Mega trading exchange set up by aerospace giants

Washington DC
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Four of the world's aerospace giants say they will form a global Internet trading exchange to process a potential combined procurement outlay of $71 billion by the middle of this year and add a potential IPO slated for sometime in 2001.

In a transatlantic press conference conducted simultaneously today in New York and London, the four CEO's of Boeing, Lockheed Martin, BAE Systems and Raytheon Company, outlined their proposals to hook up with business-to-business (B2B) solutions provider, Commerce One, in a blockbuster trading exchange.

Citing vast, potential cost savings from the trading exchange, all four CEO's maintain that the "single e-marketplace" can bring manufacturers, suppliers, airline and government customers together, to significantly lower transaction costs and extract ever greater value, even from competitive businesses.

The aerospace companies have signed a memorandum of understanding (MOU) and expect to sign a formal and binding contract soon to operate the exchange. Launch is slated for mid-year and the IPO for 2001.

Ambitious claims are being made for the new venture and the five initial participants say that the move will create the world's largest B2B trading community, using Commerce One's relationship with Microsoft and particularly, its Windows 2000 application.

Boeing chairman and CEO, Phil Condit, says: "This web-based global trading exchange will transform the way we do business and each of us [here] has come to the view that the world e-market place is absolutely essential if we are to drive new levels of efficiency for the industry.

"There will be a board of directors and each of the founding partners will have an equal stake with equity incentives based on sales through the exchange. We are [also] reserving additional equity stock (20%) for other partners as well as for Commerce One." (5%)

Commerce One already has some 53 trading exchanges in existence worldwide today, but says that the establishment of an aerospace e-commerce facility will be a "mega-exchange" in an industry that enjoys commercial and military sales of more than $400 billion.

"Dot.coms are there but aerospace companies will be able to bring powerful brand equity to build the best market in the world. We have incurred the cost of creating this exchange or portal," says Commerce One Mark Hoffman.

"This is a totally open exchange and is a very powerful coming together of people from Germany to Mexico to Singapore. It is not only our applications but those of other people who want to plug in tying together an internet environment with a global trading web."

Discussion at the press conference included observations that the new venture was tinged largely in the colours of an Anglo-US alliance, but this was refuted by several of those present.

Founding partner, BAE Systems chairman, Sir Richard Evans, anotes that Boeing aircraft manufacturer rival, Airbus, will form an integral part of the global exchange and that the proposed European Aeronautic Defense & Space Company (EADS) may also bring significant business to the table.

"There have been discussions with Airbus and we will bring in the whole of our Airbus procurement [BAE Systems supplies all Airbus wings] programme. If EADS is on track, then there will be 100% Airbus [participation] in the exchange. We want EADS to come in and they have a number of formation issues at the moment.

"Some pretty sophisticated procurement items will eventually get on to the exchange. The majority of people working in procurement spend a tiny amount of time with procurement and the rest of the time they spend dealing with the supplier interface."

BAE Systems already has an Intranet facility to operate what it terms "virtual team working" and says that the introduction of the aerospace exchange will allow it to expand those processes to its international partners and streamline its procurement business.

Speaking on a live link to the press conference from London, BAE Systems CEO, John Weston, says: "The scope of this exchange will be remarkable as buyers reduce procurement costs and sellers benefit from lower transaction pricing and better visibility into inventory levels across companies.

"We are probably going to have a flood of requests to join this [exchange] as the savings in procurement transaction costs and extra business volume should lead to price reductions."

And Weston adds he does not expect any problems with anti-trust legislation, although he concedes the regulatory authorities "to be taking some interest" in the new venture.

The BAE Systems CEO also says it would not be unreasonable to expect that an IPO should be in place at some point in 2001 but as yet there is no firm timetable. "We would not float the entire entity but strike a value for the enterprise as a whole," he notes.

The partners agree that the (undisclosed) cost of setting up the venture is "largely irrelevant" given the size of the $400 billion aerospace industry and that in any case the benefits are too large too ignore.

"The real key here is tracking interaction and reducing costs by, for example, automating the paperwork that currently goes through the system," adds Condit.

"The exchange does not fundamentally change the relationship with a supplier but it does broaden our opportunities. Our PART page, established in 1996, was the first web-based ordering system for after-market commercial aircraft parts.

"In 1999 we generated more than $400 million in on-line sales and the site was used by more than 250 airlines and about 675 other companies. We'll migrate this system to the new trading exchange.

Lockheed Martin chairman and CEO, Vance Coffman, adds: "This exchange will put smaller companies on an equal footing with the larger ones using widely available information.

"Billions of dollars are spent each year by customers buying components and even if you achieve modest savings, this can translate into a substantial amount of money. We anticipate major cost reductions."

In common with its three other competitors at the New York conference, Raytheon Company will extend its existing B2B activities - currently its Virtual Depot II allowing real-time worldwide procurement and delivery of aircraft parts - to the exchange.

"The power of this exchange to drive efficiencies and value is really unbelievable," says Raytheon chairman and CEO, Dan Burnham.

"OEMs can deliver market parts, data and services to airline maintenance shops for example and we intend this exchange to be the place where industry conducts business and grows collaborative product development."

Microsoft has largely driven the technical genesis of the project in tandem with Commerce One and the exchange has necessitated the construction of a superior internet platform, says Microsoft CEO, Steve Ballmer.

"We are using our latest and greatest stock and are committed to delivering robust tools to Commerce One. We are delighted Windows 2000 and our Internet services will be the technology employed to create that critical mass in this new aerospace marketplace."

The new global exchange will be based on the Commerce One MarketSite Portal Solution and will join a growing number of exchanges in the company's Global Trading Web.

Aircraft parts encompassing the whole gamut of the aerospace industry can be traded as well as technical data, raw materials and indirect products and services required by airlines and suppliers.