Can This Guy Work Magic?

With breathless excitement, the U.S. Big Three automakers joined hands in February 2000 and declared war on inefficiency. Having pursued separate paths in launching business-to-business e-commerce strategies, Detroit's brass realized how wasteful that would be.

They were ecstatic over the prospect of melding each company's initiatives into one colossal Internet exchange that could manage the entire supply chain and allow automakers and suppliers to shop for and sell all manner of products, from key auto parts to mops. Engineers in remote locations and from different companies could communicate online about new product specs. Quality, manufacturing and logistics all stood to benefit. It was to be a mega-portal beneficial to the entire industry and, ultimately, consumers, by way of lower prices. The world would become much smaller.

It was as if Detroit had discovered Aladdin's lamp, and the many mysteries that had befuddled the industry for years would be unlocked with a few quick rubs.

The hyperbole overflowed. “This e-revolution is big. Not big like a new vehicle launch. More like the invention of electricity or the birth of the industrial revolution,” Ralph Szygenda, General Motors Corp.'s chief information officer, told a crowd last August in Traverse City, MI. “This will radically, profoundly change the world.”

Carlos Mazzorin, Ford Motor Co.'s group vice president of global purchasing, shared similar sentiments with Ward's AutoWorld last year. “I say that the transformation is so huge that we cannot see it yet.”

But Covisint, as the endeavor was named in May 2000, has been adrift for months. It didn't meet its intended start-up date of mid-2000. Suppliers grew suspicious, federal regulators probed for anti-trust violations, and analysts speculated that Covisint was near death — another dot-com Hindenberg ready to crash and burn. The most painful illustration of Covisint's foundering was its inability to hire a chief executive officer, someone who could steer it through the enormous challenges ahead — yet another instance of Detroit over-promising and under-delivering.

So it was with less fanfare that the Covisint Board of Directors (Messrs. Szygenda and Mazzorin both are members) announced on April 18 that it finally had found its man after 14 months of searching.

The job goes to Kevin English, a 48-year-old “respected pioneer in Internet communications” from the East Coast who spent part of the 1980s running the Detroit office for CAD/CAM (computer-aided design/computer-aided manufacturing) developer Computervision Corp.

Mr. English is well aware of the huge expectations now placed upon him, and despite having no direct auto industry experience, he's learning fast. He describes his first week on the job as “drinking from a fire hose” in terms of trying to absorb information.

“It's a very unforgiving industry. It's not an industry that will tolerate lackluster performance,” he tells WAW in his first media interview since arriving in Detroit May 1.

“You've got to be there for these guys and support them and earn their trust and respect and their business every day, which is my message for Covisint.”

And with a politician's prowess, Mr. English manages to recast more attainable expectations for Covisint while at the same time dismissing some of the wild-eyed zeal that previously consumed his new bosses.

“The swagger that was part of Covisint 12 to 14 months ago, because we're supported by the Big Three and by Renault-Nissan, we've got to get the swagger out of our step and go out as a young, aggressive, hungry company,” Mr. English says.

He understands — firsthand — how easy it was to get caught up in the dot-com craze. “Let's not forget that everybody was guilty of drinking the ‘Internet Kool-Aid’ a year or so ago, and Covisint wasn't immune to that,” he says. “Some of the initial valuations that were placed on Covisint by the press and by people on Wall Street were just largely unrealistic in terms of what the expectation was. What I've got to do is level-set the company and say, ‘Let's try not to be all things to all people.’”

Those words are good news to the suppliers that suggest Covisint needs to find its niche and hone it. But at the same time, Covisint must be more than a procurement site and provide other services such as collaborative product development.

Neil DeKoker, managing director of the Original Equipment Suppliers Assn. (OESA), says Covisint should eliminate duplication of services by linking up with exchanges that already exist. Through Covisint, for instance, suppliers could purchase aluminum at the metalspectrum.com site, he suggests.

“The answer from Covisint has been, ‘We can do it ourselves,’” Mr. DeKoker says. “Maybe it means more fees for them, but they need to recognize that there's already so much out there, and they need to create alliances and affiliations to maximize services to customers.”

His advice: “If it already exists someplace, don't do it.” Mr. DeKoker was pleased, for instance, that Covisint recently paired up with SupplySolution Inc. for supply chain execution to reduce inventory and with Powerway Inc. for quality tracking through real-time communication.

“We encourage Kevin to continue in that thinking,” he says. “They're starting to recognize that collaboration will save big bucks.”

How Deep the Pockets?

“We've got to get the swagger out of our step and go out as a young, aggressive, hungry company.”
— Kevin English

The most benevolent strategy, some suggest, would be for Covisint to give up its “for-profit” status and become a developer of standards, a sort of “e-center” for a virtual supplier network. Problem is, standards won't make Covisint any money.

And make no mistake: Kevin English was hired to make Covisint profitable, so he doesn't accept the standards proposition. “A comparison might be the New York Stock Exchange, which provides tremendous value to its member companies but doesn't make much money,” he says. “The mission of Covisint is to be an independent company, a non-affiliated company with the Big Three, and to derive as much shareholder value as we possibly can back to our investors.”

The automaker investors have deep pockets, but the question is how deep. And some of them may wonder if there's a big hole in the bottom. A Forbes magazine article says that Covisint is burning through $12 million a month, and that the five automakers have spent a combined $170 million on the company, despite its handling less than 1% of the carmakers' purchases.

Mr. English dismisses those figures, but he's unwilling to provide the correct information, as Covisint is a private company. “I can say that I'm comfortable with the burn rate where it is today,” Mr. English says. “I'm comfortable with the revenue forecast.”

But there's no denying that Mr. English has to produce results — fast. On May 3, two days after arriving in Detroit, he met with the Covisint Board of Directors, of which he is the chair. The 12 other board members represent four global automakers and five of the world's largest Tier 1 suppliers — all parties that soon must see demonstrable benefits in Covisint.

“I sensed with the board what I call a healthy impatience — like, let's get going here, let's get some traction,” Mr. English says. “Let's make sure we get Covisint up and running quickly and get it going.”

Four seats on the board remain unfilled, and Mr. English says he would like to see more diversity with perhaps a woman, an African-American, a retired chief executive officer, an academic or an executive with a technology company.

Mr. English wasn't the first candidate for the job, which was obvious from the tortoise-paced search. Speculation included candidates such as Thomas Stallkamp, former Chrysler Corp. president and now chief executive of MSX International, and Raymond Lane, former Oracle president and now a general partner at venture capital firm Kleiner Perkins Caulfield & Byers.

Mr. English says one of the biggest misconceptions about Covisint is that he's the wrong guy to lead it. The fact that others had turned down the job did not make his decision to accept it any harder, he says. Even though the labor market was filling up due to a skittish economy, he says it's not a big deal that other candidates declined.

“You don't marry the first girl you take on a date necessarily,” he says. “It's not unusual for companies to go through multiple candidates before they find the right one.”

Mr. Stallkamp says he didn't consider the Covisint job because he had plenty of challenges at MSX, a company he joined in January 2000. Worth noting, Mr. Stallkamp's new job makes him a potential partner — or maybe a competitor — for Covisint, as both companies provide supply-chain management.

Managing the Chain

But the big difference that Mr. Stallkamp sees is that MSX takes a more hands-on role in helping a partsmaker manage its supply chain, while Covisint is merely a communications tool, a portal, that enables suppliers to do it themselves.

“No company wants to abdicate their supply-chain management to Web exchanges,” Mr. Stallkamp says. “Ours is a more direct way of looking, with the suppliers, at streamlining the process.”

And like Covisint, MSX serves its customers by enabling collaborative engineering, quality management and procurement.

Mr. Stallkamp says he is optimistic about the upstart exchange. “Covisint will survive and do well. Other companies will direct their own supply-chain management, and many other things will go through Covisint, and we'll work with Covisint on some services they provide,” he says, adding that the exchange will be successful handling certain transactions. “But you still can't replace the human element.”

Covisint creates a transparent environment that allows unprecedented information sharing in the auto industry. Does a supplier really want its automaker customer to see precisely how much the supplier has saved through a particular cost-down exercise? If a supplier finds a way to improve its profit margin, won't Covisint — by design — make that information instantly available to the automaker, as well as others? How much control will suppliers have to surrender?

At some point, it may be possible to have too much collaboration. In that sense, Mr. Stallkamp's remarks about a supplier taking responsibility for managing its own supply chain make sense.

Looking simply at purchasing, Covisint is a way for the Big Three automakers, as well as partners Renault SA and Nissan Motor Co. Ltd., to purchase parts and materials in bigger quantities. Covisint facilitates the transaction, with greater efficiency.

Because of antitrust issues, the five automakers cannot jointly purchase steel, for instance. But through Covisint, each automaker could purchase steel for itself and its suppliers. Automakers have done this for some time with commodities such as steel, but making the purchases via an electronic exchange takes it to a whole new level.

Like shopping at Sam's Club or Costco, the higher volume drives down price. So in this new environment, suppliers of materials and parts must be prepared to sell in higher volume, while smaller producers could be at risk.

It's interesting to note that while Covisint sets up for massive bulk purchases, the industry itself is moving toward a greater variety of lower-volume niche vehicles.

For example, the two-seat roadster market has flourished with the likes of the Honda S2000, BMW Z3, Plymouth Prowler and, in Europe, the Opel Speedster. Soon, we'll see the Ford Thunderbird, Chevrolet SSR and Lincoln Blackwood. Consumers want more individuality, and online purchasing needs to take that into account.

Covisint's purchasing capabilities already are being tested, with mixed reviews. Delphi Automotive Systems has used Covisint for procurement and has found that there is “room for improvement,” like with other online purchasing sites, says Alan Dawes, chief financial officer at Delphi.

“All suppliers and OEMs will test Covisint to make sure the offerings are competitive,” Mr. Dawes says.

So how wide is Covisint's window of opportunity? How much time does Mr. English have to prove that the vision isn't a fantasy?

Making the Case

“With the downturn in the economy, people aren't investing at the moment in infrastructure, so alternatives to Covisint aren't popping up at a great rate,” Mr. Dawes says. “That gives them some space. I don't know if it's one or two years. But they have some space to get up and running and people are giving them that room.”

Covisint's future is tenuous if Mr. English can't make a convincing business case for suppliers that translates into improved profit margins. It's not enough to tell suppliers they should use Covisint because the OEM parent companies say so.

“That can have a reverse effect,” Mr. English says. It's like telling your kids, ‘It's good for you because I told you so,’ and they go off and do the opposite thing unless you give them some rationale as to why.”

Covisint cannot be perceived as a privileged child of wealthy parents. It must prove itself on its own. Mr. English's vision has Covisint serving as the “single point of contact” for the auto industry and to extend it to marine, trucking, aerospace and other industries — in a three- to five-year time frame.

One obstacle for suppliers is price. They say the cost of entry at Covisint is high, that software for purchasing materials through the exchange isn't cheap, and that sellers are charged sizeable fees per transaction. Won't those fees ultimately make their way to the purchase price?

“My direction to my sales force is to not let price be an obstacle,” Mr. English says. “Not that we're going to give it away free. But we're going to go out there and compete for customers' business every day, and if we have to be aggressive on price, then so be it.”

Mr. English says he has heard that the initial prices “were almost punitive in some respects,” and he's taking a hard look at that.

“If you're going to build a culture around the customer, and price is a huge obstacle, then people just say ‘Hey, I can't afford to buy it,’ then we're not saving people time and money and we don't have a value proposition. We have to fix that. … It's really not rocket science.”

For a guy who's new to the auto industry, Mr. English has learned a lot about the dynamic between suppliers and automakers. He assures that Covisint will not become just another tool by which OEMs can squeeze its demands out of suppliers.

“There was a lot of consternation and gnashing of jaws early on that this was simply another mechanism by which the auto companies could shove something down the throat of the suppliers,” he says. “That is not what Covisint is about. Covisint is about supplying a value proposition where suppliers and auto companies can reduce the cost of procurement dramatically, can reduce the cost of vehicles dramatically, can improve time to market.”

Mr. English's resume includes stops at Credit Suisse First Boston, TheStreet.com, Nexis Enterprise Group, Aries Technology, Jupiter Technology, Control Data and Xerox Corp. In 1975, he graduated from Stonehill College in Easton, MA.

He also speaks fondly of his “dangerous background” in computer-aided design, honed during his 1980s stint in Detroit with Computervision, and in solid modeling with Aries Technology.

That experience could prove useful as Covisint develops products that allow engineers to collaborate electronically, even if they work in different CAD platforms.

“We're not talking about taking a three-dimensional solid model with all the weight and inertia, volume, all the different characteristics, and rotating that in real time,” Mr. English says. “We're not at that level.”

An IPO — ASAP

Also part of Mr. English's mission is an initial public offering for Covisint that could generate massive returns. The IPO capital markets are basically closed now, so there's no rush, and he has said Covisint has “patient investors” who want quality earnings.

So when might the public be offered a stake in Covisint?

“When we've executed better than we've executed to date,” he says. “There just isn't a receptive capital market to young technology companies at this point. That will change, and that window will reopen. And at the point it reopens, hopefully we'll be in position to go out with a blockbuster IPO. It's still in the plan.”

The IPO won't happen this year, and it will wait until at least 2002, he says. Besides, Wall Street has barely acknowledged automotive suppliers that have gone public in recent years. If investors think about Covisint the same as they do about Delphi, Visteon Corp., ArvinMeritor Inc. and others, then what's the hurry?

As for staying in metro Detroit, Mr. English says there are no plans for Covisint to leave. It makes no sense to move away from the key customers. Plus, the pool of available talent in southeast Michigan, with its several major universities, also was a key factor for staying put.

“We feel that we've got a better chance at attracting talent in Michigan than we would if we were in Silicon Valley,” where the competition for talent among technology companies is intense, he says.

To solidify its global position, Mr. English says he will spend one week every month in Europe, where Covisint has offices in Stuttgart, Paris and, soon, Amsterdam, where Covisint Europe is locating its headquarters.

“We don't want to take a myopic North America view only,” he says. “There are differences in product, culture and legal systems, and we have to be respectful of that.”

Overall, Mr. English is upbeat about his new job. “Everyone wants to see Covisint be successful,” he says. “We've got a good group of people here, a great management team, and considering that we're building a technology company from scratch, I think we've done OK.”

Serving many masters, Mr. English knows that granting everyone's wish will be incredibly difficult. “These guys (Covisint's automaker stakeholders) wake up every morning and go to work trying to put the other guy out of business.”

But in the end, the board spoke to him with one voice in their support for Covisint and what it represents to the industry. “You could argue that this is like the president in his first 100 days,” he says after his first week on the job. “Maybe this is a honeymoon or something like that.”

OK, the honeymoon's over. The industry says it's time for work.

Covisint Board of Directors

J.T. Battenberg III, Delphi
Laurent Bourrelier, Renault
Kevin English, Covisint
Brian Kelley, Ford
James Keyes, Johnson Controls
Olaf Koch, DaimlerChrysler
Edward Krubasik, Siemens
Harold Kutner, General Motors
Carlos Mazzorin, Ford
Ralph Szygenda, GM
Gary Valade, DC
James Vandenberghe, Lear
Don Walker, Magna
4 vacancies to be filled

Current Headquarters

25800 Northwestern Hwy.
Southfield, MI
www.covisint.com
Offices: Amsterdam, Paris, Stuttgart and Tokyo
Employees: 160, 200 by year-end

Customers

More than 900 companies currently using Covisint products or participating in events such as auctions.

Name: “CO” (collaboration) “VIS” (vision) “INT” (integration)

Marketing Pitch

“Covisint.com is the single business address for the entire automotive industry. This portal is the fastest, most efficient place to get automotive business done.”

Management Team

Rico Digirolamo, GM lead
Alice Miles, Ford lead
Peter Weiss, DC lead
Doug VanDagens, Business Development
Kevin Vasconi, CTO
Jacqui Dedo, Global Sales

Software Sold

Online Catalogs

Online Auctions