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Covisint: OEMs vs. Suppliers?

A huge dichotomy exists between owners of Internet-based trading exchanges and those who merely use them.The owners expect to cash in on a red-hot stock market.

A huge dichotomy exists between owners of Internet-based trading exchanges and those who merely use them.

The owners expect to cash in on a red-hot stock market. Covisint, created by the OEMs, has been valued as high as $60 billion. This is in the ballpark of the total market capitalization of a General Motors or a Ford.

This $60 billion, by the way, is for a company that has yet to transact any business. Given such stratospheric valuations, it is hard to understand how Covisint could even ask suppliers to pay to use it. Instead, its OEM owners could easily afford to give suppliers millions of dollars for simply using it. In doing so, OEMs would still come out billions of dollars ahead.

The only problem with this buy-market-share approach is that investors want to believe trading exchanges are cash cows. The bottom line to trading exchanges is that the only companies getting rich are those that own them, not the people who use them.

Given this enormous disparity, it is not hard to see why auto suppliers are not rushing to sign up and transact business on an OEM-dominated exchange. Sure, Covisint can cite operational benefits for suppliers. One example is a single, uniform interface and communications link for a supplier to all its OEM customers. The associated cost savings to suppliers, however, is a pittance compared to the windfall profits realizable by Covisint's owners in an initial public offering (IPO).

OEMs have traditionally dominated suppliers, leading some to believe a Covisint-dominated auto industry is inevitable. OEMs certainly had no problem bullying suppliers into complying with their electronic data interchange (EDI) requirements in the past.

Covisint, however, is much more visible and closely watched than EDI was in its early days. In the 1980s Wall Street (and the Federal Trade Commission [FTC]) hadn't the slightest interest in EDI. Founders of EDI companies such as Supply Tech hardly became billionaires overnight.

Today we are in a different situation. The expectation of some people is that the whole supplier base will soon move en masse to Covisint. If Covisint ever succeeds, however, suppliers obviously will account for 90+% of the sales. This auto industry trading exchange is nothing without them. However, if suppliers feel that basically all the initial benefits flow to Covisint's OEM owners, their cooperation certainly becomes questionable. Suppliers could collectively stall Covisint for years until they believe its value is more equitably shared between buyers and sellers alike. OEMs obviously have no interest in inviting suppliers to the Wall Street IPO party where, not ticker tape but billions of dollars will rain down upon Covisint's owners.

Coupled with the FTC's and European Commission's ongoing investigation into Covisint, other trading exchanges may quickly jump to the lead. This includes private exchanges such as the i2 Technologies-Ariba-IBM-based system for Volkswagen. Product-centric exchanges are also blossoming, such as the world's seven largest tire makers banding together to form RubberNetwork.com.

Unless OEMs ban their employees from dealing with Covisint's competitors, the auto industry should expect a multitude of trading exchanges to flourish. OEM purchasing managers, platform-team engineers and the like are not going to wait for years until regulatory, ownership, and internal-management issues at Covisint are resolved.

Given the potential huge market capitalization of Covisint and the necessity for suppliers to be on board, OEMs could try a breathtakingly original idea: offer so many supplier services and benefits that Covisint would be irresistible to them. In this way suppliers would be hard pressed not to join.

Such a tack represents a totally new course for OEMs in supplier relations. Instead of dictating business practices to their suppliers, OEMs, through Covisint, would serve them, offering deep functionality that would greatly simplify supplier operations.

Covisint's direction, however, started off precisely in the opposite direction: constructing the trading exchange to serve its OEM masters, not suppliers. Initially, supplier input wasn't even solicited or appreciated.

Given that these same suppliers' cooperation is worth billions of dollars to OEMs, it is baffling how OEMs could be so misguided. If ever there was a financial justification for OEMs to truly collaborate with its suppliers, an industry-wide trading exchange is one.

Unquestionably, Covisint is a vendor that must earn its customers' business. Heavy-handed, thinly veiled threats to suppliers would probably not be tolerated by government regulators.

The only alternative, therefore, is for Covisint to build an extraordinarily customer-centric organization. This means both of its two primary groups of customers must be well served: OEMs and suppliers alike.

Covisint cannot continue OEMs' traditional practice of treating suppliers as serfs. To do so will surely doom it to being nothing more than a brief flash-in-the-pan in an otherwise remarkable industry transformation.