The Second Time Around

Why Commerce One's auto-industry partnership arrangement may not be lovelier in this incarnation.

The new arrangement certainly enhanced the reach–and potential revenues–of the industry exchange, especially when DaimlerChrysler was added. Launched last October, the Covisint Web site handled $350 million of purchase transactions in the fourth quarter, and GM’s purchasing chief, Harold Kutner, predicts a 2001 transaction volume of $50 billion. Infrastructure for the exchange seems to be on track, and Covisint is fully funded for 2001, a spokesman says.

For Commerce One–which despite strong revenue increases has been downgraded by some analysts in the embattled procurement-software market–the situation is more mixed. Beyond the revenue benefits it will also enjoy, “the collateral effect has been obvious,” says Commerce One CFO Peter Pervere. “It has put us in a position to win a lot of business from other companies, and business from within those automakers’ other divisions.”

But the projected transaction volume reflects both “indirect” commodity-oriented products like fasteners, and customer-designed direct products, which some observers think are resistant to the move toward exchanges. (Direct products, like proprietary engine parts and on-board computers, come with extensive specifications–and far higher margins.) Further, the major cost-saving components of the site are supply-chain management and collaborative design functionality–a big draw for manufacturers and suppliers. Although Covisint has the software for these components, that isn’t worth much unless supply partners are wired to use it, which could take three to five years.


Wit Soundview’s Mahoney predicts that Covisint will settle into a comfortable niche as the channel used for buying indirect products, while direct products are bought “in extranets and private net- works.” He adds, “I don’t think humongous marketplaces will ever take off for direct materials.” For those, “quality is more important than price.” A recent all-industry study by Giga Information Group Inc. supported this assessment, forecasting that $5.2 trillion in B2B sales will go through a variety of channels by 2004, including electronic data interchange, direct Internet links, extranets, and private E-markets. “As business- to-business E-commerce matures, there will be no single magic channel that meets all companies’ needs,” says Andrew Bartels, a Giga vice president and research leader who follows the E-commerce market.

The biggest impediment for Covisint may be the cost pressures the exchange places on suppliers below Tier 2–those that themselves supply major auto suppliers. A recent KPMG LLP study listed the auto industry as the slowest to adopt Internet technology among the seven surveyed, with auto-industry suppliers especially wary of the security of online product exchanges. “Suppliers wanted to make sure their proprietary intellectual capital would be protected,” says Brian Ambrose, the study’s lead author.

Many of those suppliers also worry that the exchanges’ auction nature could help automakers slash supplier prices. And they fear making their inventory information available on-line to car companies, something necessary for the full supply-chain integration and collaborative planning envisioned as the Holy Grail of Covisint. While common among Tier 1 and Tier 2 suppliers, often directly wired to manufacturers, the requirement for open information may make smaller providers balk. Others simply lack the technological infrastructure to integrate inventory information in an exchange’s supply-chain management system.

Analysts are also concerned about when, if ever, Commerce One will gain that Covisint equity stake, if the depressed dot-com market delays Covisint’s initial public offering. And there’s a question whether the automakers will continue to support Covisint’s development, given their own financial problems of late. Covisint’s take on that prospect, says its spokesman, is that “in a downturn, Covisint becomes even more important,” because carmakers “need to make use of every possible means of cost-cutting.”

Is Commerce One kicking itself just a little for giving away so much stock for its shot at the big leagues? No, says CFO Pervere. “It’s hard to value what value you get from this deal,” he concedes. But his company doesn’t expect to sign another pact like it, ever. “There’s only one Fortune One,” he says of GM. “We’ve entered into major agreements with other companies, and equity has come up, but that happens only once in a business’s lifetime.”

Commerce One stockholders may be relieved to hear that.

Kris Frieswick is a staff writer at CFO.

The Cast at Covisint

Some key players in the auto-parts partnership.

Founding Partners

  • General Motors
  • Ford Motor
  • DaimlerChrysler
  • Nissan Motor
  • Renault

Technology Partners

  • Commerce One
  • Oracle

Business Partners (Sample)

  • AK Steel
  • Arvin Meritor
  • Dana
  • Delphi Automotive Systems
  • Federal-Mogul
  • Johnson Controls

Source: Covisint LLC


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