

The new marketplace will be hosted and built by IBM Global Services, the consulting and systems integration arm of Big Blue, and use software from e-commerce software makers Ariba and i2, whose supply-chain software automates and manages the purchasing and inventory process.

IBM recently took equity stakes in both Ariba and i2 in its move to aggressively tackle the booming business e-commerce market. Leading research firms have the business-to-business market pegged between $2.7 trillion and $7.3 trillion by 2004 from about $131 billion in 1999.

e2open.com is being led by acting chief executive John Mumford, a founding partner of Crosspoint Ventures. The company said it will begin filling out its management team immediately.