B2B Net ventures pose challenge for competition chiefs

Date: 07/09/00

By Renée Cordes

THE European Commission gave its unconditional blessing this summer to MyAircraft.com, a joint venture for the sale of aircraft spare parts and engines over the Internet.Competition chief Mario Monti and his team reasoned that the venture was likely to face strong competition from a number of similar exchanges being set up and would be just one of a number of ways in which aircraft part buyers and sellers might do business.

The exchange is the first business-to-business (B2B) electronic marketplace approved by the Commission. This kind of electronic procurement exchange allows companies to buy and sell goods and services immediately, with little or no associated transaction costs.

Competition officials reviewed the deal as they would have any other joint venture under the EU's merger control rules. When they delivered their verdict, however, they warned that they would closely examine all future B2B exchanges on their own merits, fuelling debate in legal circles as to what competition concerns arise when companies form exchanges to buy and sell products ranging from foodstuffs to aircraft fuel over the Internet.

These marketplaces bring together buyers and sellers to collaborate on demand and supply, and exchange information more easily about what is available on the market. The overall goal, claim those involved, is to improve supply-chain efficiency.

But legal experts warn that this new easy means of communication could turn into a double-edged sword, making it easier for firms to trade sensitive information to the detriment of rivals.

"On the one hand, the Internet enhances transparency in the market, which is one of the main conditions for ensuring fair competition," said Serge Clerckx, an associate at the Brussels office of law firm Hunton & Williams. "On the other hand, this very rapid, cost-efficient and extensive transfer of information almost creates incentives for companies to engage in collusion practices."

Lawyers warn that these businesses are likely to come under the regulators' microscope over any practices which exclude rivals from participating, whether they facilitate the exchange of commercially sensitive information or allow exchanges which cooperate with one another to wield too much power.

Over the next few years, regulators will also struggle to come up with a clear definition of the Internet marketplace. Normally, officials judge whether companies are operating a cartel by looking at whether there is adequate competition in a relevant market.

With the Internet, geographic borders are erased in one fell swoop, making it difficult to distinguish between different markets.

These are all open-ended questions which competition watchdogs will have to grapple with increasingly, given the growth spurt in B2B e-commerce.

It currently accounts for as much as 85% of all sales over the Internet today and the sector is expected to grow even more rapidly than business-to-consumer sales over the next few years, generating more than €1 trillion in online spending in 2004, according to a recent report by the IDC consulting group. For companies which choose to go down this route, the financial benefits can be tremendous. Many firms claim that putting their supply chains online results in huge cost savings.

A Goldman Sachs study estimated that these gains could range anywhere between 2 and 40% of total input costs, although there are wide variations from one industry to another.

These kinds of returns are attracting the likes of Spain's largest telecoms provider Telefónica, which is involved in several B2B ventures; six large air carriers which are setting up an electronic marketplace for aviation-related goods and services; and the world's biggest car manufacturers.

In the case of Myaircraft.com, the companies involved claim airlines could save as much as 25% in inventory costs by purchasing parts through their exchange. Normally, airlines are forced to maintain an oversupply of spare parts to avoid keeping their planes on the ground for too long.

The asset-intensive aerospace industry has a total of more than €50 billion in spare parts inventories. The venture's organisers insist that through this new electronic marketplace, airlines will be able to get up-to-date information on the availability of parts, allowing them to maintain the exact level of required stock.

"The idea is to create a cozy virtual inventory of all the parts in the world," said Ari Bousbib, vice-president for corporate development at United Technologies, one of the parent companies. "This will allow aircraft operators and people on the ground to adjust their inventories to the optimal level."

But the new venture faces strong competition from a rival exchange called Exostar being set up by Boeing, Lockheed Martin, Raytheon and Commerce One, which predicts that it will generate more than €250 million in the next two to three years. The fact that there were plans to set up an alternative exchange helped convince EU regulators that there would be plenty of competition in the sector.Industry insiders and legal experts predict that car giants General Motors, Ford Motor and DaimlerChrysler will face a tougher challenge to secure approval for their plans to form Covisint, an exchange for buying and selling car parts online. Like the Myaircraft.com partners, the car makers argue that they are seeking to reduce order-to-delivery times significantly, ensure better supply-chain planning and help companies boost efficiency. However, Covisint will no doubt get a tough grilling from regulators in Europe as well as in the US simply because the parent companies involved already enjoy such large market shares, especially in North America.

"Any time you have all the buyers and sellers in a market operating together, you have got a problem," said Ross Denton, of international law firm Baker & McKenzie. But he remains convinced that as long as companies followed traditional rules governing the exchange of information, even when it is distributed via electronic channels, it will be possible to set up a "squeaky clean" electronic marketplace.

There are, however, a whole host of other regulatory nightmares awaiting companies which want to pursue this kind of business.

There is, for example, the question of what happens to exclusive contracts between manufacturers and suppliers in one geographic area when these boundaries disappear and what customs duties and taxes apply in the case of a virtual marketplace.

Regulators may eventually find that they cannot tackle all these questions without a new set of guidelines specifically governing B2B marketplaces. "The same could be said of the telecommunications industry five years ago," said Denton.

For now, however, competition officials will have to continue to wrestle with the problems caused by applying traditional law to this brave new electronic world

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