A Case Study: Can the Chemicals Sector Find the Ideal Internet Formula?A Case Study: Can the Chemicals Sector Find the Ideal Internet Formula?
August 1, 2000
A Case Study:
Can the Chemicals Sector Find the Ideal Internet Formula?
Thousands of B2B sites have sprung up on the Web in the past year, includingmore than 50 in the basic and commodity chemicals industry. Survival is key inthe New Economy; in much the same way the B2C internet stampede thinned underDarwinian law, the growing glut of B2B enterprises will eventually be pared downto a few sound businesses. In the end, the "fittest" in each industrywill be marketplaces with the support and backing of their industries' biggestand most influential companies (good fundraising included). Until that time,ventures in the $1.7 trillion worldwide chemicals market will continue toexperiment in search of the right formula for buying and selling the likes ofacetone and polyethylene via the Internet.
Chemical products are ripe for Online B2B because they are standardized.Transaction costs could be cut significantly via electronic ordering, butsafety, quality control and strict government regulations complicate the supplychain and create many obstacles. Furthermore, chemical industry experts havenoted that only a small amount of the value-added is in order processing, whichis the primary benefit of the Internet.
CheMatch.com and ChemConnect are two B2B sites that have garnered attentionand industry support as neutral exchanges and auction houses for chemicals,plastics and various other related materials. These companies, both of whichfiled registration for initial public offerings (IPOs) this past year [thoughChemConnect recently cancelled its IPO] have big-time chemical company investorsand offer various unique features and benefits. ChemConnect boasts 7,000 members[including Abbott Labs and BASF] from 100 countries. It has financial backingfrom Goldman Sachs, which funded more B2B businesses in 1999 than any otherventure investor (Forbes). Meanwhile, CheMatch claims 425 companies[including DuPont and Bayer] from 34 countries, and has funding from the SproutGroup, which backed one of the largest media and advertising B2Bs. As evidenceof the depth and leadership such sites require, both chemical exchanges havebetween 75 and 100 employees, including highly touted executives.
With the race in the B2B world dependent upon conquering more"space" and industry support, these sites are competing for theloyalties of and endorsements from major chemical companies. To win, an OnlineB2B must offer more than simply a place to connect sellers withbuyers--infrastructure and software companies have largely solved that problem.In lieu of outstanding issues with security and technological efficiency, a B2Bmust save money for its members and help generate new customers.
One way to save money is to lessen the amount of the time and materials spenton gaining sales, processing orders and arranging delivery. Opening new avenuesfor business involves connecting members to the global community and attractinghigh numbers of international buyers and sellers.
ChemConnect's World Chemical Exchange touts its real-time window on theglobal market, which allows suppliers and buyers to trade on a daily basis andkeep up-to-date on current worldwide market prices. "Through the WorldChemical Exchange, it will now take just a few days to complete criticalprocesses, like bidding, that traditionally took several weeks," said SarahCatterson, divisional vice president of corporate purchasing at AbbottLaboratories, a ChemConnect investor.
Buyers search the WCE exchange floor for the chemicals they want at the termsthey want. The exchange floor section of the site lists 'offers to sell' and'requests to buy' for specific chemicals. It also includes specifications foreach chemical, including quantity, starting price and shipping terms. Themembers-only trading room is where the action takes place--users can see detailsabout the seller (including company profile), the product being offered and thebids to buy. As a measure of buying and selling flexibility, members can acceptor reject any bid or offer for any reason. Membership in ChemConnect is free,but a transaction fee of either one percent of the sale or $250 per transaction,whichever is higher, is charged to both the seller and buyer. Fees for certainchemicals in certain categories may vary. [The company would not disclose anyfigures for number of transactions completed or estimates on total dollarfigures for transactions completed.]
As ChemConnect's closest competitor, CheMatch touts high visibility andefficiency, as well as $250 million and .75 million metric tons in completedtransactions. The company has joined ChemConnect in offering real-time, activetrading, but its hallmark is that members can trade on their own terms. This isachieved by keeping the trader's identity anonymous. Only the pre-approvedcounter party knows the identity. According to the company, this ensures thatpricing is based on real-time values of the commodity being traded. CheMatchalso allows users to pre-select the trading criteria and counter parties withwhom they will conduct business, in order to help minimize financial risk.
In addition to its growing completed transaction dollar figure, the siteplaced its average transaction amount at $.5 million. In an effort to boost itsvalue, CheMatch has a section where customers can access DeWitt market analysis,Platt's global pricing (updated daily) and news headlines, Tecnon marketsummaries, NYMEX pricing (30-minute delay), foreign currency rates (30-minutedelay) and chemical industry news.
B2B sites obviously compete on scope and quality of services, but they do notalways go head-to-head in areas such as market focus and targeted transactiontypes. For example, CheMatch reported that its transactions are often thousandsof metric tons, whereas ChemConnect's average transaction is much smaller. Theseplayers have slightly different areas of operation--both operate on the premisethat members will reach new global buyers or sellers, but CheMatch seems abetter fit for companies looking to turn over big quantities of product, whichis usually a contractual deal via existing partners. ChemConnect appears tooperate best as an avenue to divest small quantities of chemicals that poseunique selling and buying concerns. This differentiation demonstrates that inany industry, there are different reasons for companies to sell Online. B2Bsites can differentiate themselves from each other not only by their investors,members and add-on services, but also by their particular market focus.
Major chemical companies are on-board as both investors and users. DuPontconducts certain business through the auction section of CheMatch. "This isa purchasing option which we choose to use when we believe it will help us meetour business objectives," said Juan Francisco Suarez, director of corporatecommunications for the e-business division. He added that, on the site, DuPontbuys more than it sells. CheMatch.com is also focused on commoditypetrochemicals and polymers, yet DuPont does not manufacture many products thatfall into this category. Suarez confirmed that CheMatch meets only part ofDuPont's business needs. "We are engaged in several other initiatives,always looking for efficiencies and better ways of conducting ourbusiness," he said. However, this does not take away the importance andpotential of CheMatch. "We expect the level of business to increase overtime as CheMatch.com and others continue to develop their offerings. We areconvinced they have a great business model and an excellent managementteam," he stated. Overall, DuPont sees great potential in Online B2B in thechemicals sector. "Yes, we have value for eBusiness,' Suarez reported."We are convinced that Online B2B is a key business enabler and is going tohelp companies to achieve their goals in many different and sometimes creativeways."
Pharmaceutical manufacturer Dow Chemical also conducts a portion of itspurchasing Online. A major investor/member in ChemConnect, Dow currentlyutilizes the site for its normal and reverse auction sales, as well as for itsneutral exchange sales. However, its purchases through the site remain a merefraction of its total purchasing. "As it relates to raw material purchases,which are less than 50 percent of Dow's total purchases, and the use ofChemConnect, our purchases are quite small--less than one percent,"explained Dow management via Mary Jo Piper, communications director. Dow's useof ChemConnect has been for purchasing non-strategic products where the marketis long and multiple suppliers exist. The company explained that Online B2B hashelped to save time and paperwork in many instances, as well as connect Dow withnew suppliers. The company sees sites like ChemConnect as one component of agreater technological advancement in buying, purchasing and fostering business."The value provided by an independent third part exchange is sufficient tomaintain ChemConnect's existence," reported the company.
Despite the progress and continued growth of these two B2B sites, a number ofleading chemical suppliers, including DuPont and Dow, as well as BASF, Amoco,Celanese, Shell Chemical, Ashland Distribution and many other internationalchemical industry giants, have united to create a new "neutralmarketplace." Slated for launch in mid-2000, this new marketplace willcover the supplier-to-supplier, supplier-to-customer and distributor markets, aswell as end-users such as formulators, processors, converters and fabricators.Called Elemica, the Online B2B exchange will have a strong supply chain focusand, unlike many other Online chemical exchanges, it will concentrate primarilyon contractual sales, which comprise the greater part of the existing globalchemical marketplace.
"E-commerce is rapidly becoming a way of life for BASF as well as forother leading companies in the chemical industry," said Bernd Flickinger,president of Dow's logistics and information services division. "Thiscollaborative effort will offer the partners significant purchasing savings bycreating an innovative virtual marketplace with efficient processes and systems.At the same time, our new marketplace offers suppliers the chance to reach awider base of potential customers very efficiently."
Dow noted that Elemica, which was founded by many investors to bothChemConnect and CheMatch, is different from and favored over neutral exchangessuch as ChemConnect and CheMatch because it is supported by industry suppliersrather than a third party. Officials at ChemConnect, however, said they do notsee Elemica as direct competition, because the consortium launch will targetexisting contractual customers, whereas ChemConnect is a platform for findingnew global customers. This may serve as a good indicator of how much room therereally is in any one industry for Online B2B ventures.
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