The New Economy is changing at the
speed of light. The latest thing to set Wall Street spinning is
the explosion of business-to-business e-commerce.
B-2-B commerce in which companies buy and sell goods and
services to each other via the Internet, instead of over the
phone or by mail are turning the business world on its ear.
Companies are cutting the cost of doing business, slashing
purchasing and other administrative expenses. And, for those
that get it right, B-2-B will create a lot of winners and happy
The nation's oldest names have seen the future and they
don't want to be caught with their bottom lines down. These
giants have rejected the notion that because the Internet is so
young it's too early to tell how important it will be for the
The spread of business-to-business commerce is also a
wake-up call for Federal Reserve Chairman Alan Greenspan, who's
scratching his head, trying to figure out what's making this New
"If B-2-B efforts succeed, the fruits could be
unprecedented heights of profitability," says Greg Smith, chief
investment strategist for Prudential Securities.
The benefits are indeed huge. E-commerce allows the
companies to use up less of their precious capital to run their
businesses while at the same time saves them buckets of money
when they buy stuff.
"Such a combination is pretty powerful and would go a long
way toward explaining why so many companies have been so highly
valued in the stock market, particularly in the B-2-B
applications area," Smith said.
Financial news wires have been buzzing over the last two
weeks with announcements of Internet deals by the richest U.S.
U.S. car makers plan to build the world's biggest B-2-B
online marketplace, an Internet-based supply chain network with
a critical mass of buying power.
Ford Motor Co., General Motors Corp. and DaimlerChrysler AG
are setting up a super auction
site to buy the $250 billion worth of parts they need each year,
abandoning a 100-year old system of doing deals.
Sears, Roebuck & Co. and Carrefour Supermarche SA,
two of the world's largest retailers, and software
giant Oracle Corp. are launching the first global
business-to-business online exchange for the retail industry,
targeting the $3 trillion retail market.
The B-2-B exchange, which eventually will be opened to other
retailers, will dabble in apparel, food and other consumer
goods. Sears and Carrefour buy $80 billion worth of goods from
50,000 suppliers each year.
USX Corp.'s U.S. Steel Group, the nation's largest
steel maker, has bought a stake in B-2-B steel exchange e-STEEL
Corp. and will sell a full range of products through the site,
which has 1,300 member companies in 65 countries.
"Many of our large customers are saying that they are going
to Internet-type purchasing and they're telling us 'You will do
business over the site or else we'll just mail in an order to
you,"' said U.S. Steel President Paul Wilhelm. "This is the
way people will have to do business in the future and they'll
have to recognize that, and get about getting it done."
Even oil companies are tapping into e-commerce to save
billions of dollars on pipes and engineering services. Chevron
Corp., Texaco Inc. and Royal Dutch/Shell Group
have each started e-commerce sites this year.
Andersen Consulting has estimated that the oil companies'
profits could jump between 5 percent and 20 percent for every 5
percent they reap in savings.
The Boston Consulting Group estimates that one-fourth of all
U.S. business-to-business purchasing will be done on line by
2003, It says between 1998 and 2003, American business
e-commerce will grow by an eye-popping 33 percent a year and
reach $2.8 trillion in transaction value, up from today's market
of $2 billion.
Also, industry experts say e-commerce, which currently
accounts for some 0.2 percent of the nation's gross domestic
product, could see that number grow to 10 percent in five years.
Smith said the companies that have been quick to jump on the
Web will show results as early as the middle of this year.
And, the Web-oriented players are creating compelling stock
The big winners will be software makers that crank out B-2-B
"This is not a one-year phenomenon," Smith said. "This is
not like Y2K that will burn out quickly one way or the other.
It's a new agenda for business to push the whole business model
to a new level of efficiency and ... the process could easily
run five to 10 years."
He said the returns on investments from B-2-B are big,
really big, ranging from the mid-teens to as much as triple
"With B-2-B, 20 percent of the cost reduction comes from
lower transaction costs," he said. "Instead of paper and
people, it's electrons recording the interactions between
supplier and buyer."
The remaining 80 percent of the cost savings is shared by
both the buyer and supplier because the amount of inventory and
cash needed to do business is sharply reduced for both.
The car makers, for example, say the online marketplace will
cut their cost by at least 10 percent, chopping the price tag of
building a car by $1,000. Parts account for some $10,000 of the
cost of slapping together a $20,000 car.
The B-2-B revolution will also make it tougher for crystal
ball readers at the Fed to get a true reading on what's brewing
in the economy.
Experts say the Internet will change the way the economy
works and inflation indicators such as the Consumer Price Index
and Producer Price Index may become less important.
"When it comes to inflation avoidance, the Fed will still
have a lot of indicators of inflation, but the central bank's
impact through the monetary tightening tool will have much less
of an impact because the economy is so much different," said
Allen Sinai, chief global economist for Primark Decision
Inflation has been absent from the radar screens for the
last couple of years to the amazement of Greenspan and other
central bankers. But their lives could get even more complicated
as e-commerce explodes.
"This poses an interesting question for the Fed: What part
will interest rates play in the attempt to slow the economy if
companies' spending has such high rates of return?" Smith
"So higher interest rates lose their sting," said Smith,
one of Wall Street's brightest investment strategists. "This
phenomenon also further reduces companies' interest costs and
makes it more difficult for interest-rate changes to control
growth within the U.S. economy at least on the business
Greenspan has been lobbing interest-rate increases at the
economy since last June to slow its remarkable growth, which set
a record 107th month of expansion in February.
The Street believes the Fed is not through raising the cost
of borrowing. The betting is the central bankers will kick up
interest rates a couple of more times this year to dampen
consumer spending and head off what they see as the threat of
The Fed may have been caught flat-footed by this B-2-B wave
and the bankers seem behind the curve in developing a system to
track the New Economy.
"The change that is going on in the economy is happening
very quickly, in fact, so fast that data cannot be collected
fast enough to really give the Federal Reserve the right scoop
on how rapidly the economy is reinventing itself," Sinai said.
"As a result, the Fed is having a tough time reining in this
booming economy," he said.
The government is starting to acknowledge the technological
changes, which are reshaping the economy. This week, the
Commerce Department unveiled an e-commerce index that will track
the fast-growing e-retail business.
The B-2-B revolution has not escaped the ever-alert stock
investors. They've priced the New Economy's stocks out of this
world on expectations there will of lots of earnings rewards.
"Wall Street, in its usual wisdom, has psyched this one out
and, as a result, money is moving to the technology companies,"
"What the market is telling us is that a big portion of the
economy is now irrelevant to the dynamic future of the U.S. and
world economies and investors are reevaluating and pricing up
the portion of the New Economy that does matter," he said.
For the week, the Dow Jones industrial average soared 505.08
points to 10,367.20. The Nasdaq Composite index jumped 323.27
to 4,914.77 and the Standard and Poor's 500 index gained 75.81