CHEMICAL E-BUSINESS: ARE WE THERE YET?
A couple of years after the tech boom, chemical firms strive to make e-business just business
HIGHTOWER WOOWARD PHOTOGRAPHY
ANN M. THAYER, C&EN HOUSTON
A recent television commercial for an Internet service provider shows a father struggling to connect to the Internet while his small children shout repeatedly from behind him, "Are we there yet?" Ask the same of chemical companies about their progress in adopting e-business, and the answer depends on whom you ask. It generally borders on "no," although progress varies from firm to firm.
E-business was "wounded over the last year or two, but it's not dead," says Thomas N. Parry, a partner in Accenture's chemical industry practice. The bleak economic environment has caused many companies to clamp down on spending and some either to shut down or slow e-business initiatives. Reorganizations, mergers, and acquisitions have created new company preoccupations, including ones related to information technology (IT) systems.
Admittedly, the hype surrounding e-business a few years ago caused some companies to start projects that weren't economically justified, Parry adds, because they didn't want to be left behind. "The good news is now there's a lot more scrutiny on making a business case and a rationale for the investments," he says. "As such, some projects that have been put on hold won't be resurrected."
In September 2002, Forrester Research reported that most chemical companies would keep to their planned IT budgets in the second half of 2002, although 16% expected to cut back. About 40% of companies were shifting some resources to Internet-related activities and to software applications development, while nearly as many moved money toward infrastructure and integration needs. However, IT budgets going forward are on shakier ground, the market research firm points out.
Forrester says only 19% of North American chemical and petroleum companies have installed Web services software that allows different applications to interact, and more than twice as many are still only considering such software or are unsure about it. However, 72% of the group has enterprise resource planning systems installed. "Given the sector's recent merger activity, these firms are more focused on consolidating their multiple instances of ERP," Forrester concludes.
This is the case at Atofina, which is working to integrate systems and e-business initiatives from the combination of chemical operations at TotalFina and Elf Atochem. The migration to a single ERP system will take through 2004, says Watt Jackson, Atofina's global director of e-business. The company is establishing both its customer service-oriented website and connection to the industry trading network Elemica on the new ERP system.
"As the business units migrate over, we want those tools available," Jackson says. Beyond buying and selling through Elemica or providing product information and ordering capabilities on the company website, a third area of focus is e-procurement, primarily for maintenance and repair items. Starting in 2002 and continuing this year, the company has been "taking business units and getting them to a high level of adoption in at least one of the three tools," he explains.
Atofina's petrochemicals business, for example, is driving the globalization of the customer service site. Meanwhile, its parent, TotalFinaElf, is an investor in Trade-Ranger, a third-party procurement network for the energy and petrochemical industries. Atofina will scale up its use of Trade-Ranger and Elemica in the next few years, Jackson says. "Our objective is [to have] 10% of our business on the sell side online by the end of 2004, going up to roughly 25% by 2006."
REORGANIZATION has had a similar effect at Bayer. For example, previously separate plastics, polyurethanes, coatings, and rubber divisions have now been combined into one polymers company. The businesses are working on a coordinated approach to e-business as well as the company's use of third-party marketplaces for chemicals and plastics.
Standards To Make The World Go 'Round
Unified standards for transactions and data transfer are expected to accelerate e-business. The Chemical Industry Data Exchange (CIDX), a trade association and neutral standards body chartered in late 2000, released version 3.0 of its Chem eStandards last summer; version 4.0 should be out by the end of 2003. To help companies use the standards, CIDX also has been developing business process guidelines. These define frequently used e-business scenarios, such as order-to-cash transactions and collaborative planning, forecasting, and replenishment.
According to Carolyn Vander Wall, CIDX adoption and implementation director, nearly all chemical-company-to-chemical-company, XML-based e-business connections now employ the standards. She describes the current set of 52 as "fairly stable," especially those that companies have used often and broadly. Feedback from early adopters has been important in their evolution.
Most companies begin with the purchase order standards, Vander Wall explains, and then move on to ones for financial information or logistics. The initial implementation is generally the most difficult, she says, but subsequent connections take significantly less time and money. CIDX offers a five-step "implementation accelerator," based on collected learnings from current users, to help companies connect with trading partners.
CIDX also has initiatives to develop cross-industry standards and to promote standards use internationally. Regional teams have been set up in Europe and Latin America to understand specific needs there, while Japanese chemical companies have already endorsed use of the standards.
Cross-industry standards convergence is a very complex issue, Vander Wall says, and CIDX is taking a careful and methodical approach. CIDX and top trading industries--including agrochemicals, petroleum, and paper--have agreed to work together. CIDX is working with IT staff from member companies and key vendors to learn their needs and plans, and is analyzing other industry initiatives to understand their positioning and viability.
"E-business remains a priority," says Tom Balzer, head of e-business for Bayer Polymers' Americas region. BayerOne, its flagship customer-focused website serving both chemicals and polymers, continues to be a major e-business platform, particularly in North America. "It's the e-business channel that's growing the fastest for us, at very good triple-digit rates," he says.
Although data, such as that from AMR Research, suggest that the chemical industry may now be lagging other industries in e-business, many chemical companies were among the early adopters, and chemical marketplaces, such as ChemConnect, were among the first to emerge. According to the consulting firm, nearly 50% of chemical companies blame partner and internal readiness, rather than cost, as barriers to bringing business online.
Chemical companies are still investing in e-business, says Paul Weissgarber, A. T. Kearney vice president in its energy practice, "but they are not merchandising it the same way." E-business tends to be "couched more as part of ongoing business improvement versus being a stand-alone initiative," he says. The focus has shifted to what he calls "digital business," or a broad use of technology to integrate with suppliers and customers or run internal processes.
An example is vendor-managed inventory, in which the supplier tracks and then replenishes a customer's inventory. For some companies, a move toward VMI may originate, Weissgarber explains, simply from "the realization that technology will enable this to be done very efficiently and effectively." And Web-based technologies permit remote inventory monitoring to be done without much additional cost.
"There's also a nice business case around being a preferred supplier, knowing that a certain amount of product will always go through this channel, and gaining deeper insight into how a customer uses that product," he says about VMI. "Ultimately, the supplier may be able proactively to offer additional support and expand their value proposition to that customer."
Accenture's Parry agrees: "A number of companies have really tried to do a better job around capturing demand signals from their customers," including getting forecasts and setting up VMI arrangements. "So we're definitely seeing that part of e-business alive and well."
During 2002, Air Products & Chemicals installed online VMI capabilities, says Bradley F. Hahn, director of e-business, taking advantage of a remote monitoring system already in place for several years. Air Products is putting in a global ERP system that he says will add extra customer capabilities when interfaced with the company's e-business offerings.
Air Products' first website, launched in 1996, has expanded from 500 pages to more than 20,000. Other e-business offerings include its APDirect customer portal, eight separate business sites, 17 language-based country sites, and self-service applications for product documentation and requesting samples.
"We're taking orders over the Web and over our APDirect customer portal from virtually all of our business segments," Hahn says. He believes customers find value principally in the self-service capabilities and product marketing information, which are quickly and easily accessible. "The number of customer downloads of information has been accelerating very, very dramatically over the last 12 to 18 months," he notes.
Air Products' approach to e-business has always been centralized, to avoid duplicate efforts and create global applications, and is balanced to address both customer and internal needs through different e-business channels. For business-to-business transactions within the industry, Hahn says, the firm is an active trading participant in Elemica.
ELEMICA is designed so that a company puts the time and investment into connecting just once and is then connected to others on the network. At the end of 2002, Elemica had 41 companies connected, with exchanges between 200 trading pairs, and links to five other industry hubs in the areas of logistics; plastics; rubber; and metals, minerals, and mining. Along with transaction capabilities, it also has supply-chain applications including VMI and logistics management.
Air Products and Atofina, which were among the original 22 investors, continue to be bullish about Elemica, in large part because many of their customers and suppliers are connected as well--in fact, more than half the chemical industry's trade occurs internally. Within 60 days, Elemica anticipates adding about 10 companies, followed by 30 more within 60 to 120 days. Another 50 or more are reportedly in discussions or considering joining.
Elemica has "definitely picked up momentum in the past two years," Accenture's Parry says. Nevertheless, he believes the site has faced challenges; though initially very easy for founders and company executives to get on board, it was much harder later to win over individual businesses and have them sign up.
"I believe it's been slower than they imagined in getting companies to commit volumes through the channel," Parry says. It's also too early, he adds, to know whether there will eventually be sufficient transaction volumes and revenues generated for Elemica to thrive as a self-funded business. As of mid-2002, Dow Chemical alone had conducted at least 1,400 buy and sell transactions through Elemica.
Scrutiny of the choice of public or private e-business channels, especially in light of tighter IT budgets, may increase as companies gain more experience in usage patterns and address their customers' and their own needs. "There just hasn't been as much discipline as there needs to be about focusing on the right business segments and then serving those segments very, very well," A. T. Kearney's Weissgarber says.
"Everybody wants to have the option of being able to conduct business in many different environments, and nobody likes to look past any potential channel," he continues. "So, often, helping a company with its strategy means helping them say 'no' to particular channels." The choice--for example, between a direct connection, third-party marketplace, or network--should depend on factors such as the type of customer, number of transactions, and volume of business, he and other consultants say.
The "80-20 rule," in which 80% of a company's business comes from just 20% of its customers, affects many chemical makers, Weissgarber points out. This concentrated customer base means that chemical industry e-business "isn't about connecting one to 8 million," he explains. "It's about one to maybe a few hundred and then, within that, five or six where most of the volume ends up going.
"One fallacy of chemical marketplaces has been so much focus on everybody doing business with everybody," he continues. "I don't think the exchanges have done a very good job of marketing a value proposition about how they can actually bring benefit to the relationship between a company and its largest customers."
Instead, depending on how a company's facilities are set up and how it interacts with customers, it may make more sense to focus on serving key customers through one-to-one direct connections, he suggests. Stewardship of products and business relationships, in large part because of Responsible Care, is an important aspect of the chemical business.
"At the end of the day, why would you want a third party coming between you and customers that are just critical to you?" Marketplaces or company websites may better serve large numbers of smaller or infrequent customers, Weissgarber suggests.
This year, Dow expects to connect electronically with 80% of its core customer base and is very clear about its preferred e-business channels. On the sell-side, it offers the MyAccount@Dow customer website and uses ChemConnect, Elemica, and the plastics industry site Omnexus. It also uses ChemConnect and Elemica on the buy-side, as well as Trade-Ranger and its Dow e-Mart online catalog and ordering system for employee purchases.
Likewise, GE Plastics, considered an e-business leader, has emphasized its own proprietary website, GE Polymerland, as the channel through which customers can do business. With 200,000 registered users, GE Polymerland expected online sales to reach $4 billion in 2002. GE is not an investor in Elemica or Omnexus, unlike many major chemical and plastics producers.
"Everybody wants to have the option of being able to conduct business in many different environments, and nobody likes to look past any potential channel."
EASTMAN CHEMICAL is not an investor in Elemica or Omnexus, but it does participate in some other third-party sites including ChemConnect. After launching its first website in 1995, Eastman focused on direct business-to-business connections and its customer center purchasing portal. Since then, it has been standardizing its ERP system, integrating back-office systems, and improving e-business channels.
The company has been trying to create a "Web-centric culture," in which e-business is an enabling function. "E-business exists to make it easy for customers to do business with us and to provide differentiated solutions to customers," the company says on its website. E-business was a major project a few years ago, a company spokeswoman says, but is now "just business to us."
Given the inefficiencies that exist in traditional global trading markets and the opportunities the Internet provides for improvement, Eastman believes a significant amount of chemical trade will be conducted electronically. It predicts a level of more than 50% of business online in the next three to five years. For the company itself, about 13% of its total sales came through electronic channels in 2002, the same as in 2001.
As part of its leap into e-business during the tech boom of the late 1990s, Eastman invested in many software providers and dot-coms; its portfolio today includes 13 IT or e-business-related companies. For supporters like Eastman, many such investments did not bear fruit, as many dot-com operations folded only a year or two later.
"I think we all expected an inevitable shakeout in the dot-coms," Accenture's Parry says. "What surprised us was how quickly it went from hundreds down to just a handful in chemicals." A similar situation has occurred among software providers. Although users may still feel some confusion about which products do what and who will survive, Parry says the good news is a greater focus by providers on their core competencies.
However, the lack of competition in the software and dot-com world may leave some people feeling nostalgic. Competition, they say, can make customers more comfortable about choosing a provider and about the soundness of their business proposition. "It would be nice to have two data points for comparison," Parry suggests. With the limited choices, he says many potential customers now are deciding between using a third party or creating what's needed in-house.
ChemConnect, which operates a chemicals marketplace and provides other e-business services, is among the handful of survivors. Early in 2002, it acquired its competitor CheMatch, followed by the purchase of a natural gas liquids trading business. By the end of the year, volume on the ChemConnect website had doubled, hitting 16,000 transactions valued at more than $8.8 billion. Membership exceeded 30,000 individuals, or 9,000 member companies in 150 countries.
Members also completed more than 1,000 product negotiations through online auctions in 2002. Whereas buyers had been largely taking advantage of reverse auctions, sell-side auctions increased to about 40% of the total. Through its connectivity services--which include VMI and a link to the Global Exchange Services hub for trading within and outside the chemical industry--ChemConnect says more than 30 companies exchanged more than 250,000 messages via its hub during 2002.
Although ChemConnect's growth rate has been impressive, trading activity on the site is just a tiny fraction of the world's $1.7 trillion in annual chemical trade, Weissgarber points out. "The reality is there is still a tremendous amount of contract buying that's not enabled or isn't taking place over an electronic marketplace," he explains. "Some of it could be moving through chemical company proprietary sites," but that amount is very difficult to gauge.
WHILE ALMOST every chemical company at least has a website on which it provides product and often technical information--DuPont, for example, has several dozen--the challenge now is leveraging IT and e-business investments, consultants say. Chemical companies are looking to be competitive and cut costs, expand revenues, and improve customer service while simultaneously dealing with lagging demand, overcapacity, and declining margins. Meanwhile, their customers are becoming more empowered and demanding, and wanting lower prices, more service, and their own cost savings.
The chemicals business is complex enough that players in fact need additional e-business tools, Weissgarber proposes. However, many have been very disappointed at the overall return on their IT investments, and not only for e-business. Admittedly, many of them say, returns are difficult to measure. At the very least, despite the time and money spent on new technology, companies have not harvested real productivity gains, he says.
Air Products' Hahn says his company has seen a very positive return in e-procurement. He attributes much of the success to a corporate purchasing department that already could leverage internal spending and interface with external suppliers. "Therefore, we could jump in deep and way ahead in our e-procurement activities because we had already centralized processes, functions, and people," he says.
The company's experience meshes with what Parry recommends for success: "The business case for many e-procurement tools doesn't hold water unless they are bundled with a strategic sourcing plan." Operations need to be "cleaned up on the front end before being automated," he warns, to get a combination of savings on purchases and lower administrative costs.
"Procurement is an area where there is still much opportunity left," Parry believes. "Most chemical companies have been focused, as they should be, on the strategic materials they buy, but the opportunity's still ripe around indirect materials, which could be as much as 15 or 20% of their overall spending."
Another area offering opportunity is the innovation and R&D process, although Weissgarber has been disappointed about the progress to date. "If you think about the idea of pure connectivity and organizations being able to transact business seamlessly, they should also be able to conduct innovation or R&D-type activities around the globe, 24/7," he explains.
For the capital-intensive chemical industry, he sees the possibility of tremendous dividends in return on capital employed coming from reducing time in areas such as product development or facility construction. "People need to push the envelope and truly get the benefit of the global economy, make dramatic leaps in cycle time, and thereby further speed up business and allow much, much higher returns," he asserts.
In the meantime, the challenges around integration, choosing channels, serving customers, making investments, and reaping returns--that is, getting to where e-business is simply part of business--remain.