The emergence of e-commerce is forcing companies around the world and in all industries to become internet-enabled enterprises. Improvements in security and increased standardization has given buyers and suppliers new confidence in the power of the internet.
Early adopters of the new economy included the automotive, transportation and electronics industries. It is now the turn of the power industry, and the last two years have seen the emergence of new portals and on-line ventures driven by utilities, equipment suppliers and trading entities.
While utilities have driven the emergence of independent procurement portals such as Eutilia and Pantellos, original equipment manufacturers (OEMs) and turnkey contractors are now forging ahead with e-business strategies.
A new report by international market consulting company Frost & Sullivan highlights the efforts being made by equipment suppliers in the European power generation industry to boost lucrativity and enhance their relationship with suppliers and customers alike.
Frost & Sullivan’s findings reveal that International Multiple Segment (IMS) OEMs, i.e. those operating on a global basis and offering a wide range of power generation equipment and services, and international turnkey contractors are at the forefront of e-procurement adoption in the European power industry. This segment amassed $600 million in combined on-line procurement and sales transactions in 2000, a figure that Frost & Sullivan expects to grow to $18.41 billion by 2007.
The IMS OEMs are expected to make the most rapid progress in these early years of e-business adoption and eclipse the other two segments of the equipment industry – the Focused Product Group (FPG) and the Packagers and Turnkey Contractors (P&C).
The last 12 months in particular has seen a rash of internet-based ventures emerge, some of them pure start-ups backed by venture capitalists and others the product of established industry players.
This growth has been driven by a number of factors, including improved internet security and an increase in internet penetration.
E-business is giving players a competitive edge; procurement costs can be reduced and companies can use the marketplace to discover real market prices, according to Harald Thaler, senior industry analyst with Frost & Sullivan’s Power and Energy Group. Companies are able to look beyond their traditional boundaries for new customers and suppliers, and they can also satisfy customer requirements more easily.
Another factor that has driven the growth of e-commerce adoption is the increase in standardization of internet protocols and frameworks.
In procuring their own goods and services on-line, most companies start with the purchase of indirect goods and services before moving rapidly towards procuring direct materials and services. Growth in this area is expected to be high throughout 2001 as some of the leaders’ procurement portals gain traction through the on-going connection of suppliers and progress in cataloguing standard parts.
Figure 2. Growth and market penetration of on-line procurement by OEMs in the European power generation sector
All three market segments analysed by Frost & Sullivan – IMS OEMs, FPG OEMs (those that operate only in one or a relatively targeted group of market segments in the global power generation industry) and P&C companies (those that assemble power generation units and/or build turnkey plants on an engineering-procurement-construction basis) – are expected to increase e-procurement extremely rapidly between 2001 and 2007.
Average annual growth rates for the three groups will range between 67 and 90 per cent. The largest segment, the IMS OEMs, recorded significant electronic B2B transactions in 2000, and are expected to make the fastest progress in the early years of e-business adoption as they have the market presence to force the pace in electronic trading.
On-line e-procurement transactions in the FPG OEM and P&C sector were low in 2000. Nevertheless, the progress of the large P&C companies – mostly global turnkey contractors – will also be rapid as they support the development of global electronic procurement hubs geared to the needs of the international engineering and construction industry.
Progress in e-procurement among the FPG OEMs is likely to be slow in the early years, as many of these companies will take a low-risk, wait-and-see approach. Their strategy is to hold on until marketplaces have become more established and more first-hand evidence of the effectiveness of e-procurement emerges. In the early years, many suppliers of FPG OEMs are likely to lack the competence and resources needed for technological sophistication, thus slowing down e-procurement developments in this segment.
Selling on the net
The internet is an obvious tool for marketing and selling products to customers, and the IMS OEMs are leading in the adoption of customer-facing e-business initiatives. The first area of focus for equipment companies developing e-sales tends to be spare parts sales, and a number of companies are already selling parts over the web and many others are planning to offer this facility in the near future.
GE Power Systems, for example, has taken the lead with GEPartsEdge. A few leading IMS OEMs already offer, or are planning to offer, on-line configuration tools enabling customers to configure power plants and also individual components, such as gas turbines.
Of the three industry segments, the IMS OEM group displays the highest share of total sales undertaken on-line. However, it is the FPG OEM group where sales are growing most rapidly, albeit from a low base. Many FPG OEMs operate in highly specialized markets and sell relatively low unit volumes, and there is little readiness in this group to sell equipment on-line. However, some of the more proactive companies plan to establish their own marketplaces that will link them with their main customers, with the ultimate aim of being a marketplace incorporating suppliers, dealers and customers in an integrated supply chain solution.
In the P&C segment, companies are expected to gradually start selling services on-line, although the overall share of on-line sales is likely to remain lower than in the other two segments. Large turnkey contractors are already looking to sell associated services on-line, while locally-based packagers and genset companies have no clear perspective on selling equipment on-line, although some firms in this group plan to launch on-line parts sales in the near future.
Picking a winner
While the involvement of OEMs in e-business is set to grow between 2001 and 2007, some key industry challenges remain which either the market or the competitors must overcome.
- Picking a winner in the e-business race is essential: Companies are under pressure to come up with a strategy on e-commerce. In particular, IMS OEMs need to decide whether they intend to be investors in a marketplace or mere users. Investment has the advantage that the company can drive the marketplace strategy, and may derive additional income from it. But there is a risk that the venture will fail in the face of strong competition and the company will lose its investment.
- Backend integration: To make e-commerce work effectively, FPG OEMs need to web-enable their back office systems to be able to communicate with these new electronic middlemen. The costs of this system integration will probably be too high for many of the smaller players, and even some of the larger ones. They will wait for such solutions to become more mainstream and affordable before making the expenditure.
- Customized procurement systems are costly: International turnkey contractors have sophisticated electronic procurement needs that commerically available solutions cannot meet. Proprietary, customized systems therefore need to be developed that to with different currencies and taxation regimes etc., and these require a large investment.
A market revolution
E-commerce will not only have an impact in individual companies, but also on market structure as a whole, according to Thaler. Consolidation will result from increased competition and price pressure, and those that are slow to adopt the new economy to acquire new customers will be the losers.
Frost & Sullivan is also expecting to see a five to ten per cent reduction in equipment prices over the next two or three years, although most of the savings made by OEMs in the e-procurement process will be cancelled out by the investments needed to web-enable their activities.