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But now the computer business is starting to move on the e-marketplace front -- particularly the 12 companies that joined forces on May 1 to create an independent company, ehitex.com. And though they might be late to the game, some observers think they may be creating a blueprint for the e-future. While many other exchanges were created by groups of buyers intent on putting the squeeze on their suppliers, ehitex is an egalitarian mix of suppliers, buyers, and other industry players. Included are computer makers Compaq, Gateway, Hewlett-Packard, and NEC; chipmakers AMD, Hitachi, Infineon, and Samsung; disk-drive makers Quantum and Western Digital; and contract manufacturers SCI Systems and Solectron. Says Blake Johnson, a professor at Stanford University's engineering school: "They're taking a very enlightened approach to level the playing field for everyone. COMMON PROCESSES. The groups' idealistic goal: to take cost out of the PC industry supply-chain, to the benefit of all. That means providing an electronic means to buy and sell parts, without the need of time-consuming faxes and phone calls, or expensive electronic data-interchange systems. But more important, ehitex members say they'll commit to a common set of internal processes -- for instance, how to report forecast data -- now being defined by an industry consortium called RosettaNet. "This isn't about beating up on suppliers, because frankly, we've already done that," says Dan Schmickrath, HP's vice-president for manufacturing. "The only thing left is to take waste out of the equation." Questions abound about whether ehitex will work. The technical challenges of linking so many large corporations together are daunting. And many of high-tech's heaviest hitters aren't quite sure what's in it for them. Seagate CEO Stephen Luczo, who has been knee-deep in an 18-month project of his own to improve Seagate's supply chain, doubts fierce competitors will expose or give up internal processes that have given them competitive advantage in the past. "If everyone decides not to include the stuff they view as strategic, it's just about buying paper clips," he says. DANGEROUS JOB. But ehitex's member companies say the benefits of tightening up the PC supply chain far outweigh any risks. And there's plenty of waste to be gotten rid of. Thanks to the PC's relatively high sticker price and the stomach-churning rate of market change -- new products rarely live more than three months and are fairly worthless after a year or so -- managing stocks of PCs and parts may be the world's most dangerous inventory management job. Just ask Compaq, which is only now showing signs of coming out of a funk that started with a huge inventory glut in early 1998, or Western Digital, whose stock has plummetted from $50 to $5 since suffering a big write-down in September, 1997. The idea of a computer e-marketplace has been circulating for a while. As early as March, 1998, HP procurement experts were working with Stanford University professors on the subject. And in February, 1999, HP christened an internal pilot program called tradinghub.com. It proved an instant hit. In its maiden transaction, HP offered a batch of excess microprocessors -- and got a price that was 44% higher than the best bid made the old-fashioned way, by phone or fax. Since then, HP business managers have made 100,000 deals with 250 companies through tradinghub.com, often to find scarce parts in a pinch or to sell off extra inventory. It was a good start, but the site's managers soon decided that it would be far more powerful if the entire industry were involved. HP was hardly alone in its thinking. By last year, companies such as Compaq, WD, Solectron, and chipmaker Samsung Electronics had also set up internal efforts to determine an e-marketplace plan. And as the B2B craze took off last year, possibilities were everywhere. Solectron fielded more than 100 offers to participate or invest in e-markets of all sorts. "We were getting bombarded, but we turned them all away," says Philip E. Fok, director for corporate operations. "They'd come in and say, 'you can make $1 billion on our IPO.'" But none had a formula to help Solectron with its most pressing need: streamlining its links to suppliers and customers. "I wouldn't even call it smoke and mirrors," says Fok of these schemes. "It was more like total vapor." INDUSTRYWIDE EFFORT. By December, 1999, more companies were beginning to think an industrywide approach was the way to go -- particularly Western Digital. That fall, the company had briefly tried to organize an e-marketplace just for the disk-drive market. But computer makers quickly put the kibosh on that. "Our customers didn't want to deal with a drive exchange and a microprocessor exchange and 10 other exchanges. That wasn't efficient," explains Wolfgang Nickl, who ran the effort for WD. So Nickl and his team looked more closely at an industrywide effort. And the more they looked, the more they liked it. For starters, with drive prices already so low, PC makers had more to gain from supply-chain improvements than from squeezing a few more pennies out of procurement costs. And while the Big Three auto makers might be able to start price wars among the thousands of auto-parts suppliers, the PC business is dominated by roughly 30 customers and 30 key suppliers. What's more, WD decided it would be better to help set the ground rules than wait for PC makers to do it. "This was going to happen one way or another, and it would be wiser take a leadership role rather than have it happen to us," says WD CEO Matt Massengill, who gave Nickl a $100,000 budget and a five-person staff to round up industry support. WD soon made contact with luminaries such as Compaq Chairman Ben Rosen, Gateway CEO Jeffrey Weitzen, and AMD Chairman Jerry Sanders. In March, seven companies -- Gateway, AMD, WD, Quantum, contract manufacturer Celestica, and middle managers from Compaq and HP -- met at a hotel at San Francisco Airport to discuss the basic structure. At a second meeting on Apr. 19, Nickl made a comprehensive presentation laying out the potential cost savings for member companies and details of how the effort might be organized -- complete with a projected profit-and-loss analysis. By then, more powerful forces were already at work. In early April, HP's Schmickrath -- who hadn't yet been told of WD's efforts -- decided to launch HP's own industrywide effort. He convinced CEO Carly Fiorina to do the recruiting. Her first call, on Apr. 9, was to Compaq CEO Michael Capellas, who quickly agreed. Without even asking for approval from his full management team, Capellas arranged for an all-day meeting the next day. By the end of Apr. 11, the basics of the deal were set. "It was like spontaneous combustion" between Capellas and Fiorina, says George Devlin, Compaq's vice-president for operations.
From there, things happened quickly. With rumors of an IBM-led e-marketplace running rampant, 15 companies convened at a hastily called powwow on Apr. 27. The meeting lasted four days, through an entire weekend. The goal: To lock down enough details so that an announcement could be made on May 1. Not everyone was sold on the idea. Seagate, Intel, and Dell participated but refused to sign up in time for the press event. But participants say it was then that many of ehitex's more egalitarian principles were laid in cement. It was decided the e-marketplace would be set up as an independent company, with each founding company getting equal equity stakes and voting rights. EVERYBODY WELCOME. It was decided that any company could trade on the e-marketplace, whether or not they joined as founders. Not only would that make for more accurate, useful market information but it also would mean more revenue for the e-marketplace, which will take a 1% to 5% commission on all transactions. What's more, companies were given an incentive to put their money where their mouth was and actually use the e-marketplace: Those that pump more of their wares through it stand to get warrants for rights to future equity. Most important, the group discussed future plans to fold in services that go far beyond basic buying and selling. Those basic e-procurement capabilities will go live on Aug. 1. But by yearend, ehitex hopes to begin launching so-called collaboration services, to enable companies to get connected more closely. Of course, ehitex still has to bring off its ambitious plants. The company has yet to name permanent executives to run the unit or to unveil its technical plans. Finding a common infrastructure of computers and B2B software capable of melding these companies together will be a huge challenge. And some observers worry that its egalitarian organizational structure may slow progress to a trickle. "Management by committee is usually deadly," says Stanford's Johnson. DUAL CITIZENSHIP. And to establish the critical mass to become the industry's main e-market, ehitex needs to increase its membership. Insiders are confident that Intel may soon join, and member-company executives are recruiting consumer-electronics manufacturers like Philips as well as electronics distributors. As things now stand, most observers doubt ehitex will dominate any time soon. IBM did in fact announce its own operation on the same day as ehitex did, and some ehitex members -- particularly chipmakers -- say they're likely to join that as well. While Seagate's Luczo says his company may yet join ehitex, it wouldn't be the only such move. "The question isn't which one we'll join, but how many," he says. Still, many industry insiders think these e-markets may well merge into one über-market over time. If ehitex can execute on its ambitious plans, it may just help determine the future of how high-tech operates. |
