Aerospace Industry Bullish on E-Business.

Can online marketplaces deliver high efficiency and lower costs?

The aerospace industry's frantic race toward higher productivity and profits has triggered anotherfeverish contest in the world of Internet-based trading exchanges.

The proliferation in recent months of business-to-business (B2B) exchanges the aerospace industry issymptomatic, on the one hand, of the growing interest in Web-base market-places that link buyersand sellers directly, without the traditional middlemen. On becoming tools to achieve specificcorporate are as the other hand, B2B exchanges increasingly are becoming tools to achieve specificcorporate goals--such as increasing sales, improving customer service and cutting back on excessinventory.

Many executives in the industry believe that the aeropace B2B environment is too complex for a one-size-fits-all solution. Some companies, for example, carry enough clout in the industry that they maynot pressure to join exchanges. Some industrialists simply don't believe that a corporation'spresence on Web exchanges necessarily translates into higher sales.

Aerospace industry giants, meanwhile, have been rushing to launch independently ownedexchanges--which allow them to join forces with their competitors and combine their buying power--without having to merge outright with each other.

There is broad consensus, additionally, that the conference that aerospace executives are placing onB2B exchanges is tied to the prospects of higher efficiency and lower costs of executingtransactions.

"E-commerce eliminates non-value-added activity," said Phil Condit, chairman and chief executiveofficer of the Boeing Company. Electronic transactions, Condit told reporters, translate into a 25percent surge in productivity.

Boeing is one of the four founding partners of Exostar, a B2B exchange for the aerospace anddefense industries. The other three are Lockheed Martin Corporation, The Raytheon Company andBAE Systems. The chief executives from all four firms briefed reporters at a news conference inFarnborough, England.

Exostar said Condit, "will provide both external and internal gains in efficiency for both buyers andsellers."

The exchange, whose creation was announced in March, was expected to open for business in lateSeptember. Headquartered in the Washington, D.C. area, it is an independent corporation. The fourcurrent participants are the industry's most powerful firms. They collectively have more than 37,000suppliers and $71 billion in commercial and government sales. The annual sales volume for theentire aerospace and defense industry is about $400 billion. "We have critical mass," said JohnWeston, CEO of BAE Systems.

Exostar's interim CEO is Kent Swanson, who is a partner at Andersen Consulting.

"We invite companies of all sizes from around the world to participate," said Vance Coffman,chairman and CEO of Lockheed Martin. "We have 100 people setting up and staffing Exostar in theWashington, D.C. area. ... We are bringing supply-chain management into the digital age and doingso on a global basis."

The supply chain is an industry buzzword that represents the various buyers and sellers involved inthe aerospace market. It includes:

* The original equipment manufacturers: These are specialized companies that design andmanufacture engines, avionics, landing gear and other aircraft systems.

* Aircraft manufacturers: These constitute a small group of players, such as Boeing and Airbus.

* Parts and component suppliers: These are thousands of vendors worldwide.

* Aircraft operators: Commercial, cargo and charter airlines.

* Maintenance, repair and overhaul centers: Facilities either owned by airlines or otherorganizations.

* Distributors: They provide services such as inventory management or order processing.

Online Marketplace

During the past several years, B2B Web-based operations have evolved from simple sources ofsupplier information to online marketplaces, with many buyers and many sellers, all focused on theindustry's offerings. Exchanges, in theory, were designed to match those buyers and sellers moreefficiently and to lower their overhead costs via paperless commerce. They also claim to offer smallcompanies opportunities to be on an equal footing with larger ones.

"We are doing this because it will snap the industry into tighter alignment with the e-commercepriorities of our customers," said Coffman. "Exostar's open supplier network will enhancecompetition ... will develop opportunities for small businesses," he said.

The exchange, Coffman said, will support the Defense Department's e-commerce project, called the"integrated digital environment." The defense industry, particularly, wants to facilitate thePentagon's effort to "integrate the supply chain," meaning that customers, prime contractors,subcontractors and suppliers would be part of a Web-based exchange.

B2B transactions range from buying and selling products out of electronic catalogs or via electronicauctions, to submission of bids and proposals, and management of joint projects and documents.

Dan Burnham, chairman and CEO of Raytheon, touted Exostar's "common protocols and expandedhorizons" as important benefits that justified Raytheon's participation.

Raytheon has a separate e-business site called EverythingAircraft.com, which sells general aviationspare parts. It has nor been decided yet whether that site will be integrated into Exostar. Boeing setup myboeingfleet.com as a portal for online maintenance, engineering and flight operations data.Boeing's online site for commercial parts sales rang up more than $400 million last year, Conditsaid.

Every member of the aerospace and defense industry is trying to decide which exchange to join,Burnham noted. "We want Exostar to be the obvious choice."

The weight behind the four founding companies will be the key selling point in this exchange, saidMark Hoffman, chairman and CEO of Commerce One. The company supplies the hardware andsoftware for Exostar's e-commerce infrastructure. "This exchange has the span of these bigcompanies. That gives this exchange a lot of power, a lot of buying power, which is very important.

"We are making an open architecture so members can join without extensive investments in internaltechnology and processes," he said. He also stressed that sensitive information is encrypted,according to industry standards.

Electronic auctions will be one option available to exchange users, Hoffman said. Small businesses,he explained, can register and make their products available to everyone who is connected. "If youwant to send ads or information to different companies, you can do that," he said. "You want them toparticipate as an active community partner"

Hoffman predicted that aerospace industry e-business exchanges eventually will consolidate becausethere are currently too many.

One of the most viable competitors emerging today is MyAircraft.com, launched by industrypowerhouses United Technologies Corp., Honeywell, and i2 Technologies. The BFGoodrich Companyrecently announced it will became a partner. These firms collectively have about $25 billion inannual revenue.

MyAircraft.com "has the potential to dramatically improve efficiency in a business involving $50billion in aerospace after-market parts and services annually," said An Bousbib, vice president ofUnited Technologies. Like Exostar, MyAircraft.com is an independent company created to provide anelectronic exchange for airlines, manufacturers and suppliers. It is expected to begin operations bylate 2000 or early 2001, said United Technologies spokesman Peter Dalpe.

The prime motivation for many companies to join an exchange is to improve inventory management,said Dalpe. The aerospace industry has inventories worth about $50 billion, mostly in spare parts.But the annual demand for new spares and repairs amounts to about $30 billion. "This industrypresents ripe opportunities for substantial reduction in inventories," said a white paper published byMyAircraft.com.

The site will offer products from parent companies United Technologies and Honeywell. But newcapabilities will be added for supply chain management and technical data handling, Dalpe said. Thesite will earn revenues from transaction fees and technical publication subscription sales.

Neither Exostar nor MyAircraft plans to impose any exclusivity requirements on companies wishingto do business on the site. "It's best to have as many companies as possible," said Dalpe.

Lockheed Martin spokesman Hugh Burns said that "any legitimate supplier" would be eligible toparticipate in Exostar, assuming that their products meet government certification requirementsimposed by the Federal Aviation Administration and the Defense Department. "This is an opportunityfor people to get into the [aerospace] business, but it doesn't mean any 'mom and pop' hardwarestore can do it."

Exostar's revenues will come from transaction fees, said Burns.

Customer Web Center

But while Exostar and MyAircraft tout the benefits of multi-company exchanges, one of theindustry's most prominent firms has experienced success with its own e-business site. The GEAircraft Engines "Customer Web Center," launched in January 2000, is expected to have nearly 300customers registered by December, said James McNerney, president of GEAE. "E-commerce is amassive productivity play, not just customer play," he told reporters. By early 2001, he said, "$1billion in orders will be flowing through the site." The company has assigned 300 employees to theWeb Center.

According to McNerney, the productivity achieved via e-business will result in a $500 millionincrease to operating margins during the next three to four years.

There are more than five million pages worth of manuals on the Web today, said John Rosenfeld,global e-commerce leader for GEAE.

To gain access to the Web Center, customers--such as airlines or maintenance shops--must be pre-approved by GEAE. They can buy spare parts, research technical publications and remotely diagnosethe condition of specific equipment, which means they can receive information on the status of anengine while the engine is in flight, Rosenfeld said in an interview.

While the Customer Web Center performs the "selling" function, the company has a Supplier WebCent4er for its 1,200 suppliers. The "buying" side of GE's Web operation has automated many of thetasks formerly done by humans. About 200 positions in the purchasing department were thuseliminated, said David Overbeeke, general manager of e-business at GEAE.

"Having 1,200 suppliers on our supply chain Web Center allows GE to do forecasting, scheduling,part shipments, drawings, quality control documents," he said in an interview.

"We used to spend a million-and-a-half dollars shipping blueprints to customers. Now, they pulldrawings off the web and print them out themselves," said Oberbeeke. "When there is no valueadded in a task, you can automate that stand eliminate people associated with it.

"We have run over 400 electronic auctions this year alone," he said.

The company plans to launch a site for military customers, Rosenfeld said. "It will leverage all of thefunctionality we built in the commercial site, although we won't be able to do it all at once becausesome if it is specific for commercial customers."

Military customers will have access to spare parts, product support and component repair status.The Defense Department's electronic commerce office, said Rosenfeld, "wants our data so it can takeour catalog data and availability information, and data from other vendors, and put it in one bigcatalog. ... We also provide status of component repair work at our shops."

But he explained that commercial and military customers have their data stored separately andcannot access that data unless they are authorized.

Most of the content material on GEAE's sites is proprietary or sensitive, "but we don't have any top-secret information on the Web," said Rosenfeld. But he believes that will change, because, "securitystandards are getting better all the time."

GEAE considered participating in Exostar, said Overbeeke. But he decided against it. "We were indeep discussions and chose to not participate," he said.

"Our volume [for the entire GE company] is as big or bigger than those companies combined. Wehave no antitrust risk by combining the GE companies. They may have a concentration in aerospace,which may cause them antitrust problems," said Overbeeke.

A more important consideration for GE, however, was the perception that defense-oriented firmsoperate at a more sluggish pace than commercial firms. "They are much slower than we are. GE isabout speed," Overbeeke said. "While they have talked about it for the past six months, trying to getorganized, we saved $100 million" through the GE Web Center, he said. "Would you rather have$100 million of bottom-line margin growth, or would you rather have a lot of meetings and talk aboutit for six months?"

Besides financial matters, there are other reasons why it would not make sense for GE to be part ofExosrar, Overbeeke added. "We don't want to get tied up with four or five companies in a bigbureaucratic structure.

Because GE is a $120 billion company, he said, "We have enough leverage, enough focus andexpertise to drive the stuff on our own.

GE Aircraft Engines, meanwhile, has begun negotiations with Boeing for participation on the "sellside" of GE'S Web site. "But on the back end, we believe we have a competitive advantage," saidOverbeeke.

That competitive advantage would be sacrificed, he explained, if GE shared its purchasing powerwith other companies. The upshot would be that they all would be charged the same prices byvendors. "We would all be sourcing the same stuff, getting the same price, yet we have to compete inthe marketplace. To me, that doesn't drive the right value proposition."

The Exosrar exchange, meanwhile, "is the right thingfor Boeing and the other companies to do, becausethey need cost control. We have our own cost control."

The "real issue that we have to figure out" in theaviation and aerospace industries is "the interfacebetween product manufacturers and the airlinesthemselves," said Overbeeke, so that the customersget more benefits and gain productiviry. "That is thereal challenge and the real question," he said.

The development of standards throughout the B2Bexchange universe will be a top priority for theindustry because "every company is affected by what

other exchanges are doing," said Shirley Goodman, from the Association of Enterprise Integration, inArlington, Va. The organization has hosted industry forums to address these issues, she said.

"You have all kinds of other exchanges out there being developed but they are all tackling it fromdifferent perspectives," said Overbeeke. "Our view right now is to stay GE-branded, give our

customers stare-of-the-art functionality and be fast to market, building de facto standards.

GE's status as one of the world's three major engine manufacturers means that, no matter whatexchanges are out there, GE will be a player, said Rosenfeld. "Exchanges are becomingintermediaries, so they can't survive without us, but we've been around a long time without them,"he said. "So we are in no rush to go and let one of these folks take over our relationship with ourcustomers. We won't allow that to happen."

GEAE's top competitor, Pratt & Whitney, is affiliated with MyAircraft.com. Pratt & Whitney is ownedby United Technologies. The third major engine maker, Rolls-Royce, announced it is launching an e-business portal called "aeromanager," which will provide "tailor-made fleet management solutions tothe aviation industry," said a company statement. The portal is a joint venture with San Diego-basedScience Applications International Corporation.

It is unlikely that all the exchanges currently in business will survive in the long term, Overbeekesaid. One of those exchanges, AviationX, appears already to lye folded. Phone calls to AviationXoffices in Arlington, Va., were not returned.

MyAircryft's Dalpe believes that there is room in the industry for more than one exchange, but thatthere will be dropouts as time goes on.

Another exchange that was scheduled to beign operations in the summer of 2000 is Aerospan.coman e-business site for the aviation transportation industry. The company predicted it would helpboost airline profitability by 26 percent.

"There is going to be a rationalization of all this effort," said Overbeeke.

Rationalization

Both Exostar and MyAircraft have been actively promoting their "openness" to other companies'participation, seeking to avoid being perceived as exclusive clubs. But industry observers believethat anti-trust issues inevitably will arise if companies find that access to certain exchanges isrestricted.

Jill Posnick, spokeswoman for Andersen Consulting, said Exostar officials have been aggressive insecuring legal advice to preempt antitrust concerns. Andersen Consulting is a partner in Exostar.

The corporate owners of MyAircraft do not plan to become a "buyers club" and make purchasesjointly, said Dalpe. "United Technologies will not be doing bulk buying with Honeywell," he said,because that was not the original intent for setting up the site. The emphasis for MyAircrafr, he said,is inventory management and automating the supplier-buyer transactions.

There still remain a few non-converts in the e-business frenzy.

Francois Roudier, director of communications at Messier-Dowry, a French supplier of civilian andmilitary aerospace products, said there is much more to achieving growth in the industry thanhaving a "wonderful Web site."

Messier-Dowry, which is owned by the SNECMA Group, has a Web exchange for selling parts and alarger site for electronic business transactions. "But we are doing quite well, even without the Website," said Roudier in an interview. He is not convinced that a Web exchange can help increase sales,

but he endorses the Internet as a valuable customer-service tool.

"For us, as a global company, e-mail has been a revolution, especially when dealing with customerswho don't know English very well and prefer to write things out," he said. "I am not convinced thatlaunching a big web site increases business. I believe in human face-to-face contact. That is the onlyway to keep yourself in the business. If you don't meet your customers in person, you'll be out of themarket soon. E-business is just a tool."

Large exchanges such as Exostar, said Roudier, should benefit small parts manufacturers "who don'thave a lot of visibility, who make unique, specialized items."

The belief that "buyers and sellers need help finding each other" is feeding the optimism of dotcomexecutives, said Barry Wightman, spokesman for TradeAir.com, based in Minnetonka, Mino.

Exchanges allow companies to set market prices more quickly, he said in an interview. TradeAircurrently is a commercial aviation site, but is "moving into the defense market," he said. "There aremany buyers in the defense community that have the same problems as the commercial customers.

Wightman does not see Exostar or MyAir-craft as direct competitors, because TradeAir specializes inthe surplus market for spare parts, which accounts for about $10 billion to $11 billion a year insales. "We are not trying to be all things to all people."

Used surplus parts are sold by airlines, manufacturers, overhaul shops and brokers. Like otherexchanges, said Wightman, "we don't require exclusive relationships with companies. They usuallydon't work."

The successful exchanges, said MyAircraft's Dalpe, will be the ones that implement the "supply chainmanagement software" in ways that will make participating companies more efficient.

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