Economics
Digital Economy
March 18, 2003
No. 36
conomics
Digital economy and structural change
The mechanical engineering and
automotive industries – online
marketplaces on the advance?
• Horizontal and vertical marketplaces are becoming increasingly important
for the mechanical engineering industry. In this way, mechanical engineering
companies use horizontal marketplaces for trading in indirect goods at
industry-wide level for the procurement of MRO consumables and office
material. Processing costs can potentially be reduced by 10% to 30% by
using horizontal marketplaces.
• Vertical marketplaces serve the mechanical engineering industry for trading
in direct goods within the sector. Estimates indicate that vertical marketplaces
facilitate a potential saving of 10% in product costs for direct goods. In this
connection, it is important to be aware that by lowering product costs by
10%, depending on the company, total costs can be cut by up to 6%. In
principle, mechanical engineering standard or mass-produced articles (e.g.
basic ball-bearings, pumps or tools) are better suited for online marketplaces
than complex special machines (e.g. hi-tech textiles, paper or printing
machines).
Editor
Hans-Joachim Frank
+49 69 910-31879
[email protected]
Technical Assistant
Martina Ebling
+49 69 910-31710
[email protected]
Deutsche Bank Research
Frankfurt am Main
Germany
Internet: www.dbresearch.com
E-mail: [email protected]
Fax: +49 69 910-31877
Managing Director
Norbert Walter
• The automotive industry is one of the industries in which B2B electronic
trading has become successfully established. One crucial reason for this is,
in contrast to other industries, its oligopolistic market structure, which
facilitates the setting up of industry-specific marketplaces. Another reason
for its relatively high importance is the fact that even before the internet
hype began, a large number of electronic networks were already in place
between suppliers (one of which is the mechanical engineering industry) and
automobile companies.
• The use of e-marketplaces in the extremely competitive automotive industry
leads to intensified price pressure; especially in the case of standardised
goods. For instance, reductions in purchase prices of up to 15% can be
achieved via online auctions. In contrast, in the case of complex products,
which are developed in a joint venture between the participating companies,
the partnership aspect becomes more significant. Furthermore, when
choosing the supplier for more complex goods, other aspects besides price
also play a role: in particular, quality, innovation, the company’s ability to meet
deadlines as well as the after-sales service offered by the company.
Josef Auer +49 69 910-31878 ([email protected])
Eric Heymann +49 69 910-31730 ([email protected])
Deutsche Bank Research
conomics
The mechanical engineering and
automotive industries – online marketplaces on the advance?
Online B2B trading sales
2001
Vehicle
construction
Mechanical
engineering
Mechanical engineering: heterogeneous range of
products poses challenge for marketplace operators
A feature of modern industrial companies is the utilisation of machines
to produce a wide range of goods such as foodstuffs, clothing,
magazines, pharmaceuticals, aircraft, power plants and buildings. Given
the key role of mechanical engineering in producing goods, its customer
structure is significantly broader than that of other industrial sectors.
The manufacturing industry consumes nearly three-quarters of
mechanical engineering output. Trade and services account for just
under 12%. The mechanical engineering industry’s most significant
consumer is mechanical engineering itself (23% share) followed by a
wide margin by the automotive industry (roughly 10%). On the supplier
side, a similarly heterogeneous picture emerges: 61% of mechanical
engineering consumption is related to the manufacturing industry; this
consumption is dominated by mechanical engineering products (25%
share ), followed by electrical engineering (11%).
Electrotechnology
Logistics
EUR bn
0
5
Source: Forrester Research, 2002
Mechanical engineering*)
140
% yoy
Online marketplaces are playing an increasingly important role in
mechanical engineering. Since the typical mechanical engineering
company primarily faces other engineering companies both on the
supply and demand side, it makes sense to look at online mechanical
engineering marketplaces. Furthermore, as a result of the
heterogeneous nature of the client structure within the industry, it would
seem fitting to analyse the significance of such marketplaces for the
mechanical engineering industry in terms of a meeting place with other
industry branches, especially marketplaces for capital goods.
Marketplaces reduce product and processing costs
As is the case in almost all other industries, horizontal and vertical
marketplaces also play a role in mechanical engineering. In this way,
mechanical engineers make use of horizontal marketplaces for trade
in indirect goods at an industry-wide level and C goods comprising
primarily the procurement of MRO consumables and office materials.
A KPMG survey of German mechanical engineering companies showed
that, from a point of view of time, roughly 80% of time used by purchase
departments is taken up in procuring relatively insignificant office
material or C goods, which, however, make up a mere 20% share of
the procurement volume. A typical, traditional procurement procedure
results in process costs of around EUR 100. A Diebold study of the
capital goods industry, conducted in conjunction with the VDMA
(German Engineering Federation), highlights the use of horizontal
marketplaces bringing about a savings potential of 10% to 30% in
process costs.
Vertical marketplaces enable the mechanical engineering industry to
trade in both direct and industry-specific goods. According to Diebold,
only 20% of all orders, but 80% of the entire order volume, are attributed
to direct goods which go directly into production. Given the sustained
value of direct goods, which is higher than that for indirect goods, the
reduction of product costs is in the foreground. According to Diebold,
vertical marketplaces facilitate a 0.5% to 10% savings potential in the
2
Economics
10
120
100
80
60
40
20
0
01
02
03
04
05
06
*) Sales development in European
B2B trading
Source: Forrester Research, 2002
Electrotechnology*)
280
% yoy
240
200
160
120
80
40
0
01
02
03
04
05
*) Sales development in European
B2B trade
Source: Forrester Research, 2002
06
conomics
Deutsche Bank Research
product costs of direct goods. It is important to mention at this point
that – depending on the company – a 10% reduction in product costs
leads to a reduction in total costs of up to 6%. In principle, mechanical
engineering standard or mass-produced articles (e.g. basic ball bearings,
pumps or tools) are better suited for online marketplaces than complex
special machines (e.g. high-tech textile, paper or printing machines).
Important horizontal and vertical marketplaces
One horizontal marketplace that has gained notice is T-Mart, which is
specialised in procuring low-value consumable goods such as office
and repair material, as well as MRO products. Besides the other
advantages of horizontal marketplaces, such as the reduction of process
costs, duration and purchase inefficiencies, the marketplace enables
the mechanical engineering company, the structure of which is more in
line with an SME, to move into international procurement; the company
has an attractive link to many online marketplaces throughout the whole
world.
Horizontal marketplace T-Mart
Given that the automotive industry consumes directly one-tenth, and
significantly more indirectly, of all mechanical engineering products,
and is thus the largest industry customer apart from mechanical
engineering itself, its marketplaces are equally important. These not
only include (vertical) marketplaces such as COVISINT and SupplyOn,
the marketplace of suppliers for suppliers, but also individual automobile
manufacturers’ marketplaces, such as that of Volkswagen.
Main customer: automotive industry
From a mechanical engineering point of view, important vertical
marketplaces include ec4ec and Componet because it is here that
mechanical engineers meet their suppliers for direct materials. The
ec4ec (E-Commerce for Engineered Components) marketplace focuses
on mechanical and plant engineering. This marketplace makes it possible
for companies to cover their sourcing and collaborative engineering
activities in full. Collaborative engineering, which has major future
potential and is the most engineer-intensive mechanical engineering
sector, means the joint development and planning by providers and
suppliers – e.g. the optimization of CAD planning. Ec4ec offers a
combination of advertising and free negotiation possibilities. In this way,
as part of a purchaser-driven procurement process, potential suppliers
are sent technical documents, sketches and specifications and
requested to use these when making offers. The suppliers can then
download and process these documents on their networks. This
sometimes results in close development cooperation and competition
with regard to concepts. Following the technical clarification process,
the supplier makes its offer which can only be accessed by the purchaser.
This means that marketplaces are more than an online place for trading
goods; they also open possibilities for cooperation.
Vertical marketplace ec4ec ....
The Componet marketplace targets the technical supplier industry. Its
range covers, inter alia, mechanical engineering, electrical engineering,
MSR technology and automotive and transport engineering products
and services. Tools such as auctions, advertising and online orders make
the negotiation stage effective. In the case of auctions, electronic agents
automate the bidding; continuous online presence is therefore no longer
necessary. The processing stage is supported by a logistics and export
services specialist in addition to a bank (financial services provider).
... and Componet
Economics
3
Deutsche Bank Research
conomics
Industry-specific mechanical engineering
marketplaces
Via industry portals, the VDMA-e-market Internet marketplace offers a
direct channel to companies and the products and services of leading
mechanical and plant engineering companies and the respective
professional association. The ser vices factor should not be
underestimated, especially in mechanical engineering, because
significant differentiation and profit opportunities can be found in preand after-sales service. There are currently six online specialist
marketplaces: motive power engineering, gaskets and washers,
pneumatic machinery, power engines, pumps and precision tools.
Specialist marketplaces for fluid technology, industrial image
processing, assembly and maintenance technology, robotics and sensor
engineering are all in the pilot phase. In addition, specialised
marketplaces for materials handling technology and productronics are
being set up. The cross-manufacturer industry platforms available to
VDMA member companies are primarily expected to shorten the search
and, thus, indirectly – similar to other sectors – contribute to cost
reduction and improved efficiency. Nevertheless, framework
agreements (containing essentials such as volume, but not details on
exact amounts and article numbers) or the other usual dynamic price
structure in B2B is not taken into account. Second-hand machines also
show specific online potential; in this way, second-hand mechanical
engineering machines are now being traded on the Internet-based bcee
second-hand machines exchange.
Vehicle construction*)
180
% yoy
160
140
120
100
80
60
40
20
0
01
02
03
04
05
06
*) Sales development in European
B2B trade
Source: Forrester Research
Mechanical engineering therefore uses horizontal and vertical
marketplaces. Measured in terms of order volume, vertical
marketplaces dominate trade in direct goods. In principle, standard or
mass-produced mechanical engineering items are better suited for
online marketplaces than more complex special machines. Collaborative
engineering has an especially favourable outlook for the engineerintensive mechanical engineering industry.
Automotive industry: online marketplaces already
established
The automotive industry is another industry where B2B electronic
trading has become successfully established. Here, too, the initial stage
of electronic trading was characterised by a number of mostly
independent marketplace operators, who pushed into the new market
segment, but disappeared soon after owing to a lack of success; this
consolidation process has yet to be completed. Nevertheless, it is clear
that some marketplaces are likely to exist for a long time. A crucial
reason for the already major importance of electronic marketplaces
today is the oligopolistic market structure of the automotive industry
compared with other industries. On the buyer side, i.e. car
manufacturers, there is only a small number of independent companies
worldwide, which favours the foundation of industry-specific
marketplaces such as COVISINT. Another reason for the major
importance of electronic trading in the automotive industry is that a
large number of electronic networks between suppliers and automobile
companies were already in place even before the onset of the Internet
boom (e.g. via orders forwarded automatically when certain inventory
numbers were reached). In this context, electronic trading between
vehicle manufacturers and their suppliers is nothing new. By the same
token, industry-specific electronic marketplaces have significantly
altered the supplier-customer relationships in the automotive industry.
4
Economics
Logistics*)
280
% yoy
240
200
160
120
80
40
0
01
02
03
04
05
*) Sales development in European
B2B trade
Source: Forrester Research
06
conomics
The dominant functions of electronic market places have thus far been
catalogue management systems and the opportunity to assemble offers
electronically as well as carry out online auctions. It goes without saying
that time and cost savings are a major concern. Many manufacturers
have already had positive experiences in this regard. For instance, by
placing purchases via the Internet for selected goods, Volkswagen
successfully reduced the lead time per order by 95%. Online auctions
also allow the lead time to be reduced significantly compared to
traditional procedures. What in the past often took months can now, to
a certain extent, be processed within a few days.
Deutsche Bank Research
Time and cost savings as a result of
online auctions
This constitutes a major advantage for the companies concerned if the
buyer communicates its requirements regarding delivered parts to the
marketplaces in good time. Thanks to this visualisation of demand,
suppliers can better plan their production. In this way, warehouse stocks
can be reduced.
15% cost savings through online auctions
In addition to saving time, auctions are, in principle, also a way of
reducing purchase prices. Experience shows that the prices generated
by online auctions are roughly 10% to 15% lower than the prices
achieved through traditional negotiations. According to estimates by
Cap Gemini Ernst & Young, manufacturing costs per vehicle can be
reduced by up to EUR 800 by using the Internet.
Time and effort required for the
preparation of online auctions
should not be underestimated
Of course, a great deal of time is needed to prepare an online auction;
this should not be underestimated. Depending on their complexity, the
goods to be procured need to be described in detail, auction participants
need to be informed in good time, the auction procedure has to be
transparent and a company’s own strategy must be discussed during
the auction. These are the conditions for achieving the desired success.
Collaborative engineering – a vision of the future
As in other sectors, until now it has primarily been MRO consumer
goods, standardised catalogue parts, basic external parts as well as
non-productive goods (e.g. office materials) that have been purchased
on electronic marketplaces; the aforementioned auctions are the usual
tool used here. The classic auction is less well suited to more complex
modules, components or systems. Electronic marketplaces are also
less significant here. However, in future, it is likely that these products
will be increasingly available to order via the Internet. To this end,
collaboration between purchasers and suppliers is possible as early as
at the development stage, i.e. the joint development of products via a
single marketplace; ideally this would also reduce the time needed for
development. Collaborative engineering is still in its infancy. The same
is true for virtual supply chain management or concept competitions
whereby suppliers face the challenge of developing solutions for a
specific problem. However, such models are a thing of the future.
Auctions for complex modules and
systems less suitable
Competition will become fiercer
The use of electronic marketplaces in the fiercely competitive
automotive industry will mean that cost pressure will intensify further.
This is particularly true for standardised goods as it is here that the
purchaser’s primary goal will be to lower the purchase price. By contrast,
for more complex products which are developed as part of a joint
venture, the partnership between the companies concerned becomes
more significant. Thus we are dealing more with a ”win-win situation”,
i.e. both parties essentially benefit from this concept. Moreover, in the
Economics
Marktplaces serve to intensify
pricing pressure
5
Deutsche Bank Research
conomics
case of more complex goods, other aspects besides the price are
important in the choice of supplier. These include especially innovation,
quality, the company’s ability to observe deadlines and its after-sales
service. By contrast, car manufacturers are the clear winners when it
comes to standardised goods, whereas suppliers’ profits are on the
decline. The increased pressure on the sales prices is certainly also a
decisive reason why several suppliers are sceptical of the new
procurement tool. Moreover, the Internet is a good disciplinary tool for
car manufacturers as alternative suppliers can be found more easily
via the marketplaces, thus giving them a ”secret weapon” vis-à-vis
their current business partners. All in all, it remains an undisputed fact
that in future, no company will be able to afford not to approach its
customers via electronic marketplaces. More and more purchasers
consider this a condition for even accepting the company as a supplier.
Standardised goods: manufacturers
are the clear winners
Restraints on electronic marketplaces
Several restrictions still stand in the way of the automotive industry
using electronic marketplaces more intensively. Worthy of particular
mention is trust, which is often lacking in an unknown or barely known
online business partner. Furthermore, technical software problems are
still proving to be an obstacle. This is especially the case if suppliers
have to participate in several electronic marketplaces with different
software solutions in order to fulfil a purchaser’s demands. In such
cases, the cost-benefit ratio is also unclear to the supplier. Also irksome
are the companies’ fears that they are relinquishing a competitive edge
or advantages compared to competitors as, for instance, the
transparency in the procurement business is substantially increased
through online auctions and also through collaborative engineering. It
is precisely here in the research-intensive automotive industry
(especially car electronics) that this danger should not be
underestimated. Suppliers ultimately fear that car manufacturers want
to force more cost transparency to increase their influence on pricing.
Lack of trust is major obstacle
Consolidation only a matter of time
Compared with other sectors, a smaller number of electronic
marketplaces is expected to materialise in the automotive industry.
For this reason, a further decline in the next few years is therefore a
given. One reason for this is, in particular, the already mentioned
oligopolistic product structure of the automotive sector. In a sector
comprising only a few end-customers, it hardly makes sense to
establish marketplaces to an excessive degree. In addition, car
manufacturers are likely to transact business primarily via the
marketplaces that they initiated themselves. When all is said and done,
trading platforms – like in other sectors – need to attain critical mass
to be able to survive financially.
Only few marketplaces will survive
Arguably the most significant marketplace for the automotive industry
is COVISINT – a joint venture by General Motors, DaimlerChrysler and
Ford, which Renault, Nissan and the PSA-Group have since joined.
Commerce One and Oracle act as technology partners. The figures
from this public marketplace are really rather impressive: more than
8,000 registered companies and almost 3,000 online transactions
comprising a transaction volume of USD 82 billion in the past two
years are clear indications of its success. At the national level, SupplyOn
is worthy of mention. Participants in this marketplace, which is also
public, are the automotive suppliers Bosch, Continental, ZF
Friedrichshafen and Siemens VDO, all trading substantial proportions
COVISINT most important
marketplace
6
Economics
conomics
of their purchases via this portal (total purchase volume: approx.
EUR 30 billion). One significant private marketplace is VW Supply
Group.com, the supplier platform on which all eight Volkswagen Group
brands – according to their own figures – transact almost the entire
purchasing volume of over EUR 50 billion. Last year, more than 500,000
transactions were carried out in this marketplace with some 5,500
suppliers participating.
A crucial advantage of these marketplaces is that as financially strong
companies these shareholders can bear the costs incurred during the
start-up stage. Moreover, the figures mentioned above already signal a
great deal of importance for the companies concerned. The chances of
survival for these marketplace are significantly greater than for
independent marketplaces without backing from large companies in
the automotive industry.
Booming B2B market growth expected
A current Forrester study on the ”Future of European B2B Business”
forecasts buoyant growth in the coming years. The study is based on a
survey of companies from 15 European countries and 13 sectors. In
Europe EUR 77.9 billion in sales, or less than 1% of business between
companies was settled online in 2001. A level of EUR 945.6 billion is
already expected for 2004 (share: 10%). Further expansion to EUR 2.2
trillion is expected by 2006; so that 22% of entire trading between
companies in Europe would take place via the Internet.1
The ”traditional” industrial sectors such as mechanical engineering and
automobile construction are undergoing dynamic growth similar to that
of the average sectors studied. In 2004, the share of Internet business
in mechanical engineering and the automobile industry will also reach
about one tenth of the respective B2B business. In 2006 the B2B share
in mechanical engineering will be around 22% and even 27% in the
automobile industry. VDMA sector experts believe that only half of the
expansion forecast by Forrester is realistic in their sector.
In hindsight, forecasts made at the zenith of the New Economy on the
outlook for electronic marketplaces have generally proved to be overly
optimistic. Since the Internet bubble burst, the forecasts have been
revised downwards to a significantly lower level. While we believe there
is no doubt that the entire B2B sector will continue to grow, we are
nonetheless of the opinion that the upward slope of the expected growth
curve will be somewhat flatter than expected today. In our view, a rise
in the B2B share to about ten per cent of overall trade by 2006 is realistic.
Josef Auer, +49 69 910-31878 ([email protected])
Eric Heymann, +49 69 910-31730 ([email protected])
1
Deutsche Bank Research
Share of online B2B trade in
overall trade volume in 2006
(forecast)
40
Electrotechnology
Logistics
30
Chemicals +
Plastics
30
Energy + Utilities
28
Vehicle
construction
27
Metal industry
27
Mechanical
engineering
22
Consumer goods
19
Company-related
services
19
Textiles and
clothing
17
Foodstuffs
15
Wodd, paper and
cardboard
14
Construction
14
Manufacturing
industry
22
0
20
%
40
60
Source: Forrester Research
The absolute volume of sales stated in the Forrester study is not compatible with
the figures cited by the marketplaces in the automotive industry; the Forrester numbers are lower. This is mainly due to differences in the way the statistics are defined,
in terms of both region and content. Forrester bases its findings on primary data
from Eurostat, surveys of companies from the respective sectors and information
from the national statistical offices. The deviations help, though, to highlight the
general difficulties with the data pertaining to e-commerce.
Economics
7
conomics
ISSN 1619-3245
The mechanical engineering and automotive industries
- online marketplaces on the advance?
Germany’s broadband networks - innovation on hold
Information & communication technologies - panacea for traffic congestion?
Germany’s venture capital market: prospects remain dim
Free software, big business?
E-government: large potential still to be tapped
Business locations in a networked world - No death of distance
Taxation of e-commerce - looking for solutions
March 18, 2003
February 17, 2003
December 11, 2002
December 5, 2002
November 22, 2002
October 31, 2002
August 27, 2002
August 1, 2002
Biometrics - hype and reality
May 22, 2002
Technology and work - the 21st century and its challenges
April 29, 2002
Online brokerage in Germany 2002: strategy changes and market shakeout
April 19, 2002
B2C trading in the automotive industry: the internet is primarily
a source of information
April 18, 2002
Framework conditions for e-commerce: all in good order?
February 11, 2002
Virtual marketplaces in the chemicals sector:
B2B turnover expanding strongly
January 24, 2002
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© 2003. Publisher: Deutsche Bank AG, DB Research, D-60272 Frankfurt am Main, Federal Republic of Germany, editor and publisher, all rights reserved. When
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