What future for Europe's B2B markets?

When the share price of business-to-consumer (B2C) ecommerce ventures took a cold bath earlier this year, the smart money immediately rallied behind business-to-business (B2B) electronic trading concerns instead.

Industry watchers predicted that virtual marketplaces would drive much of the growth in the sector by enabling vertical market rivals to get together online to buy goods from partners. The aim of such exchanges is to simplify vendors' supply chains and generate better economies of scale.

But the B2B bandwagon has been labouring rather heavily of late to live up to the hype and expectation that was heaped upon it. While B2B marketplaces have sprung up to service everything from the motor manufacturing industry to the medical supplies market, few appear so far to have won a critical mass of users.

As a result, optimism is now fading that such marketplaces will become the engine to kick-start the global ecommerce machine.

To make matters worse the European Commission (EC) has got it into its head that electronic exchanges may be having a negative effect on the competitiveness of open markets.

Anti-monopoly watchers within the Commission have expressed fears that such marketplaces, far from helping the little guy, are actually being used by giant multinationals to create price-fixing cartels.

However, electronic exchanges are only starting to come under EC scrutiny, which means that blood has yet to be drawn.

Deutsche Bank and SAP
Last month EC competition commissioner Mario Monti ruled that emaro, a joint venture between Deutsche Bank and German enterprise resource planning applications vendor SAP, was legitimate. Emaro is a marketplace for suppliers of office equipment, and Monti's department ruled that "the activities of the two parent companies did not overlap in the relevant markets".

But the EC is now also examining MyAircraft.com, a joint venture between United Technologies, Honeywell International and supply chain package supplier i2 that intends to trade in aircraft components.

A preliminary investigation is scheduled to be completed by 7 August, after which time the Commission will decide whether to launch a four-month probe into the initiative or give it the go-ahead. The former option seems a possibility at the very least, with aircraft manufacture a common interest of both United and Honeywell.

Either way, it may well be only a matter of time before a major exchange is subject to a serious investigation, which might have disastrous short to medium-term implications for the whole B2B ecommerce sector in Europe.

Market research firms predict that the global B2B market will be worth between $2.7tr and $7.3tr by 2004 - up from about $131bn in 1999. But if European exchanges are subject to harsher rules than those in the US, these projections may become skewed against marketplaces on this side of the pond.

So is European ecommerce really hanging by a thread? And is there a broader problem to be faced, namely that the principal of virtual marketplaces as they are currently understood and practised is somehow fatally flawed?

John Hagel, chief strategy officer of US-based ecommerce consultant Twelve Entrepreneuring and a former McKinsey analyst, fears so. An author of the influential books Net Worth and Net Gain, he is regarded as something of an authority on virtual ecommerce communities.

Hagel believes that companies moving to an e-procurement environment face dilemmas. At a recent meeting of the Wharton Forum on Electronic Commerce, he said: "While ecommerce reduces interaction costs for business, it also reduces these costs for customers. Over time, customers become more powerful and capture more of the value embedded in industry value chains."

But this shift of power towards consumers can create challenging situations for companies, he claimed. "If a business is not focused on getting cost out of the value chain, it will be impossible to compete. But if that is all a company focuses on, it has a serious dilemma. It will be managing a smaller and smaller business."

Look before you leap
Hagel also believes that many organisations enter into the world of electronic exchanges without considering the huge challenges that such a business model represents. Building liquidity and a critical mass of participants, for example, are formidable obstacles to the success of exchanges, he says.

He likewise thinks that maintaining the balance of power between buyers and sellers can ultimately lead to a destabilisation of the market.

Beverley Burgess, UK marketing director for Biomni, which provides e-procurement software for individual companies, although it is not yet active in the exchange market, agrees.

"These electronic exchanges are proving a lot harder to get going than a lot of people expected, thanks largely to logistics," she said. "A lot of the purchasing managers who might be taking part in them are quite sensibly holding off and taking their time before deciding which ecommerce model works best for them."

Ben Wright, vice president of marketing for Ariba, which provides ecommerce-enabling technology, also accepts that there have been problems with some exchanges, but insists that the difficulties lie not in the business model per se but in its execution on a case-by-case basis.

"It is key that these exchanges ensure neutrality, and are set up so that dominant players can't exercise their power at others' expense," he said. "Done right, the concept is clearly of value to all parties, buyers and sellers. It's all about the manner in which it is done."

Wright concedes that many potential participants might have been put off joining exchanges so far out of fear that they could be controlled by a hegemony of powerful interests.

But he believes that the B2B ecommerce market is, in general, a flourishing one that is not threatened by the slow growth of some exchanges. "The market has grown as much in the last two months as it did in the whole of last year. The signs are good," he argued.

Like other major electronic exchange service providers such as CommerceOne and i2, Ariba will be hoping that this progress can weather both the growing scepticism of market watchers and the eagle eye of the EC's law enforcers. The second half of 2000 will be a testing time for the sector in Europe in more ways than one.