Efficiency drive

On Its inception three years ago, Covisint was lauded as a global e-portal, a communications hub, a sourcing platform, an on-line design and facilitation tool for the auto industry... indeed, an industry exchange that would be a model for all other industry exchanges. But was this early optimism justified? Richard Willsher writes

'One day all this will be done on-line.' Perhaps that's what the motor industry moguls of Detroit were saying when they conceived and established Covisint - pronounced 'KO-vis-int' and short for 'co-operation, vision and integration' - the e-marketplace for one of the world's biggest industrial sectors.

Seen against the current background of consolidation and cost cutting in the automotive sector, Covisint's birth was not a moment too soon. It was to act as a channel for $300bn worth of combined purchases by the main motor industry original equipment manufacturers (OEMs) and also for the further $500bn spent by their tiers of sub-suppliers.

Looking back now, three years down the road, Covisint's launch might have been managed differently. On the one hand, it was a previously unthinkable proposition for deadly rivals Ford, General Motors and DaimlerChrysler to bury their respective hatchets and co-operate for the good of the industry as a whole. That was by any measure an achievement although it has to be said that the project has since been dogged by differences of opinion over many aspects of its development.

On the other hand, because it had been established by the Big Three, it immediately drew suspicion from all levels of the automotive supply chain. Suppliers, sub-suppliers and sub-sub-suppliers all saw this as yet another example of the big boys forcing them to do business their way, pushing risk down the line and squeezing them on price until their automotive engineering pips squeaked.

There was another suspicion too. Born at the height of the dot.com boom, with a view to a stock market initial public offering (IPO), this was viewed by some as a profiteering exercise, creating an automotive industry-wide IT dependence and bringing it to the stock market for the profit of its OEM founders. The estimated IPO value of the business was reported to be $5bn at launch. Vern Keenan, an automotive sector analyst of Keenan Vision Inc, puts it succinctly: 'Covisint's heritage is that they [the OEMs] were greedy... when they started this thing.'

But then who else could have started such an exchange in an industry where there are something like 35,000 suppliers worldwide? Maybe dominant players such as Delphi, Dana and Tenneco. But they didn't. And, of the 35,000, only 10,000 or so supply products that go directly into motor vehicles. The others make generic minor components supplied to a range of other industries as well as automotive. Given the power of the auto industry giants, Kevin Prouty, research director at Boston-based automotive sector analysts AMR Research, says in his October 2000 research into Covisint that '90% of suppliers are hesitant to use Covisint without direct instructions from OEM customers'. It was, it seems, incumbent upon the industry leaders to lead from the front. As Prouty says: 'Covisint is the only organisation available to execute the vision of industry-wide integration. OEM and supplier users can't let the opportunity that Covisint provides be wasted.'

Too big to fail?

In saying this, Prouty is reaching for the answer to the question of whether Covisint will succeed or whether it will fall apart, leaving an awful lot of very expensive egg on automotive faces. Especially so as Covisint has now signed up Renault, Peugeot-Citroen and Nissan although, significantly, not Volkswagen, Toyota and BMW. As late as December last year there was still doubt being expressed, notably in the American CIO magazine where author, Christopher Koch, interviewed Covisint's chairman and CEO, Harold R Kutner, the former Vice President of worldwide purchasing at GM. Under the headline 'Covisint's last chance' he raised the question of whether ''the auto industry needs' one public exchange''

Kutner's reply was that what Covisint is offering is 'connectivity to the industry's major customers', not just reverse auctions. And it is the reverse auction aspect of Covisint - the offer to suppliers of the opportunity to bid for business at the risk of being undercut by all comers who can meet product specification - that has attracted much criticism from suppliers. And it needs to be borne in mind that one of Covisint's expected benefits when it was established was that it would cut away 10% of the cost of manufacturing automobiles by making the supply chain more efficient.

So how is Covisint faring now and what benefit is it bringing to its sector? Getting facts and figures on what's been achieved is not easy. But, up until last autumn, Covisint was saying that since January 2001 it had handled $62bn of purchases through its on-line auctions and $100bn through its 'quote management system' - its tool to 'improve the effectiveness and efficiency of sourcing alternatives''

It is now reluctant to refer to sales or purchases, preferring instead to talk about the number of users who are signed on to use the system throughout the industry. Paul Manns, Covisint's director of marketing, says: 'We are now signing up 200-300 participant companies a week. That means about 76,000 users of our system. We are seeing about one transaction carried out every second.'

This is a mighty achievement by the standards of any industry. It means that 14,000 of those 35,000 companies in the global automotive supply chain are now active in Covisint's marketplace. There is still, apparently, unease among suppliers about reverse auctions, and the pressure from the OEMs, but Covisint's message is now less aggressive and even conciliatory to an extent. In January this year, Covisint's president and chief operating officer, Bruce Swift, set out its goals as:

• broad based participation based on standards and leveraged investments
• reduced costs by removing inefficiencies rather than simply pressuring profits
• increased velocity of information, and
• efficient exchange of information.

The emphasis is on 'building bridges' and communication whereas, once, it was on developing and selling software and being all things to all men in the supply chain.

Motor sector analyst, Kevin Prouty, is still bullish about Covisint's chances of survival and success going forward. He reckons the number of users could reach 150,000 by the end of this year, especially if one more major OEM joins up - a Toyota or a VW, for example. He also says that the IT infrastructure Covisint offers is robust and scalable to any extent that is likely to be required in the foreseeable future. He adds, though, that 'there is not much slack left in the leash' - that Covisint has wasted a couple of years in pursuing its founders' pet schemes, while its credibility in the industry, especially among the legions of suppliers, was being stretched. 'Anything could happen,' continues Prouty, 'but the unprecedented opportunity for success [in streamlining the global auto industry] is still there.'

Significantly, Swift looks to other industries and other major businesses as his role models of what can be achieved in standardising processes and making supply chains more efficient. He cites Walmart, Dell and Intel. But it is worth remembering that those are individual corporations that did not have to reconcile differences with competitors in their own industry before getting started. Dell and Intel were born in an already 'wired' age and none of the three companies has a hundred years of metal bashing history in tow to slow their forward progress.

Nevertheless, for any industry aiming to standardise and move itself into the 21st century, Covisint remains an excellent case study, both in terms of what it has achieved so far and just how difficult it is to reap the supposed benefits of global integration.

Richard Willsher is a financial and business writer with a background in investment banking. He is former editor of The Investor magazine.