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BusinessWeek: January 17, 2000 |
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News: Analysis & Commentary: The Internet Economy
B2B: The Hottest Net Bet Yet? Business-to-business Web outfits may wind up having even more impact than e-tailers
Now, the Nasdaq and FreeMarkets have both had a sobering setback. On Jan. 4, the same day on which investors began retreating from overpriced e-commerce stocks (page 32), FreeMarkets was dealt a huge blow: GM, the biggest U.S. manufacturer and the company that accounts for 20% of FreeMarkets' revenue, picked another horse to ride into the e-future. The carmaker chose technology from Commerce One, a FreeMarkets rival in which it has assumed an ownership stake. The Walnut Creek (Calif.) software house will create a vast network to handle procurement of everything from staples to steering wheels. But the good news for those betting on B2B is that GM is still gung ho on the concept. And so are companies across the economy. In the middle of the Nasdaq's 229-point Jan. 4 meltdown, a startup called Appnet Inc. saw its shares shoot up 14%, to 51, after it announced a deal to market its B2B e-commerce software with MCI WorldCom Inc. EXPLODING. Whether or not B2B stocks fare any better than other Internet issues, the reason behind investors' interest remains valid: As more and more companies look for ways to do business on the Web, they will invest enormous sums into the technology to make it work. Total sales using B2B e-commerce have exploded from almost zero a few years ago to $114 billion today, according to Goldman, Sachs & Co. And Deloitte Consulting LLC estimates that 91% of U.S. businesses will do their purchasing on the Net by the end of next year. Some 31% do so now. By 2003, Deloitte projects B2B sales will be six times as large as the business-to-consumer market. Behind the investment is the promise of a big payoff. A Federal Reserve Bank of New York study says that in general, the B2B boom could lead to lower prices, higher productivity, and reduced labor costs. David Pecaut, co-head of global e-commerce at Boston Consulting Group Inc., figures that, in manufacturing alone, B2B e-commerce will boost productivity by 9% within the next five years. And a recent Goldman Sachs study concludes that B2B e-commerce could slash processing costs by more than 20% in industries such as electronics and freight transport (table). Business costs overall could fall by as much as 12.5%. How? Consider one small example. At Norfolk Southern Railway, Herman Ricker, an assistant contract manager, used to spend hours calling construction outfits when he needed repair work. The process took days, and he was never sure he was reaching all the best contractors. Now, he does it all on the Net. When he needed repairs on a four-span bridge in Buffalo, Ricker solicited bids over RailNet-USA.com, a Web site set up exclusively for rail contractors. Within days, he had 14 bids, far more than normal. Ricker also figures the process yields more competitive bids, and the time he doesn't spend on the phone he can devote to other projects. At GE, where CEO John F. Welch Jr. has ordered a move to e-processes, B2B technology is being applied everywhere. At GE In formation Services, employees use a system called Trading Partner Network Register to order office supplies from pre-qualified vendors over the Internet. Gary M. Reiner, GE's chief information officer, estimates that making purchases offline can cost between $50 and $200 per transaction because of all the paperwork involved. The cost online? Only about $1. Proponents of B2B say you can do this with all sorts of transactions and in all kinds of companies. The upshot: more productivity and the chance for companies to continue boosting profits without hiking prices. It could even force the costs downward. "The Internet represents the most powerful engine of deflation in the modern era," says Thomas F. Carpenter, managing director of ASB Capital Management Inc. in Washington. No wonder money is flooding into business-to-business technology suppliers and services. In 1999, venture capitalists plowed $3 billion into 200 B2B companies in 1999, more than triple the amount they invested the previous year, according to Venture Economics Information Services. About $11 billion flowed into business-to-consumer Internet companies last year. The momentum is now with B2B, says Venture Economics. "WIDE OPEN." Behind the accelerating investments is the suddenly rapid uptake of B2B technology. For two decades, companies have been using electronic networks to exchange orders and invoices. But until the Internet came along, such setups were costly and limited: You could deal electronically only with a business on your private network. By 1999, only 150,000 companies had adopted these electronic data interchange (EDI) systems, according to Morgan Stanley Dean Witter. Since the 1994 introduction of Web browsers, millions of companies have gone online and can connect to such B2B marketplaces as the construction industry's BuilderSupplyNet.com and the confection industry's CandyCommerce.com. "It's accelerated from a stodgy, closed club to a wide open market," says John Wenninger, a New York Fed economist who follows B2B. Nowhere is the change more apparent than in Detroit, where EDI got its start. In November, Ford Motor Co. and GM unveiled plans to go online with their massive purchasing systems, which each year acquire $80 billion and $87 billion, respectively, in goods and services. Ford has forged a partnership with Silicon Valley powerhouse Oracle Corp. to create AutoXchange, a purchasing system that will use an online auction--a sort of heavy metal eBay--to fill orders. Soon, companies that are not using online technology could be at a disadvantage. Norfolk Southern's Ricker says there's no turning back. He expects to use RailNet over and over again. "It's easier to work in this system," he says. "We're hoping to get more competitive bids." That's a better way to run a railroad--and to keep the U.S. economy on track. Return to top | |
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 TABLE E-Commerce Reduces the Cost of Doing Business ESTIMATED SAVINGS
FROM BUSINESS-TO-
INDUSTRY BUSINESS E-COMMERCE*
AEROSPACE MACHINING 11%
CHEMICALS 10%
COAL 2%
COMMUNICATIONS 5-15%
COMPUTING 11-20%
ELECTRONIC COMPONENTS 29-39%
FOOD INGREDIENTS 3-5%
FOREST PRODUCTS 15-25%
FREIGHT TRANSPORT 15-20%
HEALTH CARE 5%
LIFE SCIENCES 12-19%
MACHINING (METALS) 22%
MEDIA & ADVERTISING 10-15%
MRO** 10%
OIL & GAS 5-15%
PAPER 10%
STEEL 11%
* Analysis compared B2B techniques with traditional business methods, such
as paper, telephone, fax or value-added networks.
** Maintenance, repair, and operating supplies
DATA: GOLDMAN SACHS
Return to top Commentary No Net Taxes: A Break for the Well-Off At this point, it's safe to say that America has embraced online retailing. Cybershoppers snapped up some $10.5 billion in goods in November and December alone, according to Boston Consulting Group Inc. and researcher shop. org. That's only 2% of all U.S. retail sales. But at this rate, online sales could top $144 billion in 2003, says Forrester Research Inc. E-commerce is no passing fad: It is stealing significant business from bricks-and-mortar stores and catalog merchandisers. But since most e-tailers don't collect sales taxes, that's not such good news for the coffers of state and local governments. Scott R. Mackey, chief economist for the National Conference of State Legislatures, figures e-commerce may have cost states close to $1 billion in lost revenues in 1999. BAD POLICY. That's a blip in the $175 billion states collect each year in sales and excise taxes. And with state treasuries in surplus, there's no threat to public finances. But by 2003, the cut could be much deeper--as much as $14 billion, according to the Center on Budget & Policy Priorities, a Washington think tank. Yet many politicians, including Presidential candidates John McCain and Steve Forbes, continue to insist that the Net must remain tax-free to ensure continued growth. "We dare not smother this infant of progress in the cradle," said Forbes in a Nov. 10 statement. The problem is that Net tax leniency, while it may help spread e-commerce more rapidly, is bad social policy. Why? Because the people who now shop on the Net come disproportionately from the upper rungs of the economic ladder--and are the least in need of a tax break. According to Forrester, online shoppers have household incomes averaging $56,320, vs. about $34,000 for the nation as a whole. For families that lack PCs and Net access, the figure is $22,940. The implication is stark. Tax-free Net shopping benefits mostly well-off people and makes the already-regressive structure of sales taxes even more unbalanced. To compensate for the loss in tax receipts, which contribute about 40% of state revenues, governments may have to raise sales taxes. The burden would fall most heavily on people who don't shop online: The poorest 20% of Americans--those earning less than $25,700 per household--which already pay about 3.5% of their income in sales taxes. By contrast, the top 20% earners, who make $75,000 or more, pay just 1.3%. The more these upper-income shoppers buy at the virtual mall, the less they'll contribute to the cost of running public schools, hospitals, and police departments. Advocates argue that collecting sales taxes on Net commerce could choke off its expansion, but the data are far from clear. A 1999 study by Austan D. Goolsbee of the University of Chicago business school calculates that taxing Net sales might reduce the number of e-shoppers by up to 24%. But while many surveys show that saving money is the No. 1 attraction for online buyers, recent Ernst & Young research finds that price ranks well below other factors, such as convenience and selection. Indeed, in a poll by CIO magazine released on Dec. 20, 71% of e-shoppers said they would buy the same amount even if they had to pay taxes. SIMPLIFY. Most tax experts argue that the artificial inequity of a tax-free Net can't be allowed to continue. "Sales taxes should be levied the same online as they are on Main Street," says University of Tennessee economics professor William F. Fox. But forcing Net merchants to levy taxes won't address a more fundamental problem: the patchwork quilt of laws that make calculating and collecting sales taxes difficult for catalogers and e-tailers alike. That's why Fox, Goolsbee, and 112 other academics have called on Washington to lead a simplification of sales taxes--then ensure that they're applied equally to all commerce. That would ease the burden of compliance while leveling the playing field. The Net tax holiday is industrial policy writ large. Some might even call it corporate welfare--this time for tiny startups with gigantic market capitalizations. But the Net Economy has enough traction that such a policy seems too generous a helping hand, especially when it's the poor who carry the load. Return to top |
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