An interesting article on how the Internet is changing the world economy. I'm not sure I believe it all yet but it's food for thought.

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Believe All the Hype About B-2-B By Pierre Belec

NEW YORK (Reuters) - The New Economy is changing at the speed of light. The latest thing to set Wall Street spinning is the explosion of business-to-business e-commerce.

B-2-B commerce -- in which companies buy and sell goods and services to each other via the Internet, instead of over the phone or by mail -- are turning the business world on its ear.

Companies are cutting the cost of doing business, slashing purchasing and other administrative expenses. And, for those that get it right, B-2-B will create a lot of winners and happy stockholders.

The nation's oldest names have seen the future and they don't want to be caught with their bottom lines down. These giants have rejected the notion that because the Internet is so young it's too early to tell how important it will be for the economy.

The spread of business-to-business commerce is also a wake-up call for Federal Reserve Chairman Alan Greenspan, who's scratching his head, trying to figure out what's making this New Economy tick.

``If B-2-B efforts succeed, the fruits could be unprecedented heights of profitability,'' says Greg Smith, chief investment strategist for Prudential Securities.

The benefits are indeed huge. E-commerce allows the companies to use up less of their precious capital to run their businesses while at the same time saves them buckets of money when they buy stuff.

``Such a combination is pretty powerful and would go a long way toward explaining why so many companies have been so highly valued in the stock market, particularly in the B-2-B applications area,'' Smith said.

Financial news wires have been buzzing over the last two weeks with announcements of Internet deals by the richest U.S. companies.

U.S. car makers plan to build the world's biggest B-2-B online marketplace, an Internet-based supply chain network with a critical mass of buying power.

Ford Motor Co., General Motors Corp. and DaimlerChrysler AG (NYSE:GM - news) (NYSE:F - news) (NYSE:DCX - news)(DCXGn.DE) are setting up a super auction site to buy the $250 billion worth of parts they need each year, abandoning a 100-year old system of doing deals.

Sears, Roebuck & Co. (NYSE:S - news) and Carrefour Supermarche SA (CARR.PA), two of the world's largest retailers, and software giant Oracle Corp. (NasdaqNM:ORCL - news) are launching the first global business-to-business online exchange for the retail industry, targeting the $3 trillion retail market.

The B-2-B exchange, which eventually will be opened to other retailers, will dabble in apparel, food and other consumer goods. Sears and Carrefour buy $80 billion worth of goods from 50,000 suppliers each year.

USX Corp.'s U.S. Steel Group(NYSE:X - news), the nation's largest steel maker, has bought a stake in B-2-B steel exchange e-STEEL Corp. and will sell a full range of products through the site, which has 1,300 member companies in 65 countries.

``Many of our large customers are saying that they are going to Internet-type purchasing and they're telling us 'You will do business over the site or else we'll just mail in an order to you,''' said U.S. Steel President Paul Wilhelm. ``This is the way people will have to do business in the future and they'll have to recognize that, and get about getting it done.''

Even oil companies are tapping into e-commerce to save billions of dollars on pipes and engineering services. Chevron Corp.(NYSE:CHV - news), Texaco Inc. (NYSE:TX - news) and Royal Dutch/Shell Group (RD.AS) (SHEL.L) have each started e-commerce sites this year.

Andersen Consulting has estimated that the oil companies' profits could jump between 5 percent and 20 percent for every 5 percent they reap in savings.

The Boston Consulting Group estimates that one-fourth of all U.S. business-to-business purchasing will be done on line by 2003, It says between 1998 and 2003, American business e-commerce will grow by an eye-popping 33 percent a year and reach $2.8 trillion in transaction value, up from today's market of $2 billion.

Also, industry experts say e-commerce, which currently accounts for some 0.2 percent of the nation's gross domestic product, could see that number grow to 10 percent in five years.

Smith said the companies that have been quick to jump on the Web will show results as early as the middle of this year.

And, the Web-oriented players are creating compelling stock stories.

The big winners will be software makers that crank out B-2-B technology.

``This is not a one-year phenomenon,'' Smith said. ``This is not like Y2K that will burn out quickly one way or the other. It's a new agenda for business to push the whole business model to a new level of efficiency and ... the process could easily run five to 10 years.''

He said the returns on investments from B-2-B are big, really big, ranging from the mid-teens to as much as triple digits.

``With B-2-B, 20 percent of the cost reduction comes from lower transaction costs,'' he said. ``Instead of paper and people, it's electrons recording the interactions between supplier and buyer.''

The remaining 80 percent of the cost savings is shared by both the buyer and supplier because the amount of inventory and cash needed to do business is sharply reduced for both.

The car makers, for example, say the online marketplace will cut their cost by at least 10 percent, chopping the price tag of building a car by $1,000. Parts account for some $10,000 of the cost of slapping together a $20,000 car.

The B-2-B revolution will also make it tougher for crystal ball readers at the Fed to get a true reading on what's brewing in the economy.

Experts say the Internet will change the way the economy works and inflation indicators such as the Consumer Price Index and Producer Price Index may become less important.

``When it comes to inflation avoidance, the Fed will still have a lot of indicators of inflation, but the central bank's impact through the monetary tightening tool will have much less of an impact because the economy is so much different,'' said Allen Sinai, chief global economist for Primark Decision Economics Inc.

Inflation has been absent from the radar screens for the last couple of years -- to the amazement of Greenspan and other central bankers. But their lives could get even more complicated as e-commerce explodes.

``This poses an interesting question for the Fed: What part will interest rates play in the attempt to slow the economy if companies' spending has such high rates of return?'' Smith asked.

``So higher interest rates lose their sting,'' said Smith, one of Wall Street's brightest investment strategists. ``This phenomenon also further reduces companies' interest costs and makes it more difficult for interest-rate changes to control growth within the U.S. economy -- at least on the business side.''

Greenspan has been lobbing interest-rate increases at the economy since last June to slow its remarkable growth, which set a record 107th month of expansion in February.

The Street believes the Fed is not through raising the cost of borrowing. The betting is the central bankers will kick up interest rates a couple of more times this year to dampen consumer spending and head off what they see as the threat of inflation.

The Fed may have been caught flat-footed by this B-2-B wave and the bankers seem behind the curve in developing a system to track the New Economy.

``The change that is going on in the economy is happening very quickly, in fact, so fast that data cannot be collected fast enough to really give the Federal Reserve the right scoop on how rapidly the economy is reinventing itself,'' Sinai said.

``As a result, the Fed is having a tough time reining in this booming economy,'' he said.

The government is starting to acknowledge the technological changes, which are reshaping the economy. This week, the Commerce Department unveiled an e-commerce index that will track the fast-growing e-retail business.

The B-2-B revolution has not escaped the ever-alert stock investors. They've priced the New Economy's stocks out of this world on expectations there will of lots of earnings rewards.

``Wall Street, in its usual wisdom, has psyched this one out and, as a result, money is moving to the technology companies,'' said Sinai.

``What the market is telling us is that a big portion of the economy is now irrelevant to the dynamic future of the U.S. and world economies and investors are reevaluating and pricing up the portion of the New Economy that does matter,'' he said.

For the week, the Dow Jones industrial average soared 505.08 points to 10,367.20. The Nasdaq Composite index jumped 323.27 to 4,914.77 and the Standard and Poor's 500 index gained 75.81 at 1,409.17.

-- Jim Cooke (JJCooke@yahoo.com), March 04, 2000

Answers

Nice post. I guess this helps explain the bubble in technology. How much bigger will the bubble get? And by how much will they over do it is the question. At some point even this development in technology will not be able to justify the higher and higher stock prices in some of these companies. I think we are allready way past the point. But it could get even more grossly overvalued. Naz 6000 sounds dangerous to me.

-- ROB MERDOCH (MRLOVE99@HOTMAIL.COM), March 04, 2000.

Rob:

I wish I knew the answers to your questions - I'd be rich :^)

There are periods in history when economic reality shifts. I imagine that very few investors understood the economic implications of railroads in 1800 or automobiles in 1900. It may be that the internet and e-commerce is another of the reality shifts.

In the short run, at least, as long as everyone with a 401k continues to put money in the market, I think the expansion will continue. The "average joe" has to get scared before they start pulling money out and I don't see that happening yet.

-- Jim Cooke (JJCooke@yahoo.com), March 04, 2000.

Jim,

Good post. I would like to throw in a couple of points.
1)If these companies are going to save a bucket of money on their purchases, then at least some of that bucket is going to come out of the profits of the company that they are buying from. An increase in competition is good for the consumer, but I don't believe that it is necessarily good for the stockholder.
2)I don't have a link or even the exact numbers, but of the numerous companies that raised capital through the stock market to build cars when that invention was changing America, most went bankrupt. This didn't change the fact that cars were a revolutionary new technology that altered the economy dramatically, it just meant that not everyone was going to have the business savvy to survive. In my opinion, it will be the same for the internet. The internet will dramatically alter the economic landscape of America, but Yahoo and Amazon.com may still end up bankrupt.

-- J (Y2J@home.comm), March 04, 2000.

J:,

Yes, you're right that a lot of those early automakers (and railroads, for that matter) went belly up. People that invested in those companies probably weren't so happy with the reality shift. But, in the long run, it was good for both consumers and shareholders. I have the feeling that this e-commerce thing is going to be a great thing in the long run but, in the short run, there are going to be a lot investors on the wrong side of the curve.

-- Jim Cooke (JJCooke@yahoo.com), March 04, 2000.