Jose Suarez used to run a Moscow-based trading company which exported leather hides around the world. Now, based in Barcelona, he has founded LeatherXchange.com which he hopes will become the leading B2B (business to business) marketplace for the global leather industry.
The exchange has about 500 member companies and lets buyers and sellers trade online in raw and semi-processed hides and skins. Claiming to be receiving about 60 requests for quotes a month, Suarez's exchange has been held back by the fact that customers cannot physically see the animal hides they are ordering.
So next January it will launch an inspection service. There will be four inspectors operating out of Barcelona and Kiev and three out of Moscow who, based on agreed online specifications, will travel across Europe to physically inspect orders of pig, sheep and cattle skins before they are shipped to the exchange's customers.
Suarez says: "The internet is a great communications channel but in itself a virtual marketplace is not going to work. You find someone online and all you have are some cold forms. You need to set up with people who are able to augment the information which exists on the cold forms."
The task of guaranteeing and delivering on virtual handshakes is one of the biggest headaches afflicting ambitious founders of B2B exchanges across Europe. It is a huge market. Recently Forrester Research announced that transactions on B2B exchanges in Europe are set to rise to £534bn by 2005.
Evangelists for this pioneering way of trading are talking about buyers being able to make better-informed purchasing decisions and they say suppliers will have a cheaper sales channel which will be invaluable in fragmented markets. While few people doubt the potential of the internet to transform B2B transactions, the reality is that the industry is struggling to successfully meet very high expectations.
"I think right now it's all hype," says Gartner Group's research director, Petra Gartzen. "In terms of actual transactions going through marketplaces in Europe, there is little going on. It's really minute."
The low level of activity can be explained by the fact that the industry is still very much in its infancy but Gartzen argues that a lot of new B2B exchanges are shooting themselves in the foot by being too buyer-biased and suppliers fear they are losing control of the pricing of their products and services. "The marketplaces need to be focusing on how they can help suppliers maintain their brand in an internet world. They do not have a proper understanding of how to put a value proposition to a supplier," she says, adding that too often exchanges rank suppliers simply on price and do not promote other factors such as quality of service.
Rouzbeh Pirouz, chief executive of Mondus.co.uk, which runs e-marketplaces for IT and office services across Europe and in the US, believes online exchanges do offer benefits to buyers and suppliers. "It's a very easy and targeted way to meetcustomers. Just having a shop front on the internet is not enough to pull in the customers."
Mondus, with 175,000 registered users, recently organised roadshows with the British Chamber of Commerce to promote online B2B transactions. Pirouz will not reveal the actual number of transactions carried out through Mondus but he says he is confident about the state of the market.
"I think a lot of transactions are occurring. Obviously the challenge that B2B marketplaces have is to track and account for as many transactions as possible. A lot of transactions do occur through the contacts that are made."
He adds that an independent third party assessment of Mondus recently found that about 12% of the relationships established through Mondus had resulted in transactions online and offline.
Many exchanges have online feedback mechanisms which are usually geared to buyers reporting on experiences they have had with particular suppliers. Pirouz points out that feedback does not generally focus solely on pricing. Ratings can cover anything from customer service through to delivery times, and buyers can use these online tools to build long term relationships with new suppliers.
All pan-European exchanges know their virtual marketplaces have to be trusted if they are to succeed and they are exploring ways to instil greater trust in potential buyers and suppliers. Intelligo.cz, a new Prague-based B2B e-marketplace for office products in central and eastern Europe is insisting that all customers of its new exchange sign contracts covering the quality of product information they offer. The exchange owners also want to use the contracts to reassure users that any data they submit online will be secure and not passed on to any competitors.
Chief executive Dalibor Wijas says that anyone in breach of their contract will be banned from the exchange. Using credit checks is another way of building trust in an e-marketplace. But so far this has not been possible for Intelligo.cz.
"It's not easy to get that information about small companies in the Czech republic and the small ones are the ones doing business in the marketplace."
The emerging B2B e-marketplaces are also having to deal with some of the thorniest problems plaguing dot.coms. For example credit card transactions are regarded with the same levels of apprehension in B2B exchanges. So much so that UK-based Ace-quote.com, an exchange for IT services, does not offer an online transaction facility for its customers who include corporates, public sector authorities and small businesses. Instead the site generates income from subscriptions and lets buyers and sellers identify each other online before meeting offline to sign deals. However co-founder Helga St Blaize wants to introduce online payments soon.
"I think it's only a question of time. There is not a great deal of confidence in the security aspects of the internet in business transactions where we are talking about a great deal of money. And we are certainly looking at ways of ensuring that both the buyers and sellers are in a secure environment to transact online."
She believes that as buyers begin to know each other it will get to a point where they want to automate the process and she hopes they will do that through the online marketplace.
Many buyers and suppliers who plan to use B2B exchanges face a dilemma. With so many setting up, it is difficult to know which they should integrate with. Mondus feels this will create pressure on exchanges to distinguish themselves and build market share quickly. Pirouz says: "People are not going to be able to integrate themselves with an infinite number of marketplaces which is why I think there will be considerable consolidation within the industry and that should make life simpler for suppliers."
Some suppliers may feel they have little choice but to integrate with exchanges run by their large corporate paymasters. For example a major supplier to the car industry will find it hard to ignore Covisint.com, a B2B exchange which is being developed by General Motors, Ford and DaimslerChrysler.
As the hype for B2B intensifies, plenty of new software vendors have moved into the market. Leaders in the space include Commerce One and Ariba but not a single software company is yet able to provide a complete solution for B2B exchanges covering everything from payments to fulfilment.
What is tending to happen is that large software companies are forging alliances with niche players to try to provide a full range of services. But integrating a series of different packages can be a nightmare for technical directors.
To try to assist B2B players select the right partners and to help tackle technical problems in the fledgling industry, a new B2B trading community has launched in the UK called NetmarketsEurope.com . Based in London, the organisation runs regular workshops where European B2B practitioners meet with leading software sellers and brainstorm issues and problems such as how to scale quickly and find the right people.
Chief executive Simon Torrance says the aim is to try to clear the fog which is engulfing sections of the emerging B2B industry. "We give them an opportunity to huddle together in little wagon circles and share best practice so they feel better about the long journey they are undertaking."
The frenzied B2B hype seems to suggest that these new marketplaces will develop easily and in a tidy way as they successfully follow a straight path to hugely impressive levels of profitability.
But it is clear that most B2B exchanges across Europe still have steep mountains to climb and not all are going to make it.
