When General Motors purchasing chief Harold Kutner was a junior executive, the company sent him to Zaire to buy a copper mine.
'I landed, and I asked where I could rent a car to drive to the mine. The people I was with said: `Are you crazy? It's all jungle between here and there. You'll probably get stopped by guerrillas, and there's no need to do all that.'
'I said, `I came to Africa to buy a copper mine; I'm going to take a look at it.' It was jungle,' Kutner grinned. 'I got stopped a lot of times.'
Kutner tends to take action first and ask questions later. This explains a lot about the difficult birth of Covisint, the online trade exchange that Kutner helped to create for automakers and their suppliers.
When it was first announced in February 2000, Covisint appeared to be a sure-fire proposition. The operation would handle online parts auctions, product development and supply-chain management. In addition to GM, Ford Motor Co. and Daimler-Chrysler, the Internet trade exchange soon lined up Renault SA and Nissan Motor Co. With a combined purchasing budget of $300 billion a year, those companies together would dwarf any competing online exchanges.
But Kutner and Covisint's other organizers announced the initiative before all of the details were completed. By doing so, they gained major publicity for the infant organization. But there is no precedent for what Kutner is doing - no road map to follow. Harold Kutner and Covisint together will have to find their way through the jungle.
Covisint is a complex, ambitious plan that may not achieve its original stated goal - being the dominant online buying exchange for the global auto industry. Many questions remain: Who will control Covisint? Which companies will participate? How will it charge suppliers? Will it sell stock to the public? Although they had yet to work out all of the details, the participants predicted Covisint would be operating within a few months.
One year later, the online exchange has established its headquarters in Southfield, Michigan. But it still is trying to get organized, and now other automakers are setting up their own online exchanges. Volkswagen, BMW and Toyota each are establishing Internet links with suppliers. Robert Bosch GmbH has launched an exchange for German suppliers. And in North America, Covisint rival Free Markets is handling online parts auctions for a batch of major suppliers and at least two automakers. While supporters remain optimistic Covisint will prosper, no one claims any more that it will be the central exchange for the auto industry.
'They are never going to do it all,' said Neil DeKoker, managing director of the Original Equipment Manufacturers Association, which represents North American suppliers. 'If you are a major supplier, you can't just deal with Covisint.' Suppliers will buy raw materials such as steel or rubber on a variety of commodity exchanges. And they will do business with whatever online exchange their customers want, DeKoker says.
Like many cooperative ventures in the auto industry, Covisint took shape when rival companies decided it was simply too costly to compete. Originally, Ford and GM each had intended to set up competing online trade exchanges. The two companies introduced their rival exchanges in Las Vegas - an oddly appropriate venue - in November 1999.
During an aftermarket equipment convention, the two companies outlined their plans at press conferences. Ford, which had heard of GM's plan to make an announcement, beat its rival with a hastily scheduled press conference. GM followed the next day. After the news sank in, suppliers began to question the wisdom of rival automotive trade exchanges. In February, Kutner got a phone call from a third party.
'I got a call on a Sunday morning saying, `What would your thoughts be relative to combining exchanges?' ' Kutner recalls. 'My first reaction was, um, I want to be first in the marketplace with this exchange. It doesn't sound like a great idea. But after thinking about it for an hour on Sunday afternoon, I said I'd be willing to explore it.'
Kutner made a stealthy visit to the Townsend Hotel in Birmingham, Michigan. There he met Brian Kelley, president of Ford's ConsumerConnect, who was organizing his company's trade exchange. The hotel was close to Kutner's and Kelley's homes. Joining them were Mark Hoffman, president of Commerce One, and Ray Lane, who at the time was president of Oracle. They were two of Silicon Valley's top technology gurus, and they were bitter rivals. It was difficult enough to coax Ford and GM to cooperate. But it was a rare event to see Hoffman and Lane at the same table.
For their first meeting, the four set up a blackboard and talked about shared objectives for a hypothetical trade exchange. The new entity should eliminate waste. It should set standards for the industry, and it should be global. 'When we laid all these things out, it started to make sense,' Kutner said. 'We could still compete on the vehicle side and yet do something positive for suppliers.'
Five days later, the participants signed a memo of intent. And the car guys ordered their technology companies to work together. That was no easy task, Kutner recalls. Both companies wanted to be the primary software supplier to the venture. 'Finally, I went up to the board and wrote a statement and said - in my usual humble fashion: `You sign this, you sign this, and you sign this.' They signed. I went to the boat show. Oracle went home and Commerce One went home, and I don't know where Brian went.'
Naturally, it is not as simple as that. Oracle and Commerce One each has been given a 2 percent equity stake in Covisint. But the two companies remain rivals. Each wants to win the coveted contract to supply software for Covisint's supply-chain management. Meanwhile, both companies are responsible for equal shares of Covisint technology. Commerce One has delivered the software for online auctions and parts catalogs. Oracle has organized Covisint's databases and provided online security.
But there is no love lost between these two companies. According to an article last April in the newspaper The Guardian, Oracle Chairman Larry Ellison once criticized GM for hiring Commerce One to handle auctions and another technology company firm to provide management expertise. It is like marrying Chris-Craft boats with Citation airplanes, Ellison said. What you get are flying boats. Now, Ellison is supposed to cooperate with Commerce One.
Of the two Silicon Valley companies, Oracle will make more money than its rival in the near future. Oracle gets paid an upfront licensing fee for its software technology, while Commerce One will get a share of Covisint's auction revenues. In December, the trade publication Information Week estimated Oracle will receive $70 million in licensing fees in its third fiscal quarter. The publication also reported that Commerce One would share as much as 10 percent of the exchange's gross revenue for 10 years.
With Oracle and Commerce One on board, Kutner and Kelley soon convinced DaimlerChrysler to join. After announcing the venture in February 2000, the participants optimistically predicted Covisint would be operating within a few months. But they had yet to win approval from the Federal Trade Commission. Federal regulators were worried about two issues: Would Covisint protect the confidentiality of its members' data? And would Covisint be sufficiently independent of the automakers that created it?
By the end of last summer, the commission still had not approved the project. Kutner bypassed formalities and brought a delegation of executives to Washington for a chat with the commission. 'At this meeting, we decided ... that we would not ask the legal committee,' Kutner recalls. 'A week later, we're in the GM plane going to Washington. The three of us went in and met with the chairman. He asked some questions, and in three hours we were done. We knew when we left that this thing was going to be approved. Twelve days later, it was.'
Not quite. The commission did not veto Covisint, but it did not wholeheartedly approve it, either. The commission said it would continue to monitor the situation. Still, that was enough to allow the organizers to move on to their next big priority: getting suppliers to sign up. Initially, Covisint invited a core group of 40 major suppliers to participate.
As an inducement, suppliers wanted an equity share of Covisint. They didn't get it. Instead, Covisint is offering suppliers a profit-sharing plan. According to two well-informed supplier sources, Covisint is offering each participating supplier 50 percent of the profits generated by its own online business. But it is unclear how much revenue Covisint will generate. The company has not disclosed the fees it will charge suppliers.
Still, suppliers appear willing to do business with Covisint, which shouldn't be surprising because the Big 3 automakers are demanding it. They also appear convinced that the operation will be a genuine money-saver. At Siemens Automotive, the paperwork for a simple transaction say, purchasing parts from a catalog averages $100, according to Bill McFarlane, the company's chief information officer. Using an online exchange such as Covisint, McFarlane predicts Siemens can cut those costs down to $25 or so.
Paperless purchasing transactions can generate substantial savings. Another way to save money is through online auctions. Covisint is offering participants the opportunity to hold so-called 'reverse' auctions. Typically, the customer invites several vendors to bid for the right to supply commodity parts such as hoses, fasteners or gaskets. After an hour of bidding, the lowest price wins.
Such auctions can generate substantial savings. In December, Ford revealed that it had conducted 65 online auctions for the year. The auctions helped Ford save about 19 percent, or $38 million, on purchases worth $200 million. 'We have saved on things like gear knobs for Ford, leather seat covers for Land Rover and flange nuts for Volvo,' said Andy Eggleston, vice president of Ford's Consumer Connect Europe. Eggleston made his comments during a conference sponsored by Automotive News Europe.
If Ford were to purchase all of its commodity parts through online auctions, Eggleston estimates the company could save $2.7 billion.
With savings like that, one might expect Covisint to be the darling of the auto industry. But other online exchanges can offer similar savings. Free Markets, an exchange in Pittsburgh, Pennsylvania, has overseen auctions worth $10.9 billion. The company estimates it has saved its clients about 20 percent on purchases. Moreover, the exchange has expanded its automotive business despite looming competition from Covisint. At the start of 2000, Free Markets had two automotive customers. Now it has 17. Customers include such well-known industry giants as Delphi, Visteon, Pilkington, Dana and Eaton. Free Markets also serves two automakers, although it declined to name them.
As so often seems the case in this story, there is an undercurrent of rivalry between Free Markets and Covisint. Becker's company originally handled GM's online auctions. In the summer of 1999, GM dumped the company in favor of Commerce One, which returned the favor by giving the automaker an equity stake. Later, GM gave Ford half of its stake in Commerce One.
Asked whether GM also had demanded an equity share of his company, Becker said, 'No comment.' Becker insists there is no bad blood between his company and GM or Commerce One. But he doesn't mind comparing the performance of the two Internet exchanges. 'We haven't tried to paint grandiose visions of our future,' he said. 'We're just signing up customers.'
Free Markets has gained business because some suppliers were reluctant to wait for Covisint to launch operations. Visteon Corp., for example, faced heavy pressure from its customers to cut costs as quickly as possible. The company used Free Markets to conduct auctions on $390 million worth of purchases. Visteon saved 15 percent on the purchase of such commodity parts as fasteners, hoses and circuit boards. 'I have to compliment them,' said Susan Skerker, Visteon's senior vice president of business strategy. 'We got double the number of qualified suppliers' to bid for Visteon's business.
The company will be a major participant in Covisint, Skerker said. But Visteon is likely to use other exchanges, too. David Becker of Free Markets predicts there will be enough business to maintain several automotive exchanges. 'We are going to coexist with Covisint,' he said. 'You won't see one exchange dominate the world.'
Suppliers say they are willing to use Covisint to do business with the Big 3. But most are studiously noncommittal when asked if they will use Covisint to manage their own supply chains. Suppliers want to know whether the operation will be dominated by the automakers, says McFarlane of Siemens Automotive. 'I think Covisint is trying hard to be independent. But they've got a ways to go. The question is: Who owns the stock?'
Covisint hopes to answer that question by hiring a chief executive with a technology background from outside the auto industry. But that has proven difficult. In September, Covisint executives predicted they would have a new chief by November. As of mid-December that had not happened, although Covisint was rumored to have a candidate lined up. Whoever the new chief executive is, he or she will have a tough job keeping GM, Ford and DaimlerChrysler at arm's length.
'It will be like carrying a bag with three rhinoceroses inside, fighting with each other,' said Kevin Prouty, an industry analyst for AMR Research in Boston, Massachusetts. 'It's going to be a struggle carrying that bag down the road with you on the way to a stock offering.'
The online exchange also must choose its board of directors. And the company must decide if and when to launch an initial public offering. By selling stock to the public, Covisint could plausibly claim independence from the automakers. But this is a terrible time for a stock offering. Several online trade exchanges have collapsed, and investors have grown wary of optimistic profit projections.
Wall Street's skepticism has affected even such reputable outfits as Free Markets. In the past three months, the company's stock plunged from a 52-week high of $87 per share in September to $20 in December. It's not likely that Covisint would get a much friendlier reception.
When Covisint first was announced, some observers estimated its market value at $5 billion. Now, the company's likely valuation would be less than the automakers' investment in it, Prouty says. That doesn't make Covisint a failure. But it does mean the automakers are more likely to recoup their $200 million investment in Covisint by streamlining their purchasing, rather than harvesting big profits from the online exchange. Prouty suggests Covisint may have to wait until 2002 to launch a public stock offering.
Despite all of these difficulties, Kutner remains publicly unbowed. Covisint will quickly prove its worth to suppliers as well as automakers, he insisted. And Covisint's critics should hesitate before they bet against Kutner. Following his journey into the African jungle, GM bought the copper mine. GM saved $36 million, and made further profits when it sold the mine six years later.
You can e-mail editor David Sedgwick at [email protected]
Writer Tim Moran contributed to this story