PC giants mean business-to-business

Hewlett Packard (HP) and Compaq caught the industry on the hop earlier this week when they announced an online business-to-business trading exchange for PC and peripheral components.

The move prompted IBM to release a statement saying that it had plans for a rival exchange of its own, with Steve Ward, general manager of Big Blue's industrial sector, claiming that the company had already made its technology selection.

Although he declined to provide any details or outline who Big Blue's partners were, Ward hinted that current partners, Ariba or i2, could provide the infrastructure.

Power to the people
HP and Compaq said the aim of their as yet unnamed exchange is to squeeze inefficiency out of the current IT manufacturing supply chain, increase members' buying power and drive down costs by enabling members to order standardised parts for PCs, printers and servers more cheaply.

The two companies say the exchange will also improve supply chain execution, provide greater accuracy in matching supply and demand with the aim of meeting customer requirements better, lower transaction costs and improve communication between members by simplifying the process.

Pricing pressure from customers would also appear to be a significant factor, however. HP, Compaq and IBM have all fallen behind Dell in the PC space, following the direct supplier's decision to introduce an internet-based sales model.

Compaq, for example, announced flat overall revenue for its fourth fiscal quarter and PC sales that fell by seven per cent. Dell, however, said its fourth quarter net revenue for the period ending 28 January 2000 rose by 31 per cent.

But HP and Compaq are not commenting on whether customer prices will fall, preferring to emphasise the service improvements.

The companies have already lined up another 10 founding members to participate in the venture. These include Gateway, Advanced Micro Devices, Western Digital, Quantum, Samsung, NEC, Hitachi, Solectron, Infineon and SCI Systems.

Participants are expected to contribute $5m to the scheme, but the plan is to generate a total of $100m from 20 founders to fund the project. Members will also be called on to share ideas on how to use internet technology to make supply chain management easier and more efficient.

Carly Fiorina, HP's chief executive, says: "This is an open, hi-tech exchange where everyone has an equal place. Anyone is free to join."

She says the consortium would account for 30 per cent of hi-tech purchasing in the future - a market that will top $600bn by 2004, according to predictions.

Compaq chief executive Michael Capellas says that in terms of rollout, members could expect to see a catalogue first, followed by "storefront, supply and demand matching, and collaborative design".

European executives were caught as much on the hop as everyone else, however, and were unable to provide details of how the scheme would be implemented in the region.

But analysts have to date been critical of the role that so-called independent trading exchanges are assuming.

Thomas Berg, an analyst at researcher Gartner says: "Even when marketplaces facilitate comparison shopping or ease the administrative burden of the purchasing process, they are not 'at work' for the buyer. In all cases, marketplaces work for themselves."

The HP/Compaq venture appears to break this mould up to a point, however, because suppliers and buyers have come together for the first time without introducing an intermediary company that is destined for future flotation.

"We should never say never, but an IPO [initial public offering] is not part of our agenda at this time," says Fiorina.

Bob Ferrari, a senior research analyst at AMR Research, says: "This is a refreshing change. The prospect of buyers and sellers acting neutrally to achieve a common goal is good for the industry."

No software vendors
The HP/Compaq initiative is also unusual because in contrast with other online exchanges, such as Ford's AutoXchange and supply chain software vendor i2's HighTech TradeMartix.com, it has no software vendor members.

While software companies such as Oracle, which are feeding off the trading exchange phenomenon, claim that development will not be hampered by technology squabbles, Ferrari doubts whether they will be able to bury their competitive differences enough to share information that would make the model viable.

"Some of these have been bitter enemies so it will be interesting to see how well they fare in collaborating with one another," he says.

But Gartner's Berg says many exchange models will emerge over time. I2's HighTech TradeMatrix.com, which also has HP and Compaq as its anchor participants, asks members to pay transaction fees rather than an upfront sum, for example.

AMR's Ferrari says i2 was also caught out by its partners' announcement, however.

Steve Weller, i2's European marketing director of consumer goods and retail said: "While we cannot speak for our partners and customers, they tell us they selected i2 as their ebusiness solution provider because of i2's long-standing reputation for creating value and efficiencies."

While Ferrari says that the online exchange will have far-reaching implications for the manufacturing industry, what they will be is as yet unclear.

"Right now it's about staking out turf, but as the consortium tries to apply consistent rules for business processes, the scene will change dramatically," he says. "History has shown you have to pilot with relatively easy processes. If they try to take on the big elephant, it will fizzle out."

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