Automakers face challenges in getting suppliers online

If all goes to plan, manufacturing companies that supply the world's two largest automakers are about to make one of the biggest technology lane changes in history.

Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
Kim Girard
4 min read
If all goes to plan, manufacturing companies that supply the world's two largest automakers are about to make one of the biggest technology lane changes in history.

In separate agreements announced this week, Ford and General Motors announced they aim to create massive new networks for buying and selling the parts and services needed to build cars and trucks. If both projects are successful, 66,000 companies could jump on the Web, where it could be easier and cheaper to obtain supplies.

But industry observers are questioning whether the two companies hired to move all of Ford and GM's suppliers online have what it takes to get these huge projects up and rolling by the first quarter of next year, as both have promised. The feat not only requires enormous commitment from suppliers, which will need to be convinced they can save money, but also huge technology and applications-hosting capabilities from the companies picked for the jobs: Oracle and Commerce One.

"I wouldn't bet the farm on Q1," said AMR Research analyst John Fontanella.

Online procurement--buying goods and services on the Web--remains comparatively small in scale. Most big industry suppliers rely on proprietary systems that smaller companies often don't use because of the cost. Web-base networks promise to level the playing field, but it's not clear that online systems are yet up to the task.

Database giant Oracle has been hired to build a giant global purchasing community for Ford through a new, jointly run venture called AutoXchange. The unit will handle the $80 billion in business that Ford does with its parts suppliers.

Commerce One, only a fraction of the size of Oracle, is already a scrappy industry veteran in building so-called global trading communities for companies like British Telecom, Eastman Chemical, and Warner Lambert. Though it reported just $17.1 million in revenues last quarter, Commerce One is charged with building an online network for GM's 36,000 parts suppliers.

Using these online communities, the automakers' suppliers will be able to search through catalogs to buy what they need or put out a request on the network to find it. The community initially will be used for buying and selling, and later will provide a forum for online business-to-business auctions and a way for users to search for the lowest price from suppliers when buying parts in bulk. For example, if five Ford motor plants need light bulbs, the AutoXchange could be used to get a volume discount.

The skeptics speak
Pierre Mitchell, an analyst at AMR Research, said he believes Oracle lacks the Internet-enabled procurement and supply chain software required to power the AutoXchange by the beginning of next year.

"They'll be able to power it with [new] 11i applications but [we] don't think they'll have that available until the May or June time frame," he said. "Given that time frame, it's going to be summer before they have the direct procurement or supply chain operational."

Meanwhile, Commerce One will likely need to partner with a large systems integrator, such as EDS, to help it handle the sheer size of the GM project, analysts said. With just 450 employees and 42 customers, there's little doubt that Commerce One will be scrambling to hire more employees to help staff the GM project in the coming months.

Announced just hours after the Ford-Oracle deal, Tuesday's GM deal sent Commerce One shares rocketing to close at $254 a share Wednesday. Chuck Donchess, vice president of marketing at Commerce One, called the surge an indicator that investors have faith in the profitability of the venture.

Donchess said he expects it will be a year before GM has a critical mass of suppliers using the online network, but added he doubts Oracle has the necessary e-commerce platform to beat Commerce One to market on its auto project.

"That's like saying that you can make a baby in three months by throwing three women at it," he said. "Building a global portal [requires] building the portal platform on which this is delivered on. That took us $150 million in R&D investment. We've shown we can do this across multiple industries."

Oracle, which has experience building a network that serves 250 suppliers on the Web, said it's committed to meeting the first-quarter deadline. The company said its revenue model with Ford will be primarily transaction-based, meaning it requires fees from suppliers who use the network.

Analysts said Oracle will likely use the project as an opportunity to cross-sell its software to Ford and its suppliers.

A graveyard of sales technology initiatives?
Of course, even if Commerce One and Oracle succeed, supplier participation is crucial if the online networks are to take off, analysts say.

A Web-based system would help suppliers cut costs as well as democratize business for suppliers, which previously had to sign on to an EDI (electronic data interchange) network for bill payment and presentment if they wanted to do business with the big boys. But both Ford and GM will need to sell the benefits to potential users, who have often been resistant to change.

"The auto industry is the graveyard of sales technology initiatives," said Joshua Greenbaum, head of Enterprise Applications Consulting in Berkeley, California. "A lot of these partners are going 'Oh my God, here we go again.' It's going to take a big selling job to get them deeply committed."

At an analyst conference earlier this week, Oracle president Ray Lane said there's no reason AutoXchange won't become a $1 billion industry very quickly.

Put another way, "When Ford speaks the supply base will listen," AMR's Fontenella said.

News.com's Melanie Austria Farmer contributed to this report.