TESTIMONY BY JERRY JASINOWSKI
DELIVERED TO THE FEDERAL TRADE COMMISSION WORKSHOP ON ELECTRONIC MARKETPLACES
Mr. Chairman, it's a pleasure to be with you today on behalf of the 14,000 member companies of the National Association of Manufacturers to discuss business-to-business electronic commerce and, more specifically, the recent emergence of business-to-business - or "B2B"electronic marketplaces.
My overall purpose is to describe how e-marketplaces work, how e-business and e-commerce affects company- and country-wide economic performance, and the possible implications for public policy of these developments. My perspective on competition theory is interwoven with these comments.
Let me begin by making six essential points about the impact of e-commerce on today's markets.
Impact of E-Commerce
First: The Internet dramatically increases the speed and quality of communication while, at the same time, reducing costs and improving quality. Many of the old barriers to communication have been substantially removed even as communication between companies anywhere in the world has become instantaneous. In addition, the quality of communications has increased. Web sites can convey more information about products and firms than written reports, which gives customers and suppliers more information in a more convenient format than ever before.
Second: One of the most significant results of faster communication is lower transaction costs. The decrease in costs takes place at all stages of the supply chain, from the initial purchase of inputs by the firm, to various stages of processing within the firm, to the final sale to consumers. In general, this leads to lower prices, greater output and higher productivity.
Third: Faster communication makes it possible to achieve process improvements at the firm level. These include just-in-time inventory controls, local area networks that link firms with suppliers and the electronic processing of transactions. Both process improvements and lower costs lead to another positive development: higher productivity.
Fourth: The communications revolution has led to a general increase in competition at all levels. The Internet makes it easier for new firms to get started and for small companies to penetrate niche markets around the globe. Expressed another way, the Internet levels the playing field for small firms by reducing their overhead, increasing the rate of return they receive on their investments and removing barriers to market entry.
Fifth: The Internet increases the movement toward the networked corporation, in which a firm can operate as a nexus of separate components - even components based in different countries. Instead of consolidating all activities under one roof, firms can outsource specific tasks in order to reduce costs and improve processes.
Sixth: Firms benefit from efficiencies of scale and the ability to niche market. The Internet expands the size of the market and enables firms to select specific markets in which they want to operate. When firms are able to penetrate large, dense markets, they can directly increase sales and revenues while building more efficient productive structures.
The Formation of Electronic Marketplaces
In just the past few years we have seen marketplaces announced in virtually every sector of American business, including steel, chemicals, electronics, auto parts, construction, heavy equipment and aerospace. In March, the NAM launched a B2B portal, "Manufacturing Central." It is a joint venture between the NAM and Unibex, a privately held technology company. Ours is both a vertical and horizontal online hub.
The NAM has as members more than 250 vertical trade associations, 48 state manufacturing associations and 70 local employer associations, spanning virtually every industry and including roughly 185,000 companies. The NAM also established its B2B portal for the 14,000 companies who are direct members of our association, more than 10,000 of which are small manufacturers.
Manufacturing Central provides services, technologies and tools that enable companies to compete effectively in the B2B world. Manufacturing Central (www.manufacturingcentral.net) is directed primarily at small and medium-sized manufacturers that may not have the resources to dedicate to a full e-business platform of their own. It is not dominated by any one sector, firm or group of firms, which allows it to provide a neutral market environment. Moreover, the NAM does set standards for the use of Manufacturing Central, as do other associations.
At the present time, there are four sponsored communities in Manufacturing Central, customized and managed by their own vertical trade associations in three industries: remanufactured products, brushes and candy/confectioneries. The fourth community is the NAM's own B2B site -- NAMB2B.com. We have also signed-up three horizontal state associations.
In using our portal, a company can proceed at its own pace and choose one or more of the following options:
The competition is intense: By last count there were about 1,000 B2B portals. We know that manufacturers have many choices and we have to offer services that not only equal but exceed our competitors if we want to succeed in the long term.
Our own survey data shows that while firms are only beginning to engage e-commerce in manufacturing, there is enormous potential and interest in the manufacturing community. For example, we found this spring that while 80 percent of manufacturers have Web sites, only 1 percent of companies are conducting e-commerce through them.
To date, most e-marketplaces have simply been trading networks . They were formed by one or more buyers who established online trading capabilities. These networks were typically developed within a single industry and were designed to link buyers and sellers, via the Net, with the primary objective of taking cost out of the procurement process.
We are now starting to see the evolution of much more sophisticated e-marketplaces that aim to reduce costs and improve efficiency for all participants within and among vertical and horizontal sectors. The new e-marketplaces go beyond linking just a few buyers and sellers to provide an environment linking multiple trading networks, individual buyers, suppliers and service providers. These B2B e-marketplaces represent not only the next stage of the Internet economy, but also the catalyst for tremendous growth in B2B trade.
These new e-marketplaces will allow trading partners to integrate, synchronize and optimize the flow of materials, finished goods and services. They will enable participating companies to anticipate and intelligently plan for changing market conditions. This evolution will introduce unprecedented levels of market transparency.
The evolution of e-marketplaces will reinvent the way that companies and entire industries are structured and operate. The use of timely information can help a company to focus on its core competencies and enhance its competitive advantage. It will support linkages with other organizations that can perform these tasks more efficiently and effectively. New e-Webs will emerge as many business functions are outsourced to specialized services providers. B2B e-marketplace strategies should allow participants to increase revenues, cut costs, broaden reach, gain competitive advantages and improve relationships to a high degree.
The Benefits of Cost-Cutting
E-commerce offers benefits in the form of cost reductions to both buyers and sellers. Typical buyer benefits include:
Typical supplier benefits include:
There are other efficiencies to be realized through e-commerce. When firms can link directly to suppliers, they can speed up production processes and reduce cycle time. This reduces inventory, thereby lowering carrying costs. Firms may also be able to reduce the costs of research; for instance, they can contract out R&D or engineering. New product specifications can then be transmitted over the Internet and sent to the factory floor for specialized production runs.
One of the benefits of better inventory management from e-commerce is a smoother business cycle. In past recessions, an unexpected fall in demand, coupled with large inventory levels, caused rapid contractions in the production process which, in turn, led to more violent down-turns. Better inventory management should reduce the impact of excessive inventory levels during future recessions.
Costs can be expected to be reduced at all stages of the supply chain. The firm purchasing raw materials or intermediate components will seek to obtain these at the best possible price. Competitive pressure from other firms that also have access to e-commerce means that when the firm sells to its customers, it will have little power to set prices. Instead, the price will be set as it would be in a competitive market. Technically, the price is set by the intersection of the firm's supply curve and the customer's demand curve. From economic theory, when costs decrease, transactions are carried out at a lower level of prices, which implies a higher volume of output.
The effect for the entire economy is a decrease in the price level. This does not take place instantly, but over a number of years, as more firms adopt e-commerce and the cost reductions work their way through supply chains. As prices decline, the average inflation rate is lower. This implies a higher level of GDP, since real GDP is calculated by taking nominal (current dollar) GDP and subtracting out the effect of inflation.
Other Benefits: Scale Efficiencies
Another well-known way to achieve efficiency gains is through economies of scale. In essence, when firms are able to sell in dense, highly concentrated markets they are able to produce more efficiently. The way this works is as follows: The firm faces a given cost structure for overhead, factories, services on the factory, land, etc. The larger the market, the more the firm can produce increased output per unit of cost (i.e., costs per item produced go down). For this reason, firms that can sell in large cities, sell to national rather than local markets or export their products abroad will generally have lower costs and produce higher volumes.
The value of e-commerce is that it enables the firm to achieve scale efficiencies with minimal cost. Without e-commerce, the firm might be able to expand its market only by advertising campaigns in other cities or other countries. With e-commerce, the distribution channels broaden as the size of the market expands to anyone who can access the firm's Web site. This is especially important if the firm operates in a niche market. In essence, e-commerce enables the firm to expand from a regional market to a national and, possibly, a global market at the cost of setting up a Web site. The firm achieves efficiency gains because the scale of its market has increased.
E-Marketplace Business Models
How an exchange is structured will vary from sector to sector based on the strategic needs of buyers and sellers as well as the nature of the industry served by the exchange.
In some instances, large buyers have established their own exchanges, usually in conjunction with a technology partner. In this instance, the buyer is looking to more efficiently manage the procurement process and lower costs. Most of the buyer-managed e-marketplaces are private and housed by the buyer or its technology partner. In a few instances, buyers have created a public, separate entity and the e-marketplace is intended to attract other buyers in the same industry. Suppliers are solicited to post their wares primarily in the form of online catalogs. A portal sponsored by e-STEEL (www.e-STEEL.com), for example, enables firms to sell and purchase numerous kinds of steel products online.
Other marketplaces are supplier-managed. In these exchanges, a supplier and/or distributor that serves a fragmented market or many small buyers creates an e-marketplace with the goal of more efficiently reaching customers, lowering transaction costs and expanding market reach. PlasticsNet (www.plasticsnet.com) provides all manner of service and product information from more than 200 suppliers.
More recently, a hybrid model has emerged. The e-marketplaces are independent and not dominated by either buyers or sellers. In some, instances these exchanges are backed by venture capital and have independent, stand-alone management structures. The exchanges are structured to represent potentially hundreds or even thousands of buyers and sellers and also have, or will have, the capacity to link to other exchanges. PaperExchange (www.paperexchange.com) exemplifies this trend: A "global neutral marketplace," participating members own, set prices for, sell and transfer paper products anonymously.
Services Provided by E-Marketplaces
The first and most obvious service is connecting buyers and sellers. In the most common form, sellers put a catalog of their offerings online and buyers can browse the catalog and order stock items.
For products where prices are volatile, an exchange can match buyers and sellers in an environment that accommodates dynamic pricing. Typically, this would be used for commodity products that have standardized features. Examples include standard computer-memory chips, oil or perhaps commodity building materials.
Auctioning is another means of matching buyers and sellers. While auctioning is most common for unique or even collectible items, in a business-to-business exchange a so-called reverse auction can be used by a company to dispose of excess inventory or perhaps products that have been superseded by a new generation.
Finally, exchanges allow buyers of a good or service to submit a request for proposal. In this instance, prospective sellers would be asked to respond to a specific set of criteria, such as technical specifications or delivery time. A buyer would then be able to consolidate and compare responses. In such instances, buyer and seller may ultimately customize on the design and specifications of a product.
An individual electronic marketplace may do one or all of these matching services, depending on the market it serves. Beyond matching buyers and sellers, exchanges can be used to provide a variety of related services. Examples include managing and updating the content within a site, registering and authorizing users, issuing digital certificates, facilitating payment and managing delivery logistics.
E-commerce will greatly increase, rather than reduce, market competition. Increased competition, along with lower transaction costs and productivity gains, will bring down prices throughout the economy. At the same time, firms will benefit from scale efficiencies. As a result, e-commerce will tend to raise real output, while lowering prices.
America's manufacturers - and businesses in general - want to abide by, and comply with, antitrust laws. In our country, we have a well-established body of competition law through which firms know how to "play by the rules."
Yet uncertainty remains as to whether this new economic environment, e-commerce, will be seen by the federal government as warranting a new regulatory regime. Given the dynamic nature of e-business, such uncertainty discourages innovation and growth in the ever-larger electronic-based segment of our economy. Therefore, in considering the implications of competition policy for the future of B2B marketplaces, the NAM does not believe that, at this time, there is a need for specific rules concerning this sector. In the antitrust agencies' most recent "Antitrust Guidelines for Collaborations Among Competitors," no such sectoral distinction is made. As these guidelines make consistently clear, there are many pro-competitive aspects of collaborations generally; B2B e-markets are no exception.
The FTC should act with both rapidity and clarity so that companies engaged in e-commerce will know whether or not new rules will be forthcoming; what those rules are; and how most effectively to abide by them. We do not see the justification for any new rules and, in fact, believe that e-commerce will, by its nature, generally decrease the ability of companies to impede competition.
- NAM -