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FINDING DANCE PARTNERS

With all the talk about electronic-commerce, one would think that the World Wide Web has been around for decades. Yet, for all its possibilities, the commercial use of the Web and all its variations -…

With all the talk about electronic-commerce, one would think that the World Wide Web has been around for decades. Yet, for all its possibilities, the commercial use of the Web and all its variations — like portals, e-hubs and e-marketplaces — has been operating as a business model since only the mid-1990s.

That’s the rub. It’s not that old, and certainly not a mature technology. That it’s a youthful technology with great potential for making its investors rich quickly – similar to the allure of the Gold Rush in California between 1848 and 1864 — partly explains the number of dot-coms that have feverishly launched Web-sites in the past few years. At last count there were more than 75 paper portals worldwide, which is far too many to support the paper industry.

“There is too much noise and activity out there,” says Craig Campbell, a partner with PricewaterhouseCoopers’s global forest and paper practice in Vancouver. “And there doesn’t seem to be any clear direction or movement to a particular solution.”

Consequently, industry analysts like Campbell predict that few of these online companies will be around next year. Whether it’s called a portal, hub or dot-com, the differences between them are in degrees too fine to measure for most users. Simply put, they describe essentially the same thing — a highly developed Web-site that allows users to not only find information, but to do commercial transactions. The dot-coms that will dominate the online market will not only have proven to paper mills and paper buyers that their technology works, but also that their business approach has taken cost out of the supply chain. Currently, online sales represent only a tiny percentage of the $500-billion a year (all figures in US dollars) global paper industry.

But that will soon change. For example, in July 2000, Georgia-Pacific Corp., International Paper Company, and Weyerhaeuser Company jointly invested $51 million to form ForestExpress (www.forestexpress.com), a powerhouse paper hub based in Atlanta. In September 2000, Mead Corp. of Dayton, OH, joined as an equity partner, and other forestry companies like Boise Cascade Corp., Louisiana-Pacific Corp. and Willamette Industries Inc. are considering whether they want to become investors.

ForestExpress joins an already crowded marketplace that includes such dot-coms as PaperExchange.com Inc. (www.paperexhange.com), PaperX Inc. (www.paperx.com) and Paperhub.com Inc. (www.paperhub.com).

E-marketplaces are neutral territory

One of the leading e-marketplaces is Boston-based PaperExchange, a subsidiary of VerticalNet Inc. Its investors include International Paper Company, the world’s largest paper producer; Bowater Inc., one of North America’s biggest newsprint producers; and Roger Stone, the former chief executive officer of Stone Container Corporation (which was taken over by Jefferson-Smurfit in 1998). It has gained $35-million in financing from venture capitalists and other investors.

Since 1998, it has signed up more than 7000 members in 80 countries, though most are paper buyers rather than papermakers. “Our model provides a neutral and independent marketplace that allows buyers and sellers to do transactions faster, cheaper and easier,” says Kent Dolby, company president and chief executive officer of the 60-employee company.

Such virtual technologies promise to save companies between 5% and 8% of the cost of doing business, or between $25 billion and $40 billion a year globally.

The aim of an e-marketplace, as with a traditional marketplace, is to bring buyers and sellers together. But instead of facing geographical limitations, as is the case with traditional marketplaces, transactions in e-marketplaces take place in a virtual space.

The dot-com world is full of stories of twenty-something millionaires, but not many of profitable ventures. This thought is not lost on Dolby, who spent 26 years at Andersen Consulting’s energy and natural resources business before making the jump to the dot-com world. “I come from a private business where if you don’t make money, you don’t pay people,” he says. “We had to be profitable all the time.”

Thus, the business plan calls for the dot-com to break-even by the end of 2001, and become profitable soon thereafter. It expects to generate revenue by charging transaction and licensing fees, and not from advertising as some sites do.

“They are doing a reasonable amount of volume, but it’s not enough,” says Campbell, referring to PaperExchange. “It’s only a fraction of the total trading that takes place in the paper industry.”

According to technology analysts, by the end of 2001, online sales will account for about 7% of the $500-billion global industry, equating to $35-billion a year in revenues. The most-optimistic predictions say that about one-third of all paper sales worldwide will be done online by 2004. And only a select group of portals and paper producers will have a share of that market, because most of the dot-coms currently vying for business will have failed to make a viable business case. (See sidebar on Canadian slice.)

One of those is PaperX of London, England, which launched operations in Europe in February 2000. Since then, it has signed up about 1000 members, most of whom are paper buyers. In June 2000, it established a North American beachhead in Portsmouth, NH. The company has a team of 90 employees, 30 of whom are technology consultants. The dot-com is not looking at E-commerce as a revolutionary way to do business, says Borge Bogaard, president and chief executive officer of North American operations. “We want to replicate the way business is done today, and use the Internet as a communications tool.”

Bogaard’s approach is to first correct the idea that all portals have only one purpose — to move paper at the cheapest price. “There are a lot of portals and a lot of confusion. People look at us as one of these auction-type portals. We like to describe ourselves as an e-hub,” he explains, which is to help paper producers become E-commerce-ready. In effect, it wants to position itself as a paper company’s technology provider or application service provider, or ASP.

By selling its application technologies, PaperX expects to save paper producers from investing in information technology (IT). It has spent more than $10 million to develop what it calls “an E-commerce in a box solution,” which Bogaard says “can be written and implemented on a company’s Web-site within two months.”

In the e-hub, which noted consultant Jaakko Pyry helped design, users can negotiate up to 25 attributes in a one-to-one private negotiation. Bogaard says that to develop the model, the company did extensive interviews with 30 leading industry executives. Equally important is its integration platform. “You can communicate through us in any language you like — XML, EDI, or others — and the technology will convert it and send it out to your customers in the language they use.” In effect, it acts like translation software.

Its business plan calls for the company to reach a break-even point by the end of 2002, and profitability thereafter. PaperX expects to generate revenues through two ways: by charging a fixed quarterly maintenance fee or by levying a 0.9% transaction fee. It doesn’t look to advertising as a revenue source.

The question on everyone’s mind is whether industry giant ForestExpress will become larger by gobbling its competitors. “I think we can be a partner to ForestExpress, especially on the technology side,” says Tom Gildea, president and chief executive officer of Chicago-based Paperhub, a start-up that aims to set up private Web-based inventory and E-commerce distribution channels for paper mills. Accordingly, it has selected Dallas-based i2 Technologies to build its trading platform, which will operate on real-time.

Its aim is to use cutting-edge technology to deal with problems common to paper mills, such as excess inventory and overcapacity. “We’re building Internet applications that will help the paper industry become more efficient,” Gildea adds.

Backed by major investor Apple
ton Papers Inc. of Wisconsin, it expects to launch its exchange — currently in beta testing — at the end of December 2000. In setting its sights on the $50-billion printing-and-writing grade market, Paperhub expects to make a business case by proving that its technology can improve the industry’s operating efficiency by 25%. Among its stated advantages is that it has developed PML, an XML-type language that will allow paper companies and customers to communicate through its hub. (See sidebar on writing universal standard.)

Who wants to dance?

Yet, many paper producers remain cautious. Campbell likens it to a high-school dance where boys are on one side of the room and girls on the other. The dot-coms, who are the boys, are trying to woo the paper mills, who are the girls. “You got the dot-coms doing all they can to convince the ladies to dance, but the ladies are standing back to see what happens.”

To carry the analogy further, the girls are watching the boys duke it out, because they are not yet sure whom they want as their dance partner. Despite all this posturing, Campbell says that portals will eventually make their business case and carve out a significant niche, if only because they are convenient for paper buyers. “If I’m a buyer of paper, I don’t want to have to go to Domtar’s site, then Boise Cascade’s site and then Weyerhaeuser’s site. I just want one stop. It’s so much easier.”

But not all companies want to dance. “We have not signed up with any dot-coms,” says Norman Lecours, vice-president of sales, marketing and IT for Montreal-based Domtar Inc. “We see no reason to go with them, nor do we recommend that our customers sign up with them. We don’t think the business model they provide, such as exchanges, will give the type of services that our customers want.” Accordingly, in January 2000, Domtar launched its e-paper Web-site (www.domtar.com) — one of the few paper producers worldwide to do so.

While Lecours wouldn’t reveal how much the company spent to launch the site, he notes that “it cost a lot less than what people think.” That’s because Domtar had the foresight to upgrade its information technology infrastructure in the mid-1990s. “We put in place an infrastructure that made it possible to transfer information internally, and we have one system that transfers information in real-time to everyone within the company.” The infrastructure includes such areas as machine planning, order entry, logistics and warehouse operations — all related to customer service.

IT has helped the company achieve a 15% return on equity (ROE), which is rare among Canadian paper producers. Such numbers, Lecours says, leaves little doubt of the value of IT to increase productivity and, hence, profitability (see PPC, December 1998). “If we hadn’t spent money on IT, the Windsor, QC, mill would not be producing at the levels it is producing today.”

Of Domtar’s 300 customers, 200 have the technological capability of using online services. Until now only about 16% have accessed the site. “But once they start using it, they’re hooked,” says Lecours, who expects the percentage of regular users to increase significantly by January 2001.

Not only customers have taken a look at what Domtar has done. “Our site has been visited by every pulp and paper company in the world,” Lecours says. Because the site is password-protected, Lecours is not losing any sleep over his competitors finding out any trade secrets. “What they [the competitors] can’t see is what is happening in the backroom,” he said. “And that’s where our competitive advantage lies.”

PwC’s Campbell agrees that the backroom operations ought to be as technologically advanced as what customers see on-screen. “It’s not efficient to have a real slick system on the outside, but in the back of the company have ‘mice’ running around from one desk to another relaying information.”

Simply put, the aim of E-commerce technology is to standardize routine transactions, thereby letting the order desk take care of atypical problems. Such sums up the thinking of many in the paper industry, including such enthusiasts of information technology as Domtar’s Lecours, who notes, “There are still some things that take a human touch.”

Perry J. Greenbaum, contributing editor of Pulp & Paper Canada, writes about business and technology for a number of Canadian publications.