(continued from previous page)
 |
 |
 |
|
Challenges: Detroit reinvents the wheel
On a blustery February day not far from the world's automotive capital, four men locked themselves in a hotel suite and vowed not to leave until they had drafted a plan that could forever change the multibillion-dollar car industry. Secrecy was paramount at the extraordinary meeting, for its participants represented bitter enemies whose mere cooperation might be seen as a threat by government regulators, labor unions or even their own companies. In attendance were Harold Kutner of General Motors, Brian Kelley of Ford Motor, Ray Lane of Oracle and Mark Hoffman of Commerce One. "We were euphoric but skeptical," said Lane, who resigned as president of Oracle in July to become general partner at venture capital firm Kleiner Perkins Caufield & Byers. "The euphoria was that the three biggest OEMs in the auto business could get together and create more than $300 million in liquidity. The skepticism was that everyone in the room was a competitor. Everyone wanted the same goal and felt it was a good idea, and we wanted to forget our competitive juices, but when it came to putting it on paper it was tremendously difficult to do."
The perseverance paid off: What emerged was an outline for a business proposal of staggering proportions, a central marketplace for parts auctions and project collaboration among as many as 40,000 companies that did business with the automobile industry, from paper clip manufacturers to multinational
Most amazing of all, the entire operation would be conducted on the Internet. Beyond its unprecedented scope, the venture is a symbolic marriage between the Old and New Economies. Perhaps more than any other industry, the American automobile business is known for an entrenched resistance to change shared by generations of company executives--often from the same families. The idea of moving entire operations to a single electronic system, let alone those as important as parts purchasing, would have been unthinkable only a few years ago. But the visionaries behind Covisint knew that something needed to be done to wake the auto industry out of its smokestack mentality and ensure a place in the digital future. Partnered with Oracle and Commerce One, they hoped the project would inject new cash and clout into a 100-year-old industry known more for stultifying bureaucracy and labor strife than for swift production and high profit margins. "It is absolutely revolutionary," said David Cole, director for the Center of Automotive Research (CAR) in Ann Arbor, Mich., whose father was president of GM in the 1970s. "At its deepest levels, Covisint is a redefining of how you think of an independent organization, how you structure a company, and how you create a whole different business model enabled by e-commerce." If that weren't enough, the ambitious plan carried ramifications far beyond the car industry as a major test for business-to-business exchanges, enormous online malls where buyers and sellers of practically any type of product can find each other regardless of size and location. From Wall Street to Silicon Valley, Covisint is viewed as a model of how the Internet can wring out waste and bring in higher profits.
"Trying to get them to agree on anything is going to be difficult, and I'm not convinced Covisint will succeed," said Dennis Virag, president of the Automotive Consulting Group in Ann Arbor. "The devil is in the details." Although carmakers need some vehicle to automate purchasing and collaborate on projects, companies and analysts in various industries question whether Covisint is the appropriate solution. Many midsize suppliers--the companies that will buy and sell products online and provide the backbone of Covisint--are highly skeptical about the project. Unfamiliar with the Internet, some suppliers worry that security holes will allow competitors to see their pricing structures and parts diagrams. Others view Covisint as a means of reversing the power automakers gave to suppliers in the 1980s, when the industry began outsourcing work to cut costs during Detroit's dark days at the height of competition with Japan. Most automakers today design and assemble the car and provide a few key components, such as the engine, transmission and sheet metal. Suppliers make almost everything else. Because the automakers don't make those commodities, they don't know exactly how much they cost. Shifting procurement to online auctions, where suppliers bid down contracts by offering prices as close as possible to cost, would allow the carmakers to better estimate the actual costs of parts and use this information against the suppliers, according to Covisint's detractors. "It's a question of, 'What do you want me to give up?" asked the founder of a 50-person supplier based in Monroe, Mich., just south of Detroit. Like numerous small suppliers, he didn't want his name used because he didn't want to incur the wrath of the larger suppliers and automakers that back Covisint and buy his products. "If I can afford to turn off the heat in the office, I can afford a small fee," he said. "If I can go without paying a few workers, I could also afford it.'" Only two months after the venture's announcement, Toledo, Ohio-based supplier Dana spearheaded an effort with five other suppliers to create a rival e-commerce marketplace. In a slap to the automakers' technology partners, Dana picked Ariba--a competitor of Commerce One and Oracle--to power the venture. The renegade effort died within a month when auto executives sent letters to top suppliers offering financial incentives for their participation in Covisint. But other obstacles were challenging Covisint on the technology side. DaimlerChrysler, which joined the venture just days before it was made public, questioned the use of Oracle as the main provider of software to power the venture. The Stuttgart, Germany-based automaker preferred to use software from German provider SAP, a DaimlerChrysler supplier. That rift healed in June, when SAP invested between $250 million and $400 million to increase its equity stake in Commerce One. "This project has moved from sizzle-on-the-steak to a more realistic attitude that this is going to take a lot longer to accomplish than anyone thought," CAR's Cole said. "It won't happen at a fast pace because of the significant cultural transformations that have to take place. This industry is moving at 100 miles per hour, but it doesn't know exactly where it's going." Neither did antitrust regulators when they first heard of the project. The Federal Trade Commission began a high-profile investigation of Covisint in the spring, about the same time it was looking into antitrust issues involving online exchanges in the retail industry. Regulators were concerned that the automakers would use their combined clout to further cut margins in the difficult supplier market, where an operating profit of 2 percent is considered standard. The FTC cleared Covisint in September, as did the Bundeskartellamt, Germany's antitrust regulatory agency. But the red tape helped in forcing Covisint to delay the launch of its first auction services from May to early October. Even the project's name came under fire. It was originally dubbed "Covis," for Cooperation and Vision, but an independent naming consultancy had to regroup, fearing lawsuits from a German technology company of the same name that had already purchased the rights to Covis.de. After months of syllable crunching, the consultants came up with the turgid "Covisint," for Cooperation, Vision and Integration. For all its external obstacles, the project's most daunting opponent may be the auto industry itself. Auto executives acknowledge that it will be difficult for many salespeople, engineers and others to embrace the intangible nature of an electronic marketplace. Detroit has always produced physical products--such as the "Detroit metal" typified by the Ford Model T or the contemporary Dodge Caravan--which stand in stark contrast to the virtual wares peddled at an online mall. "Our biggest challenge is making a cultural transition from an automobile environment to an e-commerce environment," said Kutner, GM vice president for worldwide purchasing, who plays blackjack and golf on his handheld computer. "We have to be able to dream of what this company wants to be before we have a physical product." For many, that transition will be a painful one. Any discussion about the industry's future must involve Detroit's embattled labor unions, which have always been wary of technology as a potential way to replace workers and shrink the ranks of dues-paying members. The United Auto Workers (UAW), at best, is ambivalent about Covisint and, at worst, is downright paranoid that it's a front for shrinking the number of union jobs on the factory floor. Never having much affection for automotive executives, the UAW views those behind Covisint with a jaundiced eye.
UAW president Stephen Yokich recommended that GM fire one executive, Mark Hogan, or "put a muzzle on him" after he gave a peppy speech in 1998 about potential cost savings "All start-ups go through growing pains," said the affable president of e-GM. Hogan wouldn't comment directly on the union's involvement but dismissed naysayers with a shrug: "I'd say they just don't get it." Such concerns have not been lost on those participating in the initial meeting that spawned the venture's concept at the Townsend Hotel in Birmingham, Mich., the Detroit area's equivalent to the Waldorf Astoria. But they insist that Covisint can be a winning proposition for all--including consumers, who would benefit from cost savings in more efficient operations. Indeed, many suppliers welcome the prospect of having to learn only one new procurement system instead of individual ones for GM, Ford, DaimlerChrysler, Renault and Nissan. Also working in Covisint's favor, the founding partners agreed to donate more than 250 employees of the 300 people who will work on the online marketplace, as well as fund the company to the tune of $100 million in the first year. As a result, the project's executives never worried about recruiting workers or soliciting venture capitalists as most other technology start-ups do. Even without such advantages, the potential of online exchanges alone is arguably enough reason to launch a project such as Covisint. Roughly 42 percent of corporate purchasing will be done online in 2005, compared with 3 percent now, according to Jupiter Media Metrix. The Automotive Consulting Group estimates that participating carmakers and suppliers could save $174 billion in 2005 through Covisint, which would represent a cost savings of roughly $3,000 per vehicle. "We've got all the benefits: a start-up mentality, a separate company in a separate building doing what they need to do," said Kelley, Ford's president of e-business. "But it's supported with founding partners that don't have a VC mindset (of) just looking for an exit strategy and a quick capital gain." Not everyone, of course, is convinced. Although he doesn't dispute the need to automate the automobile industry, auto industry veteran Virag evokes a different kind of New Economy metaphor. "A lot of dot-coms in the Silicon Valley thought they could make it, too," he said. "Let's put it this way: If Covisint were public, I wouldn't put my personal funds in it." |
|
| |||||||||||||
chemical conglomerates. Despite its curiously awkward name--
1885: Mercedes-Benz co-founder Karl Benz debuts the
combustion-
in a Highland Park, Mich., factory that builds Model T's
in 84 distinct steps. The process requires newfangled machinery and modern
cutting tools to make the parts so precisely that a low-skilled laborer can
operate them, replacing the skilled craftsperson who makes and assembles
the parts by hand.
1947: Toyota Motor builds its first small passenger car, the
