From novelty to necessity.

The globalization of chemical and plastics industry e-commerce

E-commerce has rapidly transformed from novelty to necessity in the global chemical and plastics industry. In the last twelve months new Web-enabled business models and technologies have been launched in virtually all of the industry's product segments and main operating regions, as more and more companies have moved from e-commerce evaluation to action. Not all products and regions are at the same stage of e-development, of course, but the overall trend is clear--the industry is increasingly committed to implementing a wide range of e-commerce initiatives to deliver everything from cost reduction to long-term value creation.

The consensus among analysts is that chemical and plastics industry e-commerce is most advanced in North America, judging by the regional split of industry e-projects and dot-coin startups announced in the last year. The European chemical industry is catching up fast, however, and by most accounts its e-commerce efforts are only six to twelve months behind those in North America. Chemical industry e-commerce is also gathering speed in Asia/Pacific, Latin America and elsewhere in the world, but it has yet to reach the scale and pace of development present in North America and Western Europe.

The regional variation in the industry's online efforts is in line with the staggered development of the broader e-commerce market. According to Forrester Research, business and consumer e-commerce across all economic sectors will hit hypergrowth in North America this year, Western Europe in mid-2001, Asia/Pacific end-2003, Latin America end-2004, Eastern Europe late-2005, and the Middle East & Africa end-2005. This year global e-commerce will be worth $657 billion, with 78% of that in North America, 13% Western Europe, 8% Asia/Pacific, 0.5% Latin America and 0.5% Rest of World, Forrester predicts. In 2004 the global market will be worth $6.8 trillion, Forrester predicts, with North America 51%, Western Europe 23%, Asia/Pacific 24%, Latin America 1%, and Rest of World 1%.

This year's dramatic decline in technology stock valuations may have eliminated much of the hype surrounding e-commerce, but most senior executives are still convinced that it will have a substantial impact on their organizations, according to a recent e-commerce report by Andersen Consulting. The report, which is based on a pan-industry survey of senior executives, finds that most are continuing to develop and implement online projects: "In the U.S., 94% of e-commerce plans were unaffected by the March/April market correction, and enthusiasm continues to build--84% have plans to exploit future e-commerce opportunities, compared to 72% last year. European responses are becoming more similar to those in the U.S. on these questions, but continue to be 5%-l0% less positive."

In both North America and Western Europe, e-commerce is now one of the most complex and fast-moving aspects of the chemical and plastics industry. This year alone has seen a host of new online companies launch to serve every aspect and segment of the industry, backed by everything from industry investment to venture and private capital. New industry-sponsored e-marketplaces--many with investors from both North America and Europe--include Elemica and Envera, which both aim to bring efficiencies to contract chemical business; Omnexus, which is serving thermoplastics buyers; e-procurement platform Trade-Ranger; and the online process equipment site Industria. Other startups backed by venture or private capital are focusing on everything from particular industry segments-including plastics, inorganics, fine & specialty chemicals, water treatment, and solvents--to functional areas like logistics, finance, customer service, human resources and product testing.

Although some of the industry's earliest e-commerce adopters--including Dow, DuPont and Eastman--are headquartered in North America, an increasing number of European companies--BP and BASF among them--are committing substantial resources to the area. A recent survey by Deutsche Bank, for example, finds that virtually every European chemical company is ready to take advantage of e-commerce. When the group asked the CEOs of Europe's top 100 chemical companies if they planned to use third-party Internet companies in the near future, 100% of them answered yes. Some 37% of the CEOs also plan to buy l0%-20% of their raw materials online, and the majority of them--60%--say it is important that external trading systems integrate with their own systems, including enterprise resource planning applications.

One aspect of the Internet revolution where Europe has a clear lead is in mobile e-commerce (m-commerce), due to its single wireless telephony standard--global system for mobiles (GSM)--and resulting high penetration and usage rates. "We're going to see a dramatic increase in online activity as wireless bandwidth increases and m-commerce becomes a practical reality," says Paul Hodges, v.p./Europe at ChemConnect. "It will take us to a new level of value creation by eliminating many of the inefficiencies in today's business practices--including all those revolving around not being able to get the right information to the right people at the right time."

Chemical and plastics industry e-commerce is also advancing in Asia/Pacific, although some countries and regions are still developing the technology infrastructure necessary to sustain widespread Internet and e-commerce adoption. Recent developments include a number of new online exchanges--including ChemCross and ChemRound in Korea, WorldSol.com in Malaysia and Chemease.com in China--and joint e-ventures, like the strategic alliance between Singapore-based Sesami.com and Eastman Chemical Asia/Pacific to develop the Sesami.com site into a full-service chemicals portal.

Elsewhere ChemConnect has teamed with four of its Charter Members--Japanese trading groups Mitsui & Co., Mitsubishi Corporation, Sumitomo Corporation, and Marubeni Corporation--to form two new online joint ventures serving the Japanese chemical industry. ChemConnect Japan will operate an online chemicals and plastics exchange and Chemical Mall Asia/Pacific a manufacturers' e-mail. ChemConnect will provide technology and management, and the four trading groups infrastructure and market expertise.

Chemical and plastics industry e-commerce is still in its early stages in Latin America, where the level of technology infrastructure in place varies substantially by country, but leading companies are already using online exchanges to expand market reach and lower transaction costs. A number of startups targeting Latin America have also launched recently, including Todoplasticos.com and Plastico.com--both based in Miami--in the polymer and plastics sector. However many observers predict that it will be two to four years before e-commerce reaches critical mass in the Latin American chemical and plastics industry.

E-commerce differs across product segments

Companies in virtually every segment of the global chemical and plastics industry are developing and implementing strategies for online trading, but different sectors naturally have different priorities. Commodity businesses, with their traditional focus on price and volume, are initially using online exchanges to reduce raw material costs--by finding new suppliers and by using reverse auctions to create more competition between all suppliers--and increase volumes, largely by using the speed and reach of the Web to find new customers.

Plastics producers and consumers are already actively using online exchanges to overcome the substantial fragmentation of their industry, which creates a host of pricing and transactional inefficiencies. Online marketplaces are arguably the only mechanisms that can efficiently gather the huge number of plastics buyers and sellers in the world--a process that increases market reach and price transparency for all participants, while also reducing transaction costs. E-platforms also intensify global competition and lead to more short-term volatility in pricing, however, Volatility increases because e-markets help to create real-time prices, which respond instantly to subtle shifts in global supply and demand.

Service-oriented fine & specialty chemical suppliers are also seeking online price and volume gains, but some of their products--particularly those that are tailored for individual customers or that involve a substantial amount of technical service--are not easy to sell over the Web. In those cases, for example, many companies are using e-commerce to get closer to their customers--to improve collaboration while also reducing transaction and communication costs.

In the industrial gases sector, companies buying bulk commodity gases are naturally using online platforms to reduce costs. But in specialty gases, companies are using online exchanges to find new customers for unique new products--which represent some 10% of the $33 billion/year industrial and specialty gases segment. Some specialty gases producers have seen prices increase by 200% and more online, although gains of this size are more exceptional than normal.

How various companies are adopting e-commerce

BASF is active in several marketplaces

BASF is taking part in a number of newly-announced e-marketplaces, including cc-Markets, a technical goods and services hub hosted by mySAP.com and including Degussa-Huls and Henkel; Elemica, an e-marketplace for streamlining contract business between chemical industry trading partners; and thermoplastics e-marketplace Omnexus, which was established by BASF, Bayer, Dow Chemical, DuPont and Ticona/Celanese. BASF has also invested in ChemConnect and uses it as its main online venue for spot transactions. E-service providers include yet2.com, which facilitates the transfer of technology and patents.

Although many companies expect e-commerce to increase price and margin pressure in the medium to long term, BASF has to date had a more positive experience of Web auctions. The company has taken part in over 20 auctions, a senior executive says, and in most of them it has secured higher prices for its products than it was able to via traditional methods.

BASF plans to invest $75 million over the next two years on e-commerce, and has established a global e-commerce task force with 20 employees in Europe, 18 in the Americas and 5 in Asia/Pacific. "We see e-commerce as a great opportunity for BASF to strengthen its customer relations by means of tailor-made solutions, and to further improve the efficiency of its procedures," says Kurt Bock, head of BASF's Logistics and Information Technology Division.

The e-commerce task force has a coordinating role, but the group's businesses are developing projects independently. All of the group's 28 divisions have projects in action or in development, for example. "We are exploring the full possibilities that e-commerce offers all our processes, and have numerous initiatives underway, Bock says. He adds that the group is already using e-commerce to improve customer service, increase its supplier base, and create efficiencies throughout the supply chain.

BASF says that it aims to conduct some 35%-40% of its business online by 2002 and 50% by 2005. In 2002 the online business will split into roughly 60% via direct system-to-system integration, 15% through e-marketplaces, and 25% via the company's extranet or dot-com storefronts.

GE's aggressive approach to e-commerce

Last year GE Plastics integrated Polymerland, arguably the first company e-commerce site in the chemical and plastics industry, into its overall operations and renamed it GE Polymerland. Now the company aims to transform GE Polymerland into a full-service portal for the polymer and plastics industry. "Customers will see GE Polymerland become more of a portal that provides depth of content, community and commerce," says Suzanne Giardino, portal leader at GE Polymerland. "We're adding content and services to expand our audience beyond core buyers by drawing in engineers, plant managers and other participants in the plastics industry."

GE Polymerland recorded online sales of $1 million in 1998, $100 million in 1999, and is on target for $750 million this year. GE Plastics signed up as a Charter Member of ChemConnect's World Chemical Exchange in February and by mid-April was using the site throughout its global operations. Currently some 70 of the company's procurement and other managers in its 15 facilities around the world use the World Chemical Exchange and Corporate Trading Rooms, ChemConnect's private auction capabilities, to make spot and contract purchases, particularly in fragmented markets. "ChemConnect's unique solution improves productivity and efficiency in our global purchasing of specialty chemicals and intermediates," says Doron Grosman, general manager of global sourcing at GE Plastics.

The company, which is known for its aggressive approach to both pricing and e-commerce, uses the World Chemical Exchange to reach new suppliers and ensure the best possible prices for a broad range of chemicals, specialty chemicals and plastics. In a number of segments the group has secured new high-quality suppliers in low-cost countries, for example. It also regularly conducts competitive bidding and negotiations in Corporate Trading Rooms for certain commodity products.

Dow is enhancing the supply chain

David Kepler, v.p./e-business and chief information officer at Dow Chemical, says the company's four main strategic e-business objectives are to improve the group's interfaces with customers; develop e-competencies with suppliers; create new, efficient and open electronic channels; and to launch new business opportunities.

On improving customer interfaces, Kepler notes that business on Dow's Web sites is increasing by 50%/year, which leads him to a bullish prediction for myAccount@Dow, the group's one-to-one customer service extranet. "About 90% of our activity is one to one with customers, so we have to get that right. We are also convinced that myAccount@Dow will be the primary method for customer transactions within two years," Kepler says.

New electronic channels include myAccount@Dow for direct sales, and a host of e-marketplaces and exchanges for indirect sales and purchases. Dow's preferred indirect channels are e-marketplace Elemica for chemicals sales, and e-marketplace Omnexus for plastics sales. The company's indirect purchasing e-channels include ChemConnect for commodity chemicals; Trade-Ranger for maintenance, repair and operations materials; and SdQuest for laboratory equipment and supplies. Dow also plans to launch four new e-service businesses this year.

The company has already held some 25 online auctions for everything from commodity and specialty chemicals to transportation, capital equipment, and telecommunications services, largely to gain first-hand experience with new e-commerce trading channels. Operations in North America, Europe, and Asia/Pacific have all been directly involved in one or more of the auctions.

Dow is convinced that the Internet creates the potential for far greater efficiency based on the needs and behavior of buyers, while also allowing companies with global capabilities and integrated systems to generate competitive advantage. Kepler characterizes e-commerce as the intersection of competencies in market segmentation, channel strategy, and technology infrastructure: "These competencies are central to an e-business strategy, and it is extremely important to ask whether your business is obtaining and developing them."