Survival of the fittest in the e-marketplace

By PAULA OLIVER

Electronic marketplaces will shrink dramatically in the next five years, say those close to the burgeoning industry.

But there is one catch. As each new e-marketplace sprouts up, its operator says it will not be the one to disappear from the e-commerce radar screen.

This is usually backed by at least three reasons they will succeed.

If you believe the hype, the electronic marketplaces will revolutionise the way businesses is done.

"Old economy" industries, such as forestry and fishing, are often seen as the hardest to win over because their business practices have been ingrained for years.

But like most other local industries, they are gradually embracing the technology. The question is: Which e-marketplaces will survive the shakeout that many experts predict, and how will they do it?

New Zealand's forestry industry has had a timber exchange since the late 1990s, when Auckland marketplace builder Global Ecomex set one up.

Fletcher Forests used it two years ago and has kept an interest since. The exchange is attracting interest from Australia, India and the Middle East.

Global Ecomex plans to start a Malaysian palm oil exchange in February, and says it is negotiating with Maori fishing interests over a seafood exchange.

The company's marketplace model is different in that it does not operate only on the internet. Users download software, make bids and send them via the internet to the exchange.

The software is roughly the same for a seafood exchange as it is for a timber exchange, meaning Global Ecomex can easily link its exchanges.

Chief executive Tony Wright says it is inevitable that the exchange industry will consolidate. The keys to surviving the cut are ensuring industry commitment, effective software design and establishing links.

His solutions include enlisting timber industry guru Gerald Hunt, whose personal network and experience helped to get the industry committed.

"The industry has to understand the need for an exchange and the benefits that come from having electrification of processes, and then they buy in to the ownership of the exchange," Mr Wright said.

"When you get key industry participants playing a leadership role, you succeed."

A study of e-marketplaces, released by the Boston Consulting Group yesterday, predicts that many will fail. Competition will cut the income operators get from transaction costs, and only a few large-scale global exchanges will survive. Offering a range of services will be crucial to survival.

Mr Wright says his exchange is linked with companies such as HSBC to handle financial services.

In the future, exchanges are likely to be linked to freight, payment and services exchanges. Users will expect to be able to complete online transactions in a safe environment that ensures payment.

Global Ecomex's competition in the timber industry now comes from newly established Lignus, an exchange set up by the McVicars, a leading timber family.

John McVicar says the exchange is going well, and international transactions have been done.

He too predicts consolidation, because New Zealand is too small to support more than one player in the industry.

"It's important to remember you're not trying to change the way people do business," Mr McVicar said.

"You have to let them maintain their existing relationships, in the way they have always traded. It's just in an electronic format."

Lignus designed its internet platform after consulting the industry, and allows traders to conduct private negotiations. Like Global Ecomex, it is spending money and time educating users to get the most out of the marketplace, but it does not find it easy to convince some timber players.

"It is difficult, but they're not going to turn their business over and start doing it a different way overnight," he said. "Most can see the benefits, but it's in its infancy."

Another timber industry exchange, Woodnet, is due to start in April.

Creator Stuart Orme intends to offer more than just a timber exchange - he wants to include shipping, consulting, software and trading services.

He also predicts big consolidation, but is confident that he will survive it because he already has overseas interest in his idea.

Clouding the crowded timber scene is Carter Holt Harvey, which has not yet aligned with an exchange.

Who it chooses is critical for the industry.

As the Boston Consulting Group study says, the big players know their value and often demand razor-thin costs or a slice of equity.

Carter Holt has floated the idea of setting up its own exchange, but others in the industry say this would be unlikely to succeed because it would not be considered impartial.

The seafood industry is heading for a similar shakeup.

Sanford has aligned itself with the Seafood Alliance - a collection of the world's fishing giants who will establish their own exchange, offering everything from fish to fuel and insurance.

The unknown local seafood player is Global Ecomex, which says it is negotiating with Maori - meaning Sealord could be part of its plans.

A key to success in operating an exchange in any industry is finding a niche. That has been done in the seafood industry by Bruce Dillner, who has set up a fish quota exchange, allowing firms to trade their quota online.

If it can capture interest early on, it could eliminate any potential competitors.

Being global, says the Boston Consulting Group study, will be a key to survival. But only time will reveal which of the country's timber and seafood exchanges have the equation right.

E-marketplaces


* Are an online platform for businesses to trade with one another.

* Companies can buy, sell, tender or auction products and services to one or many groups through the platform.

* The marketplaces are often jointly owned by industry players.

* There are 283 exchanges in New Zealand and Australia alone.

* The local timber industry has three, which trade logs and sawn timber.

* The seafood industry will shortly have two, trading fish, fuel and insurance.

* Operators take a commission or charge.

* Players benefit from lower administration and transaction costs.

* Experts predict that industries will not be able to sustain the large number of marketplaces now springing up.

* Competition will see transaction costs drop and many marketplaces fail.