E-Commerce's Evolution

By Aaron B. Pryor

Aaron B. Pryor is associate editor of Scrap.

You’ve probably seen the commercial: The board of directors of an Asian company is unhappy because a supplier is asking too much for valves. Then a board member finds an offer on the Internet that cuts the cost in half. The other board members are surprised to learn that the offer comes from a company in Texas.
   Such is the promise of e-commerce.
   In this brave new Internet world, sellers will find new outlets for their products, while buyers will discover new suppliers and better prices. All of this will be done with the click of a mouse, eliminating tasks done by telephone, fax, and footwork. The convenience of Internet trading will reduce management costs, and those savings will expand profit margins. What’s more, the technology will ultimately give employees more time to focus on the core tasks of the business and building relationships.
   While this promise sounds idyllic, it has yet to be fully realized. In fact, now that the initial hype and hoopla have faded, e-commerce is facing some harsh economic realities. Many e-commerce firms, heretofore buoyed by venture capital, haven’t lived up to market and/or investor expectations and have subsequently limped along or folded. (Thus the joke these days about Priceline.com: “Name your own price for stocks.”)
   In the recycling industry, skeptics question the value e-commerce can add to a transaction, and they worry about what value it might eliminate. They’re confused, they say, with the proliferation of e-commerce providers in the various commodity niches. If they do conduct e-business, they say, it’s often only because their customers asked them to do it that way.
   That said, e-commerce does have its share of advocates in the scrap industry. Some companies are embracing it fully, even to the point of expressing frustration that the opportunities have evolved only so far. They see room for additional services.
   Beyond these divergent views about e-commerce and its effectiveness and value, one point is certain: It’s now a permanent part of the business landscape and a tool that more and more scrap companies will have to learn to use to the benefit of their customers and themselves.

The True Believers
A few months ago, ScrapSite (Pittsburgh) conducted what it hailed as the first completely negotiated online scrap transaction. Philip Metals Inc. (Cleveland) listed 11,250 gross tons of various grades of ferrous scrap and sold 5-foot plate and structural scrap steel. Bethlehem Steel Corp. (Bethlehem, Pa.) bought the scrap using the site’s “real-time negotiated sales functionality,” which enables buyers and sellers to negotiate every element of a transaction electronically and confidentially, ScrapSite says.
   According to Ralph Pinkert, ScrapSite’s president, such negotiated transactions are the way of the future, conducted in a neutral, well-balanced, participatory marketplace that adds intrinsic value and that can’t be duplicated through more conventional means.
   Among its benefits, e-commerce can enhance communication, expand sourcing options, and improve access to information, enabling companies to make better decisions, say e-com providers. Internet trading also provides a powerful database that’s accessible anytime, and new functions will continue to emerge to make e-trading portals indispensable tools, Pinkert says.
   In the scrap niche, “an efficient marketplace will eliminate the need for consumers to ‘overbuy’ by enabling them to make more frequent purchases of smaller volumes of scrap each month,” Pinkert notes. That can help processors turn their inventory faster, maximizing margins and lowering costs for both buyer and seller. “It’ll help both sides,” he says. “There won’t be just one winner here.”
   Such changes could help “eliminate a major factor of some adversarial relationships that still exist in the industry, particularly in market downturns,” Pinkert says.
   In the future, he adds, “as we develop liquidity participation in the market, we’ll consider expanding their buy on a 30-day basis. Without the Internet, that can't be done effectively or practically.” In the long run, Pinkert claims, e-commerce could even “reduce much of the price volatility in the market.”
   E-commerce can also address what Jeff Melville, financial project manager for Weyerhaeuser Co. (Federal Way, Wash.), calls a company’s “points of pain”—those logistical problems that come with every transaction. The better a site can address such administrative issues, the more value it adds, he says.
   Christine Mason, chief strategy officer and cofounder of MetalMaker Inc. (Chicago), adds, “On our site, transactions mainly take place between customers who already have a relationship and who are using it as a tool to manage all of the scheduling, shipment, and tracking on existing contracts. We’ve had some users who have done a request for quote, but that’s not what people are as interested in at this time. In maybe two years, we could see a move away from the 30-day contract. In the current climate, there’s not a lot of domestic demand to change the market structure in scrap.”
   The only way to benefit from e-commerce, of course, is to use it. That’s why Pinkert and other e-commerce providers encourage recyclers to explore the medium now rather than playing the waiting game. “They have nothing to lose and only something to gain,” he says. “I disagree with people saying that e-commerce has little value now. That may indicate a lack of understanding of the new dynamics of a global marketplace and the benefit of an Internet exchange.” 
   For example, Pinkert says, ferrous scrap can travel greater distances on a spot basis, and the Internet can open up special buy/sell opportunities—but only to those who regularly visit e-commerce sites.
Playing the waiting game makes little business sense, Pinkert asserts, explaining that “those who adopt early and use the system more and more will see the most benefits.”
   Traders may not even know what benefits are there until they jump in, Mason adds. “I think there’s a lot here. People ask why they should put our site between them and their customer. We don’t come between people and their customers. We think of our site as a bridge or lattice that enables you to be more efficient.”
In the end, Pinkert says, “Evolution dictates that this is going to happen. My feeling is that we can be a service to everybody and that everyone will learn to use the service, faster and more regularly, whether they’re buying or selling scrap materials.”

The Skeptics
Now for the skeptics.
   One objection expressed about selling scrap on the Internet is that the material simply doesn’t lend itself to the medium. “We’re not buying widgets,” says Gary Curtis, sales manager at Wise Recycling L.L.C. (Baltimore). “It’s not all uniform. You have to have qualified suppliers. It’s not as simple as clicking and buying the material.”
   Curtis says Wise Recycling’s e-commerce experience thus far “hasn’t been that wonderful. The people I usually did business with were the ones who responded to my offer, and the price was the same.” Though his firm receives a lot of inquiries from prospective suppliers—mostly offshore vendors—“we have to qualify material going into the mill before we can buy it,” he notes.
   The bottom line for his firm, Curtis says, is that e-commerce isn’t worth it at this point because the value isn’t there and because any cost savings are negated by subscription or transaction charges.
   Adding a paper perspective, Phil Alpert, a partner of National Fiber Supply Co. (Chicago), notes, “Not every shipment of scrap paper is interchangeable,” which makes Internet buying and selling “more complicated than initially thought.”
   Offering an example, Alpert points to the ReMA specifications. As he explains, “The specs are rather general, and they’re general for a reason. You aren’t dealing with a manufactured product, you’re dealing with a byproduct. And as long as we’re dealing with a secondary product, the potential for variation is great.”
   If e-commerce is to work effectively, says Tom Mele, president of Connecticut Metal Industries Inc. (Monroe, Conn.) and chair of ISRI’s specifications committee, scrap specifications will have to be tweaked. “There’s no such thing as a generic scrap package,” he notes. “As a broker, one of the services you provide is knowing what mill will accept a certain person’s material. Everyone has a certain signature. That’s the biggest challenge we have.”
   In his view, though, the specifications issue is not an insurmountable problem “because it’s done in foreign trade. You can firm up the specs, and you can use an inspector on each end. We sometimes have problems internationally, but the specs certainly help a lot. In fact, the customs bureau in India uses ReMA specs to set its customs rate.”
   Another common objection is that scrap is an industry based on relationships and that such relationships don’t come from transacting business on the Internet. “After an initial flurry of activity, people are learning that B2B [business-to-business] selling is more than spot selling and commodity movement,” says Alpert. “Relationships are important, and over the years suppliers and customers have been working on building partnerships.”
   Though e-commerce skeptics have their complaints, virtually all concede that the technology will play a role in the industry’s future.
   “Anything that can make us more competitive and efficient, we’ll be happy to investigate,” says Alpert, who so far has seen more potential in e-commerce as a clerical and notification tool than as a negotiation tool. “Several of our mills have come to us and said they’d like to give us our orders via blank-blank.com. As long as they give us the order, we don’t care how they send it to us. One potential for these e-commerce sites is logistics, and I think it has great potential for the more efficient movement of tonnage.” 
   Curtis, too, sees a future in e-commerce. “We’re not afraid of the technology,” he says. “We look forward to the technology and the tools growing and making our jobs more efficient. But there’s something about relationships in our business that’s very important.”
   Picking up on that point, Weyerhaeuser’s Melville adds, “Everyone believes the Internet will change the way we do business, but they fear how it’s going to impact them.”

E-Commerce in Action
In 1999, there were an estimated 240 million Internet users and approximately $130 billion in e-commerce, according to International Data Corp. (Framingham, Mass.). A report by eMarketer estimates that e-commerce sales could grow from $963 billion in 2000 to more than $4 trillion in 2004. B2B—as opposed to business-to-consumer—e-commerce currently accounts for nearly 80 percent of online sales and will reportedly grow to 87 percent by 2004, eMarketer says.
   The buying and selling of scrap is part—albeit a small part—of the B2B trend. But is scrap e-commerce growing, maintaining, or receding?
   That depends on whom you ask.
   Speaking from his experience and conversations, Curtis says “it’s not being used very much. Some scrap companies are using it maybe with some partners who are also invested. Lately, with the markets being what they are and consumers pulling out of the market, I don’t think people are talking about it much right now.”
   Kevin Preblud, the Denver-based executive director of recycled fiber for PaperExchange.com Inc. (Boston), counters that usage is increasing, though there are “different stories” in each commodity segment. In the scrap paper niche, for instance, “as a rule, the larger entities aren’t using it as much as the smaller and midsized companies,” he notes.
   In the aluminum sector, “Generally, the primary and secondary producers and consumers have engulfed the site much more than the scrap generators,” says Jim Diamond, vice president of sales for Aluminium.com Inc. (New York City). “I think the nonferrous metals industry has recognized that e-commerce is the wave of the future, it’s here to stay, and it brings value.”

An Online Future
Any number of indicators could suggest where the dot-com industry is going—starting, perhaps, with the Super Bowl. Last year, 19 dot-coms ran ads during the event, accounting for about 35 percent of the advertisers. This year, there will reportedly be two.
   That’s one indication, some say, that the Internet wagon is slowing down, the market is growing up, and it’s in the midst of a shakeout. Internet consultant Bill Moore of Moore & Associates (Atlanta) recently conducted a study of e-commerce in the recovered paper industry. “When we started our study, there were seven companies that were either transacting or said they would be,” he says. “When we commissioned the work in June, one had dropped out, but seven new ones were added, making it a field of 13. That’s too many. It’s not a big enough market, and there’s not enough money there. To get a critical mass, you have to have a smaller universe.”
   MetalMaker’s Mason agrees, asserting that “in the metals sector, there will likely be about four to six e-commerce companies left standing when the dust settles.”
   Preblud of PaperExchange.com adds, “In 2000, you couldn’t see who were the winners and losers. There weren’t any losers, there were just a lot of players. But in 2001, you’re going to see the players become more defined as to what they’re actually providing to the industry, and the winners will become more obvious.”
   Diamond agrees that the e-commerce industry is evolving toward a more expanded-service focus. “When Web sites were introduced, they were mainly just bulletin boards and portals that didn’t have a great value to the buyers and sellers of scrap,” he says. “The evolution now is to give them more value and establish trade-negotiation networks to allow buyers and sellers to work out certain items on the Internet.”
   In Mele’s view, the e-commerce survivors will be those that do just that—provide useful tools unavailable elsewhere. “Some of these sites are offering credit insurance, which is an excellent service,” he states. “They’re not just bringing in information. They’re bringing in tools.”
   Given the challenges facing e-commerce providers, though, how can they sell their services and build their businesses?
   “It’s a training situation,” says ScrapSite’s Pinkert. “We have people that train the buyers and sellers. We aren’t a faceless computer site. We’ve become the marketing arm for buyers and sellers. We even help them learn the Internet and understand their computer systems. We help them in every way to facilitate their buying and selling on the Internet. People change with time when they recognize the value.”
   Overall, Preblud notes, acceptance and use of e-commerce is requiring “a behavioral and philosophical change where people have to get used to the process, like when the fax machine came out. But I believe in the open-mindedness and sophistication of the audience.”
   And if e-commerce providers have their way, companies will get used to the process to the point where it becomes their business tool of choice, as ubiquitous as the fax machine and telephone. •