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marketplaces haven’t yet transformed the way industry works.
Every Wednesday and Friday, Teauction.com, a B2B e-marketplace promoted by Williamson Magor, Apeejay, Bagla and Dhunseri Tea, conducts online auctions to sell tea. In the six months since Teauction.com went live, the hammer (or its digital equipment) has fallen on hundreds of types of tea, weighing over 15 million kg and worth Rs. 100 crore, with scores of sellers and buyers participating, including biggies such as Tata Tea and Nestle. Teauction.com chief executive officer Rakesh Bhutoria, an ex-GE Capital man, believes that in the next financial year his portal will hold auctions worth around Rs.800 crore.
His peers, heads of other e-marketplaces (Business world spoke to nine of them) are equally bullish on the future of B2B exchanges. Together, they claim to have brokered online deals worth Rs.812.50 crore in the last year or so (see list). But a few others, such as A.V. Ram Mohan, chief executive of Satyam Webexchange (a subsidiary of Satyam Infoway), which launched seven e-marketplaces, Machine tools and a general horizontal) in the past six months, dismiss these statistics. “I would love to have a close look at those transactions,” he says, laughing.
So, have B2B exchanges, ever since their much tom-tommed debut last year and promise to revolutionise the way industry works (see ‘Watch Out! Here They Come’, BW 18 September) begun to make a difference yet? Or are they still more hype than substance?
Notwithstanding what the bosses of e-marketplaces, say, the value of trade, when put in perspective, is small. For example, the Rs.100 crore worth of auctions at Teauction.com account for only 1% of India’s Rs.10, 000-crore tea auctions business. Seen in the perspective, the B2B marketplace is still a non-starter.
Yet, these nifty little digital exchanges – offering a meeting place for buyers and sellers to trade just about anything including finished products, raw materials, surplus inventory, spare capacities, used machinery, disposable assets and scrap through a variety of options such as online negotiated deals, auctions and reverse auctions and virtual fairs – aren’t going entirely unnoticed either.
The most significant reason why B2B auction sites can’t be dismissed is that they are getting users to pay for their services. Take the case of the Mumbai based clickforsteel.com – promoted by the Ruias of Essar, though some equity will be shared with participating companies – which conducts online auctions of a tonne of steel every day, worth roughly a crore. Clickforsteel charges between 0.75% and 1% of the value of a transaction as its fee, which works out to around Rs 0.7 crore on the back of the Rs 70 crore in trades it has snagged so far. Again, Teauction.com has already made Rs 1 crore in transaction fees for the Rs 100 crore worth of tea it has auctioned so far.
Predictably, of course, e-marketplaces that focus on non-commodity items like used machinery, surplus inventory, maintenance and office-repair requirements have begun to command a higher transaction fee, though their volume is relatively lower.
In New Delhi, for example, trade2gain.com, a start-up promoted by Jay Choudhary, Subroto Banerjee and Sanjay Mehta over a year ago, already has 20 marketplaces, each dedicated to fulfilling the complete indirect material disposal requirements big-ticket clients such as Maruti Udyog. Tata Steel, Telco Compaq, Colgate-Palmolive and Glaxo-Welcome.
Trade2gain has already facilitated 160 online auctions worth over Rs `120 crore, charging between 3% and 5% in transaction fees. Its biggest success has been with Maruti, which has completed four online auctions of scrap including aluminum chips, corrugated boxes and air compressors worth about Rs 25 crore through January and February. Trade2gain has also seen the value of its average transaction go up from about Rs 20 lakh six months ago to over Rs 1 crore now, touching Rs 3 crore more than a few times.
Again, the Chennai-based auctionindia.com (recently acquired by the Chennai-headquartered TVS group) has been charging between 2% and 6% transaction fee for most of the 42 online auctions (worth Rs 12 crore, mostly in indirect materials) that it has completed.
Sure, you could say that the margins are still small, though it can be argued that these marketplaces, specially the ones dealing in commodities, are betting on the huge volumes of business they hope to get. Trade2gain’s president and managing director Subro Banerjee voices the dilemma that many e-marketplaces perhaps face today: “The biggest challenge for all B2B marketplaces will be to have customers that pay and yet get them to transact a certain volume at the minimum.”
While transaction fees are emerging as the primary source of revenue for B2B sites, a few are also experimenting with the idea of getting users to pay for making use of the site. Take the case of the Bangalore-based matexnet.com, promoted by Jagan Vasan, who earlier worked as a consultant in the US. Subscriptions account for about 30% of Matexnet’s revenues.
Vasan says that around 400 companies access the site frequently for all kinds of information, and at Rs 14,500 for an annual subscription; he has found an alternative revenue model to transaction fees.
Again, clickforsteel has started charging its 5,000 registered users around Rs 5,000 annually for accessing the site. And about 15 new users are signing up every day. Similarly, about 10,000 of the 40,000 users registered on Sify’s marketplaces are paid users.
Many of course, are skeptical about whether registration wills sork as a revenue stream. “We are not sure how many of these users will actually renew their registration. This can’t be a significant revenue stream,” says V. Sriram, head (strategy practice), Icra Advisory Services, who adds that some market makers are now morphing into technology providers. But Satyam Web exchange’s Ram Mohan remains bullish: “Three years from now, we hope to have half-a-million paid users,” says he.
Much of the registration revenue that Mohan and his peers hope for will depend on how much the users actually benefit from their sites. The common pluses of using a B2B exchange are cost savings, freeing up of capital, opening up of new markets, increased speed and efficiency in non-core activities like disposal of scrap.
In India too, the initial benefits have been no different. For example, sellers on Teauction.com have seen their transaction costs come down from about 8% to 3% and the selling cycle time from nine weeks to about five weeks. Prospective buyers can make or postpone purchase decisions by browsing and scanning unique satellite-based images and weather reports for almost every single tea plantation in the country.
Clickforsteel’s Bharathan says that Essar’s realization on steel sold through online auctions has gone up by around Rs 200 to Rs 300 per tonne.
Or take autopartsasia.com, also based in Chennai, which offers it small and medium-sized component manufacturers an opportunity to make contact with global after-market importers. With 500 buyers from 58 countries using his site, chief executive officer N. Vaidyanathan says Autopartsasia.com has already generated online enquiries worth $ 10 million, of which $ 0.55 million have been converted into online transactions.
Meanwhile, fast-moving consumer goods company Hindustan Lever Ltd. (HLL) has achieved more than a 35% cost saving through a reverse auction at Auctionindia for Rs 1 crore and an electrical-wiring contract for its new personal products plant coming up in Assam. Again, Madras Cements found a supplier offering impactors and conveyors for Rs 55 lakh on Matexnet; that’s far less than the Rs 1.7 crore that the company’s regular suppliers would have charged for the same thing, says Vasan of Matexnet’s.
Industry watchers, of course, say that while these transactions may seem ‘interesting’, in the overall context of commerce here, it is a small sum. For example, a saving of Rs 53 lakh on a bottom line of Rs 10,142 crore is small change for HLL Indeed, most of the big corporate such as HLL Nestle India, Tata Steel and Telco have conducted only a few transactions on B2B exchanges so far. That apart, the entire support framework that is required for the smooth flow of online transactions on these e-marketplaces still does not exist. Online payments, logistics support, online escrow mechanisms, online risk profiling or even a simple data service on the finances of companies participating in these marketplaces (along the lines provided by Dun & Bradstreet in the US) are not available.
Even the very seriousness of the user companies, which are currently registered on such e-marketplaces, is questioned. Says T.E. Gautham, senior analyst, Icra Advisory, the consulting arm of the rating agency: “These marketplaces also face problems of frivolous listings and registrations. Nobody knows how many serious users are really there.”
Predictably, therefore, the issue of how many of the 30-odd B2B exchanges that have sprung up so far will survive is still open. Sure, Teauction.com is claiming revenue of Rs 4.2 crore (Rs 1 crore from online auction and the rest from implementation, integration and so on, for members) and a pre-tax profit of Rs 2.5 crore, quoting financials audited by Ernst & Young. Again, clickforsteel is confident of breaking even this June. Yet, as the overseas experience shows, the going will be tough, and many of the e-marketplaces will fall by the wayside.
A recent report by AMR Research, a leading US-based research house on e-business, forecasts that bankruptcy, mergers and acquisitions could swallow up as much as 90% of the current crop of online B2B marketplaces. The research company predicts that the number of exchanges will shrink from 600 currently to less than 100 companies by the end of 2001. AMR also predicts that only two or three such ventures will survive in each industry.
Some of that activity is already visible here. The TVS group’s acquisition of Auctionindia is an indication of things to come. You can expect many more such deals in the future. “Independent marketplaces are fast running out of money. We do not know if they will still be around six months down the line,” says Gautham, who points to the recent failure of supply (a B2B exchange across industries) in the international context. His boss reiterates the same point. “I think what we are seeing now is some liquidity in the B2B e-marketplaces that have been promoted by the industry.
“However, the independent exchanges are nowhere near achieving any critical mass,” says R. Raghuttama Rao, ex-officer, Icra Advisory. “But there are silver streaks. Specific activities such as disposal of surplus inventory, procurement of indirect materials, etc., are where these independent exchange are making an impact,” adds Gautham.
For the moment though, the consensus opinion is that independent initiatives don’t stand much of a chance unless they align and share ownership with industry. Globally too, even reasonably well-established independent vertical marketplaces such as chemdes.com have folded up. Which is why even strong players like Sify are keen to align with industry players. “We are willing to play the subservient role of a technology enabler. In all our marketplaces, the industry has been offered ownership,” says Mohan.
But that too may not underwrite survival. For example, the much-written about, eight company-promoted as yet unnamed auto portal in India (the promoters include Ashok Leyland, Hero Honda, TVS Suzuki, Bajaj Auto, Telco, Mahindra & Mahindra, Hindustan Motors and Maruti) is yet to take off. Those associated with the initiative say that one of the reasons why it has been a slow starter is that the partners aren’t sure about how they can benefit from it.
Of course, there is no dearth of optimism regarding e-marketplaces. Two research firms, Forrester Research and Gartner Group, predict B2B e-commerce transactions will top $7 trillion by the year 2004, of which 37% will be done via B2B marketplaces. More than 80% of the Global 1,000 companies will participate in B2B e-marketplaces by 2002.
The Asia region’s B2B e-commerce market is estimated to grow from $9.2 billion in 1999 to $995.8 billion in 2004. Both Forrester and Gartner forecast that over the next five years, e-market makers would be a primary driver of e-business transformation in the region. If you believe in these numbers, it’s clear that some Indian e-marketplaces will definitely prosper. The question is, of course, which ones.
The Credit Rating Information
Services of India (Crisil) has entered into an alliance with Teauction.com,
a leading B2B online tea exchange, to provide e-commerce evaluation and
e-commerce rating services for the Teauction.com exchange participants.
Under this alliance, credibility first (a division of Crisil) would be
working with teauction.com to offer the first of its kind performance
ratings to tea industry participants.
The first ever Internet tea
auction company about to go into business in Assam has demanded parity
in sales tax with the Guwahati Tea Auction Centre (GTAC).
Auction through the Net
? Yes, that’s the need of the hour. In a bid to improve the economy of
Assam, besides creating an environment conducive to the healthy growth
of the industry, an internet site with the name of teauction.com was formed
-Jan 8 to 21, 2001
The stage is all set for
the launch of virtual trade in tea futures with teauction.com, the one
and only tea auction centre in the cyber world, pitching for getting necessary
clearances from the Forward Markets Commission (FMC). If teauction.com
gets the FMC green signal, it will go down in the history of commodity
trade as the first ever virtual exchange offering forward contracts in
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