Part One in a Series on Global Internet Growth

When President Clinton flew to India in March, he took with him a plane full of corporate executives selected to strengthen foreign trade and commercial ties with India, where one sixth of the world’s population now lives. One of those executives was Alan D. Weinberger, CEO of TechnologyNet.com, a Bethesda, Md.-based e-marketplace for the global information technology (IT) industry. Commerce Secretary William M. Daley, part of the delegation, watched Weinberger sign an agreement with Satyam Infoway Ltd., India’s largest IT provider, expanding TechnologyNet’s e-marketplace into India.

The signing ceremony captured one moment in the breakneck proliferation of e-marketplaces — online sites (such as aggregators, auctions, bid systems and exchanges) where buyers and sellers meet to transact business — that are now propelling global Internet growth. According to industry analysts at Stamford, Conn.-based Gartner Group Inc., e-marketplaces will be the primary driver of e-business in Asia over the next five years and will facilitate $581 billion in electronic sales transactions of nonfinancial products and services by 2004, equaling 29 percent of all business-to-business e-commerce forecast for the region.

Companies typically turn to e-marketplaces to increase efficiencies, lower costs and broaden market reach through instant access to worldwide suppliers and buyers. TechnologyNet is a prime example of the new global reach of e-marketplaces. With the completion of the TechnologyNet/Satyam joint venture, finance executives based in the U.S. who are interested in moving into India will be able to locate Indian IT resources and services, including IT experts, through the e-marketplace site. "It will provide one-stop shopping for a CFO who wants to learn about IT in India or who is looking for local partners to help put together structures required for doing business there," Weinberger says. It already provides links to IT experts in 110 countries and has just signed deals with local partners in China, Brazil and Israel to expand its links to IT manufacturers and distributors.

"This is the year of the e-marketplace, and IT is a perfect industry for it because 80 percent of all IT products and services go through intermediaries — about 700,000 to 800,000 worldwide," Weinberger says. "E-marketplaces will proliferate globally in all the industries that are characterized by a large number of atomized players — everything from steel to pharmaceuticals." His company’s e-marketplace will facilitate $300 million to $500 million in e-commerce transactions this year, and Weinberger expects $50 billion to $100 billion to pass through it within the next five years.

Dominant Model

Forrester Research Inc., Cambridge, Mass., predicts that e-marketplaces will capture 53 percent of total online business trade by 2004 and that total business-to-business e-commerce — defined by Forrester as intercompany trade in which the final order is placed over the Internet — will hit $2.7 trillion that year. According to Steven J. Kafka, e-business trade research analyst at Forrester, "The rampant growth of online trade will taper off after 2001, as firms more actively participate in e-marketplaces," consolidating the number of sites and transactions required to conduct larger amounts of business.

Although TechnologyNet’s Weinberger believes that Forrester’s predictions may be "somewhat aggressive" for some industries, he thinks they’re right on target for IT, telecom, health care, pharmaceuticals, steel and other industries that are not dominated by a handful of huge firms. Forrester predicts that e-marketplaces will ultimately account for 45 percent to 74 percent of e-commerce in a supply chain, depending on the industry. In the computer and electronics, shipping and warehousing, and utilities sectors Forrester forecasts that e-marketplaces will handle 70 percent of online trade. In the energy industry alone, Forrester predicts that e-marketplaces will facilitate 64 percent of all online energy sales by 2004 and push total online energy sales to $266 billion.

Although U.S. companies host most of the existing e-marketplaces, internationally based e-marketplaces are zooming ahead. Earlier this year, the Matsushita Electric Industrial group, Secaucus, N.J., announced plans to establish an e-marketplace for products sold by its Japanese conglomerate of 11 manufacturers. Last October, Infobank Electronic Commerce Systems, Berkshire, England, launched a site for suppliers in the e-procurement market, with 275 United Kingdom-based suppliers on board. Retailers in the United States and Europe formed two huge e-marketplaces for retailers earlier this year. In Malaysia, three Internet-based trading sites designed to facilitate global electronic trade with export-oriented Malaysian companies appeared last year.

E-Marketplace Financing

"By end of this year, Internet marketplaces will represent a significant amount of e-commerce, and by the end of 2002, they will be the dominant form," predicts Brett N. Silvers, chairman and CEO of the Hartford, Conn.-based First International Bank. "E-marketplaces have gained traction very quickly. Our bank’s strategy is to provide full financial services for participants at some of these sites." The bank is active in 14 international markets in developing countries and focuses on providing financing for small and midsize industrial companies. First International has been the largest U.S. Export-Import Bank lender for the past three years.

In March, First International announced that it will offer online loans of up to $5 million to companies in the railroad industry that participate in RailNet-USA.com, a U.S.-based e-marketplace that allows railroads, their suppliers and subcontractors to conduct business online. "Industry-specific Internet marketplaces allow buyers and sellers from all over the world to transact business," Silvers notes, "but financing can be difficult because many of the deals are relatively small transactions that cross borders and currencies and entail a certain level of risk. We can finance these purchases because we routinely do the risk analysis needed and we’re part of the e-marketplace through which the transaction occurs." First International’s strategy is to make e-marketplaces a primary business. "Right now, the e-marketplaces represent less than one percent of our business," reports Silvers, "but we expect that 50 percent of our requests for credit will come through these channels within the next three years — and that’s a conservative figure. We’re looking at a revolution in our business."

Global business-to-business Internet growth is booming in developing countries for good reasons. "We noticed that the privately owned industrial companies in emerging markets are taking to the Internet very, very fast," Silvers notes. "Traditional ways of doing business are dysfunctional in these environments — there’s often no road network or reliable air travel. The Internet — a new medium — is a less expensive and much faster way to conduct business." Silvers says that contrary to what most people think, small industrial companies in emerging markets are often quite sophisticated. "A second generation of owners are coming into control," Silvers adds. "They are computer savvy and fully capable of moving their companies into Internet-based deals. The global supply chain has pulled many of these businesses up into world-class status. Because their own domestic markets have never provided a sufficient outlet for their products, these suppliers have always been exporters, unlike similar companies in the U.S. Now with the Internet, they can be every bit as competitive as any U.S. company."

Overcoming Barriers

There are real barriers to global business-to-business Internet growth, however, and e-marketplaces solve only some of the problems. According to Silvers, one barrier arises in the exchange of credit information. "In terms of the underwriting process," he says, "there are real limits to what can be financed online in real time. The biggest problem with instant online financing for companies in developing countries is that these companies have no way to get their corporate finance and tax information to us online." Silvers also points to jurisdictional and legal limits to global business-to-business Internet growth. Loan documentation differs from country to country, and there is no universally accepted protocol for electronic signatures. "But these obstacles will be resolved over the next 10 years," Silvers predicts. "There is a steady convergence of standards so loan documentation can be completed in real time online. The Web-based solutions available now are the first step in an evolutionary process toward real-time online financing."

For finance executives at U.S.-based companies, major opportunities exist in accessing e-business marketplaces, and the increasingly global nature of the marketplaces will only enhance the enormous efficiencies and market reach that can be gained. The ability of buyers and sellers to find each other, set prices, negotiate terms and arrange financing on a single site, with little concern for national borders, will permanently alter traditional ways of doing business here and abroad. For a business model that is barely a year old, e-marketplaces have scored big, and true globalization via the Internet is one step closer to reality.n