A Real Online Revolution

I've always envied people who lived 100 years ago who must have gaped in wonder at seeing their first automobile putt-putt down the road. Or who marveled to hear music coming out of a wireless radio. Or who stared in awe at an airplane droning through the air.

But now I can't believe my good fortune. I get to witness the impact of one of the greatest inventions in history, the Internet. What's most amazing is that the revolution it spawned really didn't get going until 1993 when a group of college kids in Illinois wrote a graphic browser called Mosaic to convert the World Wide Web into a point-and-click tool. Everything you know about dot-com mania can be traced to that development barely seven years ago. And we're still learning about new opportunities the Internet makes possible.

Automakers began to awaken to a new opportunity in late 1999, when they realized they could conduct all their purchasing online. General Motors Corp. and Ford Motor Co. lunged at the opportunity and were up and running with online exchanges in a matter of months. Then they realized that if they banded together, the impact could be even bigger, so they roped DaimlerChrysler Corp. into their effort as well.

It's easy to see why automakers want their own exchange. Purchasing is their single biggest cost. Collectively, GM, Ford and DaimlerChrysler buy $240 billion worth of goods and services every year. By conducting all those purchases online, automakers believe they can cut the cost of processing a purchasing order from $100 down to only $10. And each of them processes hundreds of thousands of purchasing orders a year. Commerce One, one of the technology companies in this field, claims that online exchanges can cut purchasing costs by 3%. Well, three percent of $240 billion is $7.2 billion. That's a ton of cost cutting. And it doesn't stop there. Automakers plan to charge fees on every transaction that takes place on their exchange. That could generate another $5 billion in fees!

These kinds of numbers scare the stuffing out of suppliers. They are leery of all this happy talk about cost savings because they know whose hides those savings are going to come out of. In fact, the Big Three were actually forced to form one exchange. Few suppliers were signing up with GM's or Ford's exchange. Even now, after the Big Three have combined forces, spun the new exchange off as a separate entity, and offered suppliers seats on the company's board, suppliers still are hesitant to come on board. And, much to the annoyance of the automakers, suppliers are looking at forming their own exchange.

Even if they end up working through the automakers' exchange, however, there will be cost savings for suppliers, too. They will be able to find cheaper prices for what they buy, and they'll be able to cut the cost of processing orders as well.

And here's something I don't think any of the suppliers have thought about. There's an opportunity for them to turn the tables on automakers. What if a supplier came out with a technological breakthrough that could dramatically reduce emissions, or boost fuel economy, or was something that consumers felt they just absolutely had to have? That supplier could get on the exchange and dangle that technology in front of automakers. Then it could ask one simple question: Who wants to be the first to bring this technology to market? The exchange could get automakers bidding against each other, driving the price up, rather than forcing the supplier to sell as cheaply as possible.

Of course there are several issues to be resolved before any of this can work. First, the Federal Trade Commission has announced it will look into this automotive exchange to make sure there isn't any price collusion. Just watch what happens to the concept of "Internet speed" when the legal system gets involved.

And the biggest issue to be resolved was first raised by Tom Stallkamp, former president of DaimlerChrysler and now president of MSX International: Who owns the information going through the exchange - the knowledge of who is bidding what for billions of dollars in goods and services? Do the buyers and sellers have the rights to that info? Or does the exchange, which is a separate, legal entity, have the rights to that information? One thing is for sure, that information is going to be worth a fortune!

Interestingly, European and Japanese automakers are sitting on the sidelines, watching what the Americans are up to. One BMW board member told me he's highly skeptical. "Where are the results?" he asked. He's got a good point, but I think that by the time he sees any bottom-line results, the Big Three are likely to be years ahead of everyone else.

That's why it's critical for industrial regions to grab onto this one and make sure they're part of the online revolution. This is their ticket to grab a bit of that Silicon Valley magic. If the Internet tide is going to raise all boats, you have to make sure you at least have a boat in the water.