Tech companies wary of online exchanges
Online marketplaces may be all the rage among old-line automakers and steel companies, but fear of disclosing sensitive information to competitors is keeping some tech firms on the sidelines.
In recent months, companies including Boeing, DuPont, Sears Roebuck, General Motors and Ford have linked with their rivals to form industry marketplaces. Companies are aiming to use their collective buying power to drive down purchasing costs.
Although these large online purchasing houses have been widely touted as the "next big thing" on the Net after the portal craze, some key technology companies--including Sun Microsystems and Oracle--are taking a more cautious approach before joining hands with a close rival.
Make no mistake: Oracle and Sun hope to profit from the online marketplace trend by selling their technology to other firms. But the two high-tech giants--along with General Electric--don't see these large industry marketplaces as appropriate for their own businesses.
The companies say that huge marketplaces shared with competitors could compromise tightly guarded lists of approved vendors. In addition, some analysts say that large, shared marketplaces may not make sense for businesses in highly competitive markets, or at least not for those that compete in fields where the existing purchasing process works just fine.
"There are definitely some organizational issues of having competitors band together (to form marketplaces)," said AMR Research analyst Pierre Mitchell. "The (technology) implementation hurdles are already so great (in addition to) trying to get competitors to play nicely in the sandbox together."
Laurie Orlov, an industry analyst at Forrester Research, said: "Sun and Oracle are examples of companies that are fierce competitors. They'd be the last people to join (a marketplace). Oracle's largest competitors are Microsoft and SAP. Sun's (biggest rival) is HP. I can't imagine a trading exchange to work for any of those guys."
In recent research notes, Merrill Lynch analyst Steven Milunovich wrote that some leading technology companies, namely Sun, Oracle and General Electric, don't believe in massive online trading exchanges, such as those being established by GM, Ford and DaimlerChrysler, as well as the most recent one unveiled by Hewlett-Packard and Compaq.
Milunovich noted that Sun views its approved vendor list as "top secret" and can't understand why HP would want to share information with Compaq, nor can he understand why Ford would want to share with GM. Instead, Sun believes it makes more sense to set up its own private auction exchange to ensure privacy and to keep its top vendors under wraps, he said.
Sun executives were not available for comment, but Sun spokeswoman Ann Little said the company does not disagree with Milunovich's report.
Jeff Demarrais, a spokesman for GE, said the company will not enter an industry marketplace with its nearest competitors, in part because GE consists of numerous business units, ranging from aerospace equipment to health.
Meanwhile, Oracle executives said the company most likely will not join a software industry marketplace with top rival SAP, because an online marketplace for that specific industry would not make much sense.
The database software giant sells its own Internet procurement software which allows companies to conduct business and fulfill order transactions with their partners and suppliers over the Net. Oracle already operates OracleExchange.com, its own online marketplace for the procurement of goods and services.
Oracle argued that 
a massive marketplace or trading exchange makes more sense for industries that are highly fragmented, such as the automotive business, which spends more than $300 billion annually on supplies and conducts business with some 30,000 suppliers.
"It's different in the software industry," said Vance Checketts, senior director for Oracle Exchange. "We don't have the same constraints that we see in other (fragmented) industries. It doesn't make it that obvious for us to do that type of exchange."
AMR's Mitchell added that despite the hype, most large companies will realize that sticking to their existing corporate purchasing systems or creating a private exchange will work just fine and can help most wary companies avoid some of their data security fears.
Private exchanges can vary from a hosted procurement system provided by one company to its customers and suppliers, such as the one being created by Ariba and Bank of America, to a more simplistic, private extranet where one company collaborates with its supplier base for its purchasing needs.
"There's a major privacy issue," Mitchell said. "Even if you do get competitors to work for the common good (of saving money), getting past some of those real-world privacy issues" will be a challenge.
"Even though technology providers do address it, there's still that fear and uncertainty that's leading a lot of people to not just want to jump into these things," Mitchell added.
AMR analyst Bruce Richardson said that unlike the repetitive products and goods acquired by giant buyers, such as those that build cars or airplanes, high-technology companies are competing in a field where advanced planning and inventory scheduling is nearly impossible. Because technology is rapidly evolving, what is in high demand today may be on its way out the door within months or weeks.
"Product life cycles are so short in high tech," Richardson said. "No one can do a good job of foreseeing product and demand" when it comes to technology.
Still, leading technology players are moving quickly to establish a viable presence in the heavily touted market for business e-commerce--a market that analysts project will surpass the trillion-dollar mark by 2004. Most of the recently announced marketplaces are simmering in the early development stages, and according to numerous critics, they have a turbulent road ahead.
"The idea of a shared procurement environment that the automotive guys are doing is a win-win for suppliers if they can...get better prices from the buyers or...if manufacturers can have secure access to suppliers and information--and if they can operate (the site) in an economy of scaleable infrastructure," said Forrester's Orlov. "But there's a lot of 'ifs.'"