The web's economic miracle

Rival car giants have joined forces on the web to increase their buying power

Many online retailers may be close to collapse, and many investors in web shares will be furious over the performance of their shares, but as the BBC's Declan Curry explains there are ways to make money with e-commerce.

Industry experts are predicting an explosion in the amount of shopping done on the web; but not because of people at home ordering cut-price CDs and books.

The huge expansion in e-commerce will be driven by companies ordering the things they need from other companies, all over the world-wide web.

In the jargon, it's business-to-business (b2b) e-commerce. It won't get the same hype as internet shopping for music or holidays.

We're unlikely to see a figure like lastminute.com's Martha Lane Fox promoting its cause.

But the effects of business-to-business trading could be felt every time we earn or spend our money. Analysts reckon it could lead to cheaper prices and an economic boom.

Rapid growth

Web exchanges for chemicals are among the most successful on the web

The idea of businesses trading goods and services with each other on the internet in still in its infancy.

Just 0.5% of all company-to-company trading in the United States is currently done on the web.

But it is forecast to become a truly enormous enterprise.

Investment bank Goldman Sachs predicts a 20-fold rise in business-to-business e-commerce in the next three to four years.

Putting that into dollars, the US-based internet consultancy Forrester Research says as much as one dollar out of every 10 transacted in the American economy will pass from company to company on the web.

Forrester's experts say $1.5 trillion worth of goods and services will be traded electronically between American businesses by the year 2003.

That's 14 times bigger than the estimates for the amount of home shopping likely to be done on-line.

Europe could pull ahead

In Europe, businesses are lagging behind, but they're expected to catch up soon. In fact, European companies may overtake their American rivals, and end up doing proportionally more of their trading on the web.

Twelve of the world's top computer makers recently created the first "high-tech" b2b market for the industry

Ben Funnell, UK & European Equity Strategist at Morgan Stanley Dean Witter, says that by the year 2004, business-to-business e-commerce will account for more than 15% of all transactions by value in the European economy.

And the figures for global business are truly staggering.

Henry Blodget, the New York-based internet guru who watches the web for Wall Street firm Merrill Lynch, says world-wide revenues for business-to-business e-commerce could total $2.5 trillion by 2003.

Given that inter-business trading on the web is currently almost non-existent in Europe and Asia, that's a prediction of riches that even Mystic Meg would balk at.

Saving time and money

There's a simple reason why companies want to do their business with each other on-line: e-commerce will save them time and money.

Rival web markets vie for business to serve the world's multi-billion dollar petrochemical industry

Buyers on the web get a wider range of suppliers, more choice and lower prices.

Suppliers get access to new buyers, and can spend less securing their trade.

And because the web brings their businesses closer, and they get a better understanding of each other's needs, both buyers and sellers will be able to cut the amount of stock they have to keep.

The economists at the investment banking arm of HSBC estimate that some businesses will be able to chop 50% off the costs of ordering in goods, and will be able to trim their stockpiles by up to 30%.

The winners

The big winners of business-to-business e-commerce will be chemical companies, steel producers and car makers - all companies with a high degree of standardisation in the way they make their products.

Chemical companies that already use the Internet say they have saved 7% on the cost of buying in their raw materials.

Michael Steib, UK and European internet analyst at Morgan Stanley Dean Witter, says the chemical industry could see 50% of its trading move on-line. That would put $700bn worth of business into the b2b part of the web.

Suppliers under pressure

The car industry thinks it will benefit so much from business-to-business e-commerce that some of the big auto makers are already forcing their suppliers to trade on line.

GM and Ford, the big American car makers, were the first to move.

They've now been joined in the e-trading world by DaimlerChrysler, Renault, BMW and Volkswagen.

The car parts suppliers are also pulling together - six of the biggest large component suppliers struck an e-commerce co-operation agreement in April.

For the global car industry, the forecast savings are 80bn euros ($75bn).

Economic miracles

And shopkeepers could also be among the big winners.

Selling food and goods directly to consumers will not do much for their profit figures, but dealing with their own suppliers on the web will cut costs.

Shops hope to go on the web - for both their customers and their suppliers

Retail experts calculate that a 5% cut in the cost of ordering goods, along with a 5% cut in shop administration costs, combined with a 5% increase in sales could boost operating profits for the typical shopkeeper by 70%.

The effect of all this on the economy could be little short of a miracle elixir.

Just as ancient alchemists spent their lives trying to turn base metals into gold, economists dream of the magic ingredient that will give an economy constant growth without overheating or soaring prices.

Some economy watchers say business-to-business e-commerce comes close to that miracle cure.

Growth without pain?

Gavyn Davies, chief international economist at Goldman Sachs and an unofficial adviser to the Chancellor Gordon Brown, says the savings that businesses will make through business-to-business e-commerce will spark major growth in economies around the world.

Companies will be able to boost their output, producing more product for their money, and yet at the same time cut their prices, or use those savings to churn out even more goods.

His prediction for the overall economy around the globe is that business-to-business e-commerce will lead to a massive boost for growth, without a single penny or cent on prices.

Businesses have of course been trading electronically among themselves for many years, in the form of private networks set up by the biggest firms.

These old relics show that business-to-business e-commerce is not some futuristic mirage, but will be magnified by the internet thousands of times over.

B2b will be a growing, if overlooked, tool for future economic growth and wealth creation.