Like most forms of electronic commerce, on-line business-to-business (B2B) marketplaces were born in the USA (see sidebar, "B2B for beginners"). Still finding their feet in that country, they have also begun to appear in Asia, where their value could be substantial. One market research firm¹ expects that by 2003, on-line B2B transactions in the Asia-Pacific region will be worth $270 billion, some 20 percent of the worldwide total.

The trading mechanisms of B2B marketplaces are much better defined and understood today than they were a few years ago. So are the ways their owners can make money. Asian market builders can thus learn from the experience of the pioneers in the United States, but this doesn’t mean that it will be easy to establish successful marketplaces in Asia. The important sources of value for buyers won’t be the same, because the business environments are different.

Asian buyers, for example, will gain less from lower procurement-process costs than US buyers have, because those costs are already low in Asia, thanks to its lower cost of labor. Conversely, Asian supply chains are much less efficient, and this leaves a wider margin for market builders to improve them, not just by establishing electronic marketplaces but also by enhancing the physical infrastructure and by offering additional services, such as help with logistics. These services are treated as extras in the United States, where marketplaces use them to gain a competitive advantage; Asian marketplaces, by contrast, will have to provide them just to get started.

Advantage, incumbents

The main lesson Asian businesses can learn from the development of B2B e-commerce in the United States is that marketplaces launched by big industrial insiders have the greatest likelihood of success, especially for industries with only a few large buyers or suppliers. In such industries, a marketplace launched by a single company or a small group has enough buying or selling clout to attract a worthwhile volume of trade from the start.

In the United States, most of the intermediaries launching early on-line B2B marketplaces came from outside the industries they served. Some used proprietary technology—typically, market-making and auctioning tools. These intermediaries struggled to build sufficient trading volumes. Big incumbents soon realized, first, that if they joined any B2B marketplace they would instantly provide the necessary volume and, second, that owning such a marketplace could be lucrative. Consequently, several of these companies have jointly launched B2B marketplaces in industry sectors such as aerospace, automotive, food, and retail (Exhibit 1). Asian incumbents will probably follow this example. Outsiders are therefore likely to create successful marketplaces only in industries with highly fragmented buyers and sellers, such as specialty chemicals, fine chemicals, and freight, where outsiders can form alliances with several incumbents.

Moreover, outsiders with proprietary software no longer have an advantage: any marketplace can now work with technology providers such as Ariba, Commerce One, and i2 Technologies to secure the software that makes B2B transactions possible. Seven conglomerates from Greater China (including Hong Kong and Taiwan), for example, are forming an electronic marketplace for their collective purchases, worth the equivalent of 20 percent of Hong Kong’s gross domestic product. Commerce One, which until recently was thought to be positioned to own such a marketplace, is providing the technology.

Large incumbents in Asia have another advantage: their extensive network of relations, both formal (through cross-shareholdings and the like) and informal, with customers, suppliers, regulatory authorities, technology providers, and investment banks. Such a network—a characteristic of successful Asian companies—is critical to the building of the alliances that characterize winning B2B markets the world over. An industry outsider in Asia isn’t likely to have a network anywhere near as broad, deep, and strong as an incumbent’s.

The Asian B2B environment

Companies that want to build on-line B2B marketplaces in Asia won’t be able to adopt the US marketplace models wholesale. Rather, they will have to address four challenging differences in the Asian business environment.

1. Manufacturing dominates

Asia has become the workshop of the world: more than half of all manufacturing on Earth is estimated to take place there. Manufacturers buy more "direct" goods, so-called because they are directly used in final products, than "indirect" goods—things, like office supplies or travel, that contribute to a product or service but are not a part of it. In Asia, we estimate, direct goods account for at least 80 percent of the total purchases of companies, whereas in the United States they account for only 60 percent.

US experience suggests that trade in direct goods is harder to move on-line than trade in indirect goods, which are easy to specify in a buyer’s request for quotes or a seller’s catalog; many direct goods, by contrast, have to be tailored to suit a particular production process. Instead of offering direct goods in a catalog, suppliers may need to develop engineering drawings with their buyers. Customers therefore tend to be cautious about changing the way they buy direct goods.

2. Supply chains are less efficient

On average, distribution and logistics account for 12 percent of FOB steel prices in Asia, compared with 4 percent in Continental Europe, for Asian supply chains are less efficient and more fragmented than supply chains in Europe and the United States. There are usually three or four intermediaries between each seller and business buyer in Asia but only one or two in Europe. Asian companies also tend to perform less well than European ones on other indicators of supply chain efficiency: finished-goods inventory, raw-materials inventory, stock-outs, and accounts receivable (Exhibit 2).

3. Infrastructure is less well developed

Moreover, in Asia the e-commerce infrastructure lags behind that of the United States. Most Asian countries lack an efficient on-line payment system. There are few established third-party logistics providers. Neither the mechanisms for managing suppliers’ credit risk nor legal sanctions against defaulting debtors are as well developed as they are in the United States.

Also, information on companies is scarce. In the United States, an information provider such as Dun & Bradstreet can supply data on the finances of a midsize company. But in China, for example, no such information is publicly available. Payments may therefore have to go through the secure but complex letter-of-credit route, for which each country has its own procedures. In India, issuing a letter of credit can involve up to seven banks and government agencies.

4. Markets are smaller

On-line B2B marketplaces that carry large volumes from the outset are most likely to attract more users and thus to succeed over the long term. Most domestic US markets for on-line marketplaces are big enough to achieve the volume required for success. In contrast, B2B markets targeting any single Asian country may have too little home demand to achieve sufficient scale.

Asian tailoring

The four characteristics of the Asian business environment just described determine how market builders must proceed to develop successful electronic marketplaces in Asia.

Target direct goods early

To gain liquidity, B2B markets serving Asian industries will have to target direct goods early on. Marketplaces can begin with simple, standard commodities such as fasteners, chemicals, and bolt-on components for the automotive sector. Then they might try to attract complex engineered goods on-line. To do so, they may have to offer digital asset-management software, which allows buyers and sellers to transfer engineering designs and specifications. Marketplaces probably will also have to help members train their buyers in the use of the new systems and manage the change to on-line procurement, for buyers are conservative the world over, and Asian buyers are no exception.

In industries with relatively few buyers, those buyers owning marketplaces can obtain large savings by purchasing direct goods on-line. In South Korea, for instance, B2B on-line auctions in the chemical industry have yielded savings of 10 to 15 percent. So for marketplace owners such as BeXcom (an Asian B2B technology provider and marketplace builder), the extra cost of targeting direct goods may be offset by the volume of trade such a strategy attracts. Since 1996, BeXcom has developed flourishing on-line marketplaces largely for direct inputs like petrochemicals and food in Asia, Europe, and the United States.

Target supply chain efficiency

B2B markets make supply chains more efficient by improving the communications between links and by obviating the need for links

On-line marketplaces can make supply chains much more efficient in two ways: by improving communications between links in the chain and by obviating the need for so many links. To improve communications, the marketplaces must connect every buyer and seller in the supply chain by using technology compatible with different information technology systems. This is a difficult condition to fulfill, and no B2B marketplace in Asia has yet begun rolling out such a technology. Still, some incumbents are showing how this might be done.

For example, Li & Fung, a textile producer, works with a number of specialist spinners, knitters, weavers, dyers, finishers, sewers, and printers as well as with wholesalers, retailers, and customers for finished goods. Many of these business partners are spread across Asia. Instead of owning them in a traditional, vertically integrated structure, Li & Fung has leveraged World Wide Web technology to manage a multitude of production sites. The company has brought its entire supply chain on-line so that each link knows what to produce and when. Incumbents already using these technologies in their core business can and probably will transfer them to B2B marketplaces. Especially if the members of an on-line marketplace integrate such technologies with existing enterprise resource-planning (ERP) and other IT systems, the resulting gains in efficiency will be substantially greater than the potential savings in procurement costs (Exhibit 3).

B2B marketplaces can eliminate the need for intermediaries by helping buyers and sellers to "meet" and strike deals electronically. For this approach to succeed, the marketplace must include enough suppliers to offer a buyer a good choice. Again, scale is crucial.

Target additional infrastructure roles

The absence of a well-developed infrastructure to support e-commerce gives B2B marketplaces an opportunity—in some cases, a pressing need—to fill gaps. Marketplaces can play several roles beyond simple matchmaker between buyers and sellers. For example, NECX, a subsidiary of VerticalNet, is a consumer electronics marketplace that also provides inventory-management, financial-settlement, and global logistics-management services as well as quality assurance checks on Asian suppliers. Marketplaces in Asia are likely to offer such extra services, often in partnership with companies that are expert in integrating flows of physical goods and information.

These services could capture substantial value. In India, the difference between farm gate and mill prices for agricultural goods is 35 to 50 percent (compared with 9 to 10 percent in the United States) because the supply chain has many intermediaries and little supporting infrastructure. A B2B marketplace that consolidated agricultural produce and managed physical flows and finances from broker to farmer could capture several times the value available to a marketplace pure and simple.

Marketplaces wouldn’t necessarily have to build any new asset to broaden their role; to provide their members with logistics services, for example, they could ally with existing freight forwarders. But of the few established logistics firms in Asia, even fewer are internally networked, and none is pan-Asian in scale. So a marketplace might need to ally itself with several firms across the region. Later, it could join forces with a B2B marketplace specializing in transportation, such as the Global Transportation Exchange (GTX), the marketplace that Hutchison Port Holdings and Oracle are creating. These companies plan to offer a broad set of services, including the optimization of transportation routes, the tracking of an order’s status, documentation to facilitate expeditious customs clearance, and general information on ports, routes, and cargo facilities.

Target export markets

To combat the problem of small home markets, some Asian B2B marketplaces may need to target users in larger Asian regions and in developed countries. Many Asian conglomerates already do so, which suggests that they should be natural B2B marketplace owners. For instance, the Sinar Mas Group—one of the largest Indonesian conglomerates, with interests across Asia in agribusiness, banking, property, and pulp and paper—is building on the regional scale of its businesses to develop several e-commerce joint ventures. Two of these enterprises are a venture in China to give retailers access to Internet purchasing facilities and an alliance with Paperexchange.com, a Boston-based on-line marketplace for paper. Another of the ventures is a scheme to develop vertical markets in food products, paper, real estate, and steel together with Commerce One and a Japanese trading house, Nissho Iwai.

Regional players in a single industry can gain scale by collaborating to form a vertical B2B marketplace—as petrochemical buyers and sellers in China, Indonesia, South Korea, Taiwan, and Thailand did when they formed the petrochemical marketplace ChemCross. Besides a marketplace, it will provide services such as stock keeping, financing, insurance, and transportation.

It will not, however, be easy to expand on-line B2B markets across Asia. Some elements of a marketplace—the way that it generates its income, the supporting technology it uses, and the brand—may remain the same throughout the continent. Other elements will vary country by country to accommodate differences in local regulations, taxes, languages, and other aspects of culture.

A marketplace can attract users by stressing that e-commerce could help them build sales and logistics networks in developed countries, something many Asian exporters have struggled to do in the past. B2B marketplaces make building these networks easier by reducing costs and reaction times on both sides of a transaction.

Many customers in the developed world like nothing more than an attractive deal, and e-commerce gives Asian sellers access to those customers. Global Sources—originally, under the name Asian Sources, a Hong Kong publisher of industrial trade magazines—launched a Web-based marketplace in 1995. Today, Global Sources has more than 195,000 buyers (including global companies like Dell Computer and Sony) and 83,000 suppliers. The buyers and sellers use the network to exchange goods ranging from computer sound cards to baby strollers to watchbands. Although trade magazines still bring in a large slice of the company’s revenue, a growing share comes from licensing and subscription fees for trading services.

On-line B2B ventures launched by incumbents are likely to make steady progress in Asia. Tailoring US business models to local Asian conditions will turn B2B ventures into different animals. Successful Asian electronic marketplaces offering a wide range of services suited to the local business environment will in fact be much more than just electronic marketplaces.