Leveraging E-commerce and the Internet to Buy Chemicals Effectively
Jay Hall, Vice President, Product Management, ChemConnect, San Francisco, CA 94104, 415/364-3300, www.chemconnect.com
85th Annual International Conference Proceedings - 2000
In 1848, the grain marketplace faced major supply and demand problems. Eighty-two Chicago merchants joined together to meet the need for a central marketplace. Building the Chicago Board of Exchange took 150 years.
Today the world chemical industry, burdened by similar inefficiencies and imbalances, recognizes that a similar, open, neutral marketplace is an imperative for its healthy growth. Today, we're on Internet time. Building the World Chemical Exchange has taken less than a year. Now, manufacturers and producers instantly convert chemical needs, surpluses, and shortages into trading offers, online, in real time. In addition, analyses on trades and prices give exchange traders vital strategic information for future planning.
Today the worldwide chemical industry is rapidly moving from its fragmented and cumbersome model of erratic "cyclicality," over-supply and arms race mentality. No longer will companies try to out-do one another by building new manufacturing plants, hoping that by out-spending the competition, they will gain new market share. It is by far more efficient to open complementary new sales channels and participate in real-time, online trading on a neutral exchange. On such an exchange, industry players enter new markets, gain new efficiencies of scale, and obtain a global view of the entire market. As well, strategic information on actual and future supply and demand requirements helps build a new business model-one in which production needs and outputs can be more safely managed to avoid the tremendous swings in availability and of course costs, the industry has had to weather for so long.
Five years ago-even five months ago-using the word "revolution" to describe the changes now underway in our industry would have been incendiary. Today we can use the word without fear. The revolution is a healthy one that will result in tremendous benefits for our industry, for every world manufacturer using our products, and for all the end-users of those products.
Andersen Consulting (a ChemConnect strategic partner) reports that the world's top 50 chemical firms are working on their Internet trading options. The GartnerGroup postulates that almost 80% of the Global 1000 companies will be trading on-line at some level within two years. Andersen Consulting also notes that the top chemical concerns are naming company e-commerce directors.
I predict those companies will quickly promote their "directors" to the vice-presidential level. The business is simply has too much potential not to become a major strategic growth and marketing tool for every successful player.
The beauty of the Chicago Board of Exchange model is it promises both stability and tremendous growth.
Stability comes with a saner approach to spot markets. A contract four months out on the exchange is fundamentally worth more than individually negotiated contracts. With futures contracts, it is easier to manage production, because variable costs greatly diminish for each additional pound pumped through a plant. Now the industry is about 90% long-term contracts and 10% spot contracts. With a real-time view on the total market that an exchange offers, and with the potential of future contracts, there can be a seismic move from long term contracts to future contracts. The cyclical nature of the industry will become more and more manageable.
Growth comes as buyers and sellers, working on an even playing field, meet new partners. Surpluses and shortages find new homes, fast. With the best technology powering the network, companies which could not, in the past, have known of one another's existence, can now negotiate, immediately, mutually advantageous transactions. It is simply stunning to see on our board-as we have-a company surplus that had been warehoused for two years, find a buyer within hours. Or in another, recent instance, to watch the vigorous bidding from six companies in different parts of the world, to fill the annual supply requirements for two plants for a major US chemical company. Such sourcing efficiencies and speedy transactions take place, now, daily, on our exchange. As chemical manufacturers, sellers, buyers and users worldwide understand the potential and experience the reality, they will join the global e-commerce economy. They simply can't afford not to.
Five years from now the worldwide chemical industry will be vastly more efficient, more environmentally responsible, large suppliers will be more heavily consolidated, while more mid-size and small companies will be thriving in a healthy, competitive market. Supply and demand will find balance much more quickly. The industry will be characterized by sustainable growth, with more predictable earnings and sane production schedules. Fundamental market trend knowledge will be greatly increased and more equitably disseminated. Service will be a key differentiator in the industry. What will really move product is not just price, but the ease and convenience of doing business with a particular vendor.
The Internet-with the trading efficiencies and new market potential it offers--will be the single biggest motivator of this change. Business-to-business e-commerce is growing so quickly, that it's beginning to look as if predictions on its impact-Forrester projects that e-commerce in the U.S., chemical industry alone will grow to $180 billion by 2003 (half the total trade)-may turn out to be conservative.
In addition, e-commerce, which at the moment is both booming in, and dominated by the United States, will take on new importance in Western Europe in the next two years. The imperative for a global presence thus becomes even more pressing. In the chemicals industry, especially, the impact of the Internet on Asia will also be spectacular.
The target is fast moving, and companies around the world are quickly implementing myriad e-commerce strategies. The best minds today predict that the breakdown will look like this: Half of the $1.6 trillion global industry transactions will be sold through various e-commerce channels, including company's own Web sites. Fully 15% of the trade, however, will be conducted on exchanges. The optimum exchange will cover the width, breadth and depth of the industry in both products and geography; offer dynamic pricing and real-time negotiation in a neutral marketplace; and be open to all qualified buyers and sellers.
ChemConnect started as a bulletin board site for chemicals trading in 1995 in Atlanta. We launched the World Chemical Exchange in August of this year in San Francisco as the open, neutral marketplace where chemicals and plastics of all types are traded online, anonymously and in real time. Initially, we shied away from using the word "revolutionary" to describe the changes underway. Because we come from the industry, we know its conservative nature so a cautious approach to online trading seemed both necessary and inevitable. I'm happy to say we underestimated the speed at which the industry would understand the opportunity.
In the past few months I have noticed a quantum shift in that way of thinking. Chemical industry leaders are anxious to, at a minimum, experiment in Internet-based trading. ChemConnect membership now includes the most prestigious companies-Dow, Eastman, and Rohm & Haas. All have chosen to lead our industry's adoption of e-commerce with Dow even naming ChemConnect as its exclusive e-commerce exchange for worldwide purchasing. Throughout this e-commerce revolution, the biggest surprise I have faced is the eagerness with which small to mid-sized companies are embracing the new market possibilities. Now, ChemConnect has 4,100 members representing 3,500 companies in over 135 countries, and average transaction sizes of more than $200,000.
This is not unique to the chemical industry. At the Las Vegas Comdex show in November, Cisco Systems president and CEO John Chambers, speaking about Internet e-commerce said: "Every company in every industry is in a state of transition. In the past 24 months, people have really gotten into it, and during the past 12 months, it's been like somebody switched on a light."
The quantum leap will be a psychological shift. The chemical industry-no longer stodgy--will justly pride itself for its leadership in having made a truly successful shift to e-commerce prominence in the new global economy. With chemicals the most-traded commodity in the world, the industry is scarcely going to be left behind in the Internet age.
Earlier in this paper, I mentioned that the consolidation at the top will continue but there will be more healthy growth at the mid and low end. Expanding market reach creates a level playing field in a global market. All participants have the opportunity to expand their market reach, get competitive prices for the their products, and establish new relationships. Well-run, smaller companies will be more competitive because they too will benefit from a real-time view of the market and new more stable pricing structures.
We all know the chemical industry is fragmented, fraught by wild supply and demand swings, and so big that it has hard to move it. We also know that chemicals are the most traded commodity in the world with some of the best brains, and smartest business people in any industry, anywhere. The proof is the enthusiasm and energy now being evidenced by players of all sizes around the world, as we move-in Internet time-- into a remodeled trading environment on the World Chemical Exchange.