Fragile economy putting online exchanges to the test

For the last nine months, the purchasing manager at Texatronics Inc., a Richardson, Texas-based printed-circuit-board maker, has visited Virtual Chip Exchange Inc.'s Web site several times a week to look for parts and send out RFQs. The site's interactive aspects and power to search nearly $750 million worth of excess OEM stock keeps Neubauer coming back.

But that's where his loyalty ends.

"Virtual Chip has so many competitors that if they were to dissolve, someone would take their place instantly," Neubauer said.

Indeed, dozens of online exchanges have stepped up to fill supply chain gaps. How long some of these companies will last is becoming hard to predict.

The dot-com death march plaguing other b2b sectors is seeping into the high-tech space, living up to analysts' projections that the swell of online marketplaces will dwindle to a handful of players. The economic climate and drastic turn in the supply/demand environment is forcing several companies, including eChips, FastParts, and Need2Buy, to tweak their strategies.

The demise of the dot-coms has even left brick-and-mortar companies like Arrow Electronics Inc. wondering if their investments in Internet start-ups are still worth the millions they paid.

No one is disputing that some Internet companies will have viable models. However, many have failed to influence the electronic components supply chain the way people suggested a year ago, according to industry executives and analysts. "Adoption and use are dependent on a growth environment. There is no growth right now in the industry," said Bob Moncrieff, a director at management consultant firm Pittiglio Rabin Todd & McGrath, based in Mountain View, Calif. "Many of the market environments depend on liquidity, but now liquidity has shrunk completely."

Battening down the hatches With only so much available capital, reality is setting in that some companies may be better off shutting down or being bought than pouring more money and resources into development.

FastParts Inc., San Jose, may be one such company. Several sources told EBN that FastParts is in acquisition talks with DoveBid Inc., Foster City, Calif. The deal would give DoveBid, which provides auction services for various industries, additional auction technology and cash, sources said.

Like other online companies, FastParts, which received $30.5 million in venture funding in March 2000, has been struggling to carve its niche. Earlier this year, FastParts cut its 50-person staff by about a quarter, reportedly because of pressure from its venture capital investors to reduce spending, sources said at the time. In June, its president and chief executive, George Gordon, stepped down to take a similar position at Enporion, an exchange for the gas and electric industries.

Gerry Haller, founder, chairman, and interim chief executive, acknowledged recently that FastParts is seeking strategic partnerships, but declined to elaborate. DoveBid also would not comment.

Arrow's quandary Traditional companies that ponied up funds to get online companies off the ground are also reconsidering their expectations.

During Arrow's earnings call a couple of weeks ago, the Melville, N.Y., distributor said it will evaluate the need for potential write-downs on the value of previous investments to adjust for changes in their book value, following the yearlong crash in dot-com valuations. A decision will be made by the third quarter.

Over the last two years, Arrow has invested between $60 million and $70 million on several start-ups, including Buckaroo.com, ChipCenter, eConnections, Questlink Technology, Viacore, and Virtual Chip Exchange. A hybrid business model emerged when Arrow's Advantage telesales business unit last fall agreed to merge with QuestLink and ChipCenter, forming eChips Inc.

While Arrow might have seen revenue from its Internet investments trickle in this past year, most if not all companies have yet to show a profit. "The companies had strategies and ideas that seemed interesting and had the possibility to produce value in the supply chain," said Robert Klatell, Arrow's executive vice president and general counsel. "We're assessing the value to see if they have diminished, but we do this periodically."

One of Arrow's Internet partners, Virtual Chip Exchange, is not overly concerned about the distributor's evaluation of its Internet positions. In fact, Michael Wood, president and director of the Hauppauge, N.Y., company, welcomes the review. "We hope they do take a closer look and determine who is performing up to their expectations," he said. "We're not afraid of showing what our performance has been."

While Internet companies might still have valuable business models, the investments Arrow and Phoenix-based rival Avnet Inc. made were as much a defensive strategy as they were offensive, according to Robert C. Damron, an analyst at Tucker Anthony Sutro Capital Markets in Milwaukee.

"Two or three years ago, everyone was talking about the distributor being replaced by these marketplaces," Damron said. "Distributors needed to at least make an effort at the time to show they were committed to the marketplace to satisfy customers. The marketplaces proved to be a great tool for business, but it's not something to base a business model on."

Where to go from here What are companies doing to ensure that their models survive the onslaught? Many are honing their offerings. San Jose-based eChips, for instance, is said to be concentrating its efforts on building a new e-commerce platform that will allow engineers to purchase small quantities online, according to sources. However, sources also said that despite its ability to turn an operating profit with its existing applications, the cost of putting in the infrastructure is more than eChips can afford. eChips executives would not comment.

Need2Buy Inc., Westlake Village, Calif., is going another route; it's looking to capture some business from the buzz surrounding private trading exchanges. To help it achieve that goal, the company has named Nima Bakhtiary president, replacing Andrew Wilson, who will act as a consultant during the transition.

Bakhtiary, who was executive vice president of strategic business development at Adexa Inc., a collaborative supply chain software vendor, is charged with accelerating the development of Need2Buy's Private Trading Network for small and midsize companies. Resembling the application service provider model, the platform will consist of various services hosted by Need2Buy, but will operate as a company's internal exchange, Bakhtiary said.

"We have a huge opportunity to enable critical solutions in the areas of design collaboration, sourcing, and order management," he said. "This is part of the evolution of the online models, and I'm not sure the economy has anything to do with it. Our customers started coming to Need2Buy to use auction services and are now looking for more ways to get cost out of the process. They are coming to us and [asking], 'What other solutions can you provide?' "