Aerospace giants plan online marketplace to reap savings on $71bn purchasing bills

The old economy big guns are setting aside rivalries to turn the new economy revolution to their advantage

Four of the world's biggest aerospace and defence companies yesterday joined forces to launch an online trading exchange that will open up an electronic marketplace worth $71bn to manufacturers, component suppliers and end customers.

Four of the world's biggest aerospace and defence companies yesterday joined forces to launch an online trading exchange that will open up an electronic marketplace worth $71bn to manufacturers, component suppliers and end customers.

The trading exchange being created by BAe Systems, Boeing, Lockheed Martin and Raytheon is not the first of its kind, nor will it be the last. Similar e-business market-places have been launched by suppliers, distributors and retailers themselves. Now the big battalions of industry, the equipment manufacturers, are getting in on the act, principally as a means of cutting their procurement bills. Only two weeks ago, 40 of the world's largest food manufacturers got together with the Grocery Manufacturers Association of the United States to form an exchange aimed mainly at simplifying buying processes.

The list of members reads like a Who's Who of the American consumer goods industry, including Coca-Cola, Colgate-Palmolive, Gillette, Heinz, Kellogg's. Procter & Gamble and PepsiCo. Unilever, the Anglo-Dutch group which makes Persil and Flora margarine, has also joined through its American subsidiary.

Similar ventures have been unveiled by big players in the car, oil and retailing sectors and more are sure to follow as the goliaths that dominate other "old economy" industries seek to turn the "new economy" revolution to their advantage.

If the internet is a byword for boom, then these so-called business-to-business or B2B ventures are its boom sector. There are estimated to be at least 50 online business to business transactions underlying each business-to-consumer or B2C transaction. In other words, every time a customer clicks their mouse to order a book or CD from Amazon.com, an awful lot more money is being made behind the scenes. That is why B2B revenues are forecast to grow from less than $100bn in 1999 to $800bn within the next three years - more than four times the predicted level of B2C revenues.

The aerospace industry is noted for its hyperbole and yesterday's launch did not disappoint. Vance Coffman, the chairman and chief executive of Lockheed Martin, predicted that the new trading exchange would transform commerce across the global aerospace industry.

Just think, for instance, of the savings that could be achieved if all 6 million components that go into a commercial aircraft could be ordered henceforth on line. Not to mention the millions of pages of accompanying technical documentation that would become redundant.

Research by the investment bank HSBC estimates that for every 1 per cent saved on procurement costs, the aerospace industry could increase profits by 7 per cent. With a combined supply budget of $71bn that translates into big money for BAe and its US counterparts.

There are three obvious ways these global trading exchanges could lower costs. First, there is huge potential to cut both the time it takes to conduct a transaction and the amount of paperwork involved.

Second, the companies involved could aggregate purchasing requirements to obtain lower prices from suppliers. Third, they could use e-auctions, where suppliers are invited to tender for business via the internet, to encourage greater transparency and lower prices.

In reality, manufacturers will have to rely largely on the first of these. Ganging up on suppliers by pooling purchasing budgets would amount to a cartel operated in reverse by customers, in which case anti-trust authorities would almost certainly intervene. And while e-auctions look attractive as a means of securing lower prices, the reality is that many of the products involved are too specialised or contain too much proprietary technology to be traded in such a way.

Wolfgang Scheunemann of DaimlerChrysler, which last month formed an e-business procurement joint venture with Ford and General Motors, says: "Even if we decided to bundle our procurement power to get lower prices the outcome would be that the supplier would go bankrupt so we would find ourselves with less choice."

He also says the only instances where DaimlerChrysler would conduct e-auctions would be for low-grade basic components such as fastenings or bulbs.

According to Tig Gilliam, a partner in PriceWaterhouse Coopers, which helped set up the food manufacturers' exchange, the electronic marketplace will initially concentrate on the procurement of materials, supplies and services. He dismisses the notion that the grouping is a cartel aimed at defending its profits against the buying power of the supermarket giants. "The objective is not to create a behemoth that can beat up the suppliers," he says adding that US anti-trust law would bar such activities.

Mr Gilliam says the exchange will principally enable members to communicate more effectively with their suppliers. It will start first with the purchase of office supplies and equipment. However, it will not be used for the purchase of commodity raw materials such as sugar, flour and wheat, as these are already traded on futures exchanges.

The manufacturers' efforts have been mirrored by their retail customers. Last month Sears, Roebuck of the United States, combined with Carréfour of France and Oracle, the American software company to form GlobalNetExchange. J Sainsbury and Metro, the German retail group, joined the exchange last week. Kroger, the giant American supermarket chain signed up yesterday.

The idea is to create the retail industry's biggest B2B marketplace. The members aim to put 75 per cent of their $200bn annual purchasing through the system within 18 months.

But, like their manufacturing counterparts, retailers say this is not collusion. "We can't collude with rival retailers on goods for re-sale but we can come together in the e purchase of other goods and services such as power and office equipment," says Patrick McHugh, Sainsbury's director of e-commerce.

It will also make it cheaper for suppliers. According to Sainsbury's, it can cost a new supplier £200-£300 just to set up a electronic data interchange toto communicate with the supermarket group. To use the exchange the supplier will just need an internet browser.

What differentiates the online exchange in the car industry from other industries' is that the manufacturers are creating it themselves. In contrast, the aerospace exchange and a similar electronic market place launched by Shell for the oil industry are being set up in conjunction with Commerce One, a California-based company that specialises in B2B websites.

In the case of the aerospace exchange, Commerce One will have a 5 per cent equity stake while a further 20 per cent has been set aside for other industry participants. In most instances, the plan is to float these electronic marketplaces, so stand by for another crop of internet millionaires.