By NICHOLAS NESSON PARIS
Thirteen thousand kilometers separate Silicon Valley and Dubai. That is an awfully long trip, even in business class, but it is one that is being made with greater frequency every day. All that traveling has come as a boon for a few airlines, some individual frequent-flier accounts and three of the world's biggest names in information technology. For Oracle, Ariba and Commerce One, the race is on to seize control of the Middle East business-to-business (B2B) e-commerce market; for the Valley giants and the local B2Bs, like Dubai's Tejari.com, the stakes are extremely high. The winners will secure a foothold in a rapidly emerging, and hugely lucrative, market. The losers risk financial ruin.
The principles of B2B e-commerce are simple and based on sound logic: buying and selling on the Internet is fast, efficient and potentially very profitable. While business-to-consumer (B2C) e-commerce will succeed in places where Internet penetration rates are high and consumers are confident about online security, B2C margins tend to be low, and success depends upon high volumes.
According to Ayman Abousief, a marketing manager at Oracle Middle East, "B2C will gravitate away from mass-market retailers and towards companies like Toyota and Nokia, which can sell their own products on the web. They might do more business," he says, "or they might just do the same business more efficiently."
The real money, say many industry analysts, lies in B2B. Currently, the average B2C order is worth just $75; the average B2B order is valued at $75,000. According to AMR Research, global B2B e-commerce could be worth a staggering $5.7 trillion by 2004, although eMarketeer, another market research firm, puts the figure at a more modest $2.8 trillion. But even if the smaller number proves accurate, that would represent a massive gain from last year's $449 billion in B2B e-commerce.
In the simplest terms, B2B is any business transaction that takes place between two or more companies using digital technology. There are essentially three kinds of B2B marketplaces: a boutique exchange involves one company that buys from and sells to a limited number of member companies. MMI, a Dubai-based food and beverage wholesaler, is a good example of a boutique; using fairly simple and inexpensive Microsoft technology, MMI set up a catalog of its goods and sells them to, for instance, the Spinney's supermarket chain.
The second kind of B2B marketplace is a vertical, or industry, exchange: Enron, the energy company, runs a typical vertical exchange. The last and most ambitious type of B2B marketplace is a horizontal, or open, exchange: Tejari.com, based in Dubai, is the best example of a horizontal exchange in the Middle East. On Tejari's platform, a wide range of companies can buy and sell goods and services through electronic catalogs and Internet auctions.
Theory and reality. B2B is not a radical departure from the old-fashioned way of doing business. The difference is technology. Instead of a handshake, it's a mouse click; instead of a fax or phone call, it's an e-mail; instead of a paper catalog, it's a database; and instead of a wad of dollar bills, it's an electronic transfer. In theory, there is greater transparency and increased competition. And, in theory, time is saved and so is money. Those are the theories. Now get ready for the harsh reality.
B2B e-commerce has been bad for businesses, especially suppliers. A recent report by MRO Software shows that most suppliers see B2B as costly and complicated. Very few have seen increased business, and almost none report any of the promised savings on transaction costs. Most suppliers say that they joined e-marketplaces because of pressure from customers and fear of falling behind the competition. And many say that they were enticed with free trial offers and discounts on catalog-creation rates.
If B2B is a bad deal now, when many exchanges are offering fire-sale prices, imagine what it will be like once the sites get serious about their own bottom lines. Getting a B2B exchange up and running is no bargain. A small exchange can be set up for as little as $10,000 and up to $1 million, depending on the functionality of the site, says Latif Hamlani, an Internet business manager at Microsoft Gulf and Eastern Mediterranean. But average start-up costs for a vertical B2B exchange range from $12-$50 million, according to a recent industry survey by Morgan Stanley Dean Witter. The entry point for software alone for a vertical exchange like Tejari averages $5 million. "A thousand people, overall, have to work on the technical side," says Oracle's Abouseif, "and annual costs from Oracle are about $2 million."
Catalogs are the sine qua non of e-commerce, and many suppliers need to list tens of thousands, even hundreds of thousands, of items in their catalogs, which then need to be updated regularly. According to Tejari, Oracle's asking price for creating catalogs for suppliers was $5 per item and, says Tejari, it was not offering an international standard. Tejari went with cheaper companies, employing global technology standards, in Britain, India and Dubai; these firms charge $1.50-$2 per item. As of May, there were 85 suppliers listed on the Tejari site and a total of 65,000 cataloged items. The total price for catalog creation appears modest - somewhere in the $113,750 range - and Tejari says that, rather than profiting from catalog-creation, it actually offered subsidies to entice suppliers. But for a small business with a large catalog, the costs can still be prohibitive.
"It's not do or die," says a manager at one B2B application provider. "For small and medium enterprises, catalog creation can be die or die. They can't afford to catalog, and they can't afford not to catalog. Oracle and Commerce One charge suppliers from $5-$25 per item; that can easily translate into millions. And then there are transaction costs."
A vertical B2B like Tejari has two primary sources of revenue: monthly membership dues (which range from $200-$10,000 at Tejari) and transaction fees. The Dubai-based site, which is funded by the local government, charges between $2-$5 per purchase order, based on a sliding scale. That fee is applicable to both the buyer and the seller, although Tejari does not charge local government bodies. Since Tejari's buyers are almost exclusively governmental - Sheikha Lubna Al Qasimi, the exchange's managing director, describes "government-to-business as the main driver" - a high number of transactions is vital to offset the cost of giveaways, software, marketing and promotion.
If the driving idea behind B2B is to improve efficiency, then Tejari's fee structure does not appear to make much sense: rather than promoting multiple, real-time purchase orders, there is an incentive for companies to buy and sell in bulk. Transaction fees are based on the number, not the volume, of purchase orders. It's a Catch-22: while the Internet is a great tool for keeping inventory low, Tejari's fee structure encourages high-volume trade.
Neither Tejari nor Oracle, which has a profit-sharing arrangement with the site, would disclose transaction figures. But it appears, based on available numbers and industry estimates, that Tejari showed substantial losses in its first 12 months of operation. That's not surprising, and it is not necessarily cause for worry. Tejari compares reasonably well with similar B2Bs in emerging markets, and it can count on support and funding from the Dubai government.
"I'm not looking at my numbers in terms of getting benefits or revenue in the first year," says Al Qasimi. "People who got their funding from a VC [venture capitalist] and created private markets are worrying about a second VC. If Tejari depended on venture capital," she says, "I might not be sitting here talking to you right now."
"I see Tejari succeeding," says Waddah Salah, an analyst at Arthur Andersen in Dubai. "But success can be measured in all sorts of ways: financial success is something else altogether from what they're looking at right now. Tejari is supported by the local government, and the biggest buyer is also the financial backer," Salah points out. "But Dubai is a small place. They have to secure big buyers and suppliers from outside Dubai and the UAE. In certain countries, that might be possible. Jordan is very interested in Tejari, and they might be successful in Oman."
As of May, Tejari had 85 suppliers. Eighty of them are based in the UAE. None of the five other suppliers, according to the exchange, is based in the Gulf. Unlike first-year losses, that fact should be an enormous cause for concern, especially since the competition is just now arriving on the scene. Commerce One (C1) sponsored last year's GITEX conference in Dubai and, in April, launched the first B2B e-marketplace in Qatar. The Qatar project - which is a partnership between C1 Middle East, Q-Tel and The International Investor, a Kuwaiti Islamic investment bank - aims to expand beyond the Gulf state and become a global marketplace.
C1 has announced plans to set up e-marketplaces in Saudi Arabia, Egypt, Bahrain and the UAE. The company's director for corporate communications in London, Patrick Meyer, says that C1 is currently in talks with investors in Kuwait about setting up a B2B there. "It will probably be a regional exchange," says Meyer, "and it will likely be indirect, rather than direct. The marketplace could be involved in business support - say, pencils, paper and office equipment. A power company might not buy and sell power but the cables necessary for the business."
Another major provider of B2B solutions that is preparing to move into the Middle East is Ariba. The California-based firm went public in 1999, just a few months before Commerce One launched its own IPO. For Bassem Bouzid, Ariba's regional manager for emerging markets, the key to Middle East B2B growth is "building an incentive environment, especially for the small- and medium-sized suppliers. Something - the rules, the barriers - has to open up for there to be growth. There has been a lot of B2B hype in the Middle East," Bouzid insists, "but most of the exchanges in the region are still empty. All that will change - all that needs to change - in the next six months."
Each of the big three B2B solution providers talks about the great opportunities in the nascent Middle East market. But if the past is prologue, then investors in the region should exercise caution before throwing money at proposals from any of these companies. Oracle's CEO, Larry Ellison, once promised that he would never lay off an employee; times have changed. The company's stock has performed terribly in the past year - falling to an April low of just $14 per share - and Ellison had to break his promise about lifetime employment. Commerce One was trading at less than $10 in May, while Ariba shares plummeted from nearly $170 in October 2000 to just $9 last month.
In the big business of B2B, no matter how bad things get, everyone's a salesman. Oracle takes the high ground and touts its global reach; Commerce One badmouths Ariba, and says that the company thinks B2B is dead; Ariba says that Oracle "creates barriers to growth," and that C1 is desperate. Microsoft, which is a partner with C1 and not a direct competitor with any of the big three, carefully makes the case for its own, low-cost version of B2B.
The global dotcom bubble has already burst, and many of the industry's best salesmen have already died a figurative death. IPOs did not pay off, virtual fortunes were lost, B2Cs lost their funding, B2Bs went bust. That's the big picture. Is there any reason to think that this pattern will not be repeated in the Middle East? Penetration rates in the region are currently extremely low (there are just 20,000 users in Dubai, the region's hi-tech showcase) and convincing local businesses to get on the bandwagon presents unique challenges.
"Not one dotcom in the Middle East has so far delivered on its promises," says one industry insider. "It's a very small market, and there are huge trade barriers. Look at the big companies, like Bin Laden in Saudi Arabia. They set up a B2B exchange with Oracle, but it didn't work and they gave up. If they can't do it, who can?"
According to a report last year by ActivMedia Research, 43 percent of traditional B2Bs have seen a drop in business since the advent of the Internet. Thirty-three percent of all online B2Bs are not involved in buying or selling anything; instead, they use the Internet for marketing. And, according to ActivMedia, just 32 percent of all B2B e-marketers are profitable.
Never mind the numbers, insist the salesmen, who are at pains to point out that B2B is not just about transactions. "People think of B2B as being synonymous with e-procurement," says Microsoft's Hamlani, "but it isn't. Businesses can collaborate with other businesses in more ways than just buying from each other."
Again and again, the salesman talk of "value-added services" and point out that growth, and profits, will come with time. It is not clear, however, if businesses are willing to shell out millions for so-called services that do not translate into an improved bottom line. And, as the past year has illustrated, patience is not always rewarded.
In the case of Tejari.com, the thinking is clearly long-term. Al Qasimi plans to take the company public in 2003 and hopes to sign up regional businesses and partners before the Nasdaq IPO. "We have been approached by some horizontal exchanges in Europe," she says, "and while I could look at them as competition, I think that they could be ways to add value for my customers. Competition doesn't always work," Al Qasimi insists. "That is not always the best way of looking at things."
As Dubai loses its main business of physically trading goods, the emirate has sought to reinvent itself as a center for virtual trade, and Tejari is the centerpiece of that strategy.
Sheikha Lubna Al Qasimi is a highly respected businesswoman - she formerly headed the business solutions and IT department for the Dubai Ports Authority and her IT background goes back more than 14 years - and she is a persuasive spokesperson for Middle East B2B. But she nevertheless faces an enormous challenge as she seeks to take Tejari from Dubai to the big time.
Expect to see the exchange sign up smaller Arab countries like Jordan and Oman in the coming months; partnership agreements with other B2Bs are also likely to be announced. But if Tejari does not announce signings with buyers and suppliers in the larger states in the region - especially Saudi Arabia, Iraq and Iran - then it is unclear how Tejari can expect to become what it wants to be: a Gulf powerhouse.
The big three. While the big three B2B application providers are eager to undercut one another, it is worth noting that none of them is critical of Tejari - at least on the record. There's a good reason for that, and it is not necessarily because they are optimistic about the company's future. The fortunes of Oracle, C1 and Ariba - three companies whose stock value has plummeted in the past year - depend upon expansion into new markets. If Arab investors lose confidence in the whole idea of B2B, then the application providers won't be able to tap into the market.
Oracle's slogan - "We provide the software that powers the Internet" - reveals the company's weakness, and that of rivals C1 and Ariba. If no one believes in the promise of the Internet, then no one will buy the software to power it. And if a high-profile project like Tejari fails, it will be that much harder for any of those companies to succeed in the Middle East.
According to the Arab Advisors Group, a new economy consultancy, there were just 3 million Internet users in the entire Arab world - including the Gulf, Levant and North Africa - at the end of last year. Much as it would like, Tejari can do little to improve those numbers. The fundamental question for the company, then, is whether a B2B can succeed in a geographic region where penetration is extremely low and government, rather than the private sector, is the driver for growth. The answer, perhaps surprisingly, is yes.
Back in 1977, long before anyone had heard of a dotcom, a company called Software Development Laboratories was commissioned by the American government to build a relational database, which can be considered a crude model for today's B2Bs. In those dark ages, Bill Gates was just another 22-year-old nerd and no one owned a personal computer. But the founders of Software Development Laboratories had a vision and, just as important, government backing. Last year, that company reported revenues in excess of $10 billion.
You've probably never heard of Software Development Laboratories, which isn't terribly surprising. The company changed its name shortly after it was founded, figuring that something shorter would be a lot easier to remember. And they were right. Oracle is composed of just six letters, and it's a cinch to pronounce. Come to think of it, you could say exactly the same thing about Tejari.
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The new wired world
- Tuesday, June 19 - 2001 at 11:00
business-to-business e-commerce will soon be worth trillions of dollars. A look at the prospects and major players in the new economy Middle East, including Dubai's Tejari.com.
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Arabies TrendsTuesday, June 19 - 2001 at 11:00 UAE local time (GMT+4)
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This article was updated on Fri Jun 15 2007.
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