B2B internet hubs catch the eye of competition watchdogs

Brussels is set to decide whether an aviation e-exchange falls under merger rules. The result will have far-reaching implications
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In recent months, companies from industries as diverse as aviation and cement have rushed to create business-to-business hubs, marking the latest phase in the development of e-e-commerce. These internet marketplaces have established an entire new business sector, with massive implications for the supply chain and particularly for small manufacturers.

In recent months, companies from industries as diverse as aviation and cement have rushed to create business-to-business hubs, marking the latest phase in the development of e-e-commerce. These internet marketplaces have established an entire new business sector, with massive implications for the supply chain and particularly for small manufacturers.

Yesterday five leading leisure companies, including Whitbread and Bass, announced the formation of an exchange through which they will buy everything from food to travel and maintenance services.

Not surprisingly, the emergence of these B2B hubs has caught the eye of the regulatory authorities. In the US, the Federal Trade Commission has launched investigations into a range of internet exchanges, the most significant of which is Covisint, backed by a group of car companies including Ford, General Motors and DaimlerChrysler. It aims to be the primary platform for car makers to do business with their suppliers.

The FTC investigation is continuing, and the anti-trust group does not intend to make a formal statement unless the inquiry leads to some form of law enforcement action. But the outcome of the Covisint case and the issues raised are likely to spark widespread debate about how, or whether, the B2B industry should be regulated.

B2B models can take a several forms. Some e-hubs amount to nothing more than electronic catalogues. More sophisticated mechanisms allow companies to place their orders and even carry out complete transactions online.

Exchanges are usually buyer-driven, with the aim of cutting supplier costs by streamlining procurement. But others are run by third parties who match products and services with the needs of purchasers, or by suppliers who band together to reduce marketing costs.

Tim Frazer, partner and competition expert at law firm Arnold & Porter, said: "There is no inherent anti-trust problem with B2B exchanges and portals. In some cases they can increase competition... But the regulators are concerned about two main issues." First, they are anxious the hubs are not used as information exchanges, where participants share details on pricing, allocating customers and capping volumes. "They must not be used as a mask for uncompetitive acts."

Second, B2B ventures must allow free access to anyone who wants to join. "If a group of big companies gets together and does not allow other players to access their hub, small companies can be permanently excluded from the market," Mr Frazer said.

Jim Norton, head of e-business policy at the Institute of Directors, said: "When the concentration of power is too great or the balance of power tips too far, that is when [B2B activities] become a matter for the regulatory authorities."

One area where trading hubs have attracted concern is the retail sector, where some fear the supermarket giants could exploit their immense buying power to abuse suppliers.

So far there are two main global retail hubs; the WorldWide Retail Exchange (WWRE), which groups UK giants such as Tesco and Marks & Spencer with overseas groups such as Cora and Safeway in the US; and GlobalNetExchange, controlled by Sears, Carrefour and the technical service provider Oracle. According to the WWRE, retailers who participate in these exchanges and move their supply-chain processes online are expected to cut their procurement costs by 3 to 5 per cent. Analysts at Morgan Stanley Dean Witter have calculated that a 5 per cent increase in buying efficiency could boost retailers' operating profit by up to 70 per cent.

David Hands, a spokesman for the Federation of Small Business, said: "It's a sign of the times that the big companies can band together and do this. The smaller firms just have... do what they can to compete."

But Jane Beard, a spokeswoman for the Institute of Grocery Distribution said it was wrong to assume that B2B hubs are always bad news for smaller players. "As far as we are aware, these retail exchanges are open to anyone who wants to take part... They provide a big opportunity for small suppliers, because it opens them up to new markets in countries they could never have dreamt of being."

The more open the exchange, the easier for small businesses to compete with bigger rivals. Niche suppliers can drastically reduce marketing costs by selling services online to a registered database of customers.

Although there are an estimated 400 B2B hubs in operation in Europe, it is too early for regulators to know how to handle the sudden influx of new Net portals and exchanges. The FTC has held a series of public forums in the run-up to its ruling on the Covisint case, and the European Commission has set up a focused team in its competition directorate to devise special guidelines for B2B e-commerce.

Brussels is considering whether to launch a full inquiry into MyAircraft.com, a proposed joint venture between Honeywell International, United Technologies and i2 Technologies. It must decide by Monday whether the hub falls under Europe's merger control law in terms of size and the nature of the operation.

If a full review is launched, it will set a precedent for B2B businesses in Europe. But even if Brussels decides to approve the MyAircraft deal without further consideration, the announcement could have implications for companies who considering forming their own e-hubs.

Kiran Desai, a partner at the law firm Rowe and Maw, said: "The MyAircraft.com decision could be the occasion for the EC to clarify their views on the rules for owners and participants in the B2B industry."

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