Speaker: Andrew Liveris, Business Group President, Performance Chemicals
Event: Strategic Alliances Conference
Location:
Date: 04/09/2002

Good afternoon. I've been asked to relate a case study on successfully creating and participating in a consortium. The consortium I'll be talking about is called Elemica, an e-commerce business in the chemical industry formed by a large group of competitors who also happen to do a lot of business with one another.

Let me spend a few moments setting the stage.

First I'll explain what Elemica is all about. Then I'll address the special challenges posed when trying to build a consortium in the chemical industry…and when trying to build an alliance with competitors. Then I'll summarize the key things we learned along the way that I hope will be useful to you as you consider the merits of forming alliances with your competitors…or anyone else for that matter.

So, what is Elemica?

Well, it's not an e-Bay for chemicals. Elemica is a global, neutral information network built to facilitate order processing and supply chain management of contract and repeat chemical transactions.

In the language of e-commerce, Elemica is a hub that allows a company to transact with all other linked buyers and sellers who already have contracts in place. Elemica's focus is to help chemical companies with the everyday business of executing known commercial trading relationships where the buyer and seller not only know one another, but have already negotiated price and commercial terms.

Elemica is the first e-commerce company to commercialize what many consultants have called the "holy grail" of e-commerce: "ERP-to-ERP" connectivity. Using standards developed by the members, Elemica connects each member company's enterprise planning system – whether SAP, Baan or other – to the hub to automate confidential transactions.

Rather than 1-to-1 EDI connections, with Elemica you connect once and interact with many.

The benefits to the members of Elemica are several:

• To improve operational efficiency…improved speed, lower costs, and greater accuracy of order entry and fulfillment.
• To reduce supply chain costs caused by redundancy of systems and additional inventory in place to ensure safe and reliable deliveries.
• To reduce the cost of e-commerce capability by sharing the development expenses with others.

So, that's what Elemica is all about — at the 30,000-foot level.

Now, let me continue setting the stage with a quick look at the unique characteristics of the chemical industry and why establishing a widespread alliance was particularly challenging.

The chemical industry is a 1.3 trillion dollar global industry. That's a pretty impressive number and you'd expect there would be huge companies leading the category…that some small percentage of companies was responsible for a large percentage of the output and sales. After all, that's almost always the case in basic industries.

Well, not so in this one. Consider this. Dow is the largest and our sales are around 30 billion dollars…just a little over 2% of the total. If you add up the top ten global companies, you reach just 20% of the total. It takes thousands of additional companies to make up the rest.

Contrast this with the global automotive industry or the airline industry where a few dozen companies dominate and you'll appreciate just how fragmented our industry is…and, as a result, how it might require quite a bit of cooperation in our ranks to pull off any kind of a broad-based alliance.

Also consider that 50% of our industry's output is purchased by itself. Companies like mine make basic and specialty chemicals, but even our specialty products are primarily sold to others in the industry as raw materials for their products. Half of everything our industry makes is bought by others who create the finished products other businesses and consumers ultimately buy. In most cases, companies in the chemical industry count some of their biggest customers as some of their biggest competitors.

It's also an incredibly competitive industry. Chemical companies face tremendous pricing pressures from our customers who are increasingly global and have a lot of leverage. We also face it from local suppliers who are geographic and/or niche technology players who survive with much smaller margins than most publicly held companies find acceptable.

Also important to remember is that our industry has not been in the forefront of adopting new information management and communications technology. Although a few of us in the chemical industry are leading, the vast majority of companies have been slow to take advantage of the tremendous efficiencies possible with new technology.

I'll ask you to keep these points in mind as I now trace the history of the formation of Elemica, so you'll have an appreciation of the obstacles that stood in the way of success...and how we surmounted them.

The idea behind Elemica — a cooperative alliance between competitors — started after a period of much internal debate at our company…and probably within many others…in the mid-to-late '90s…about how we were going to get into the e-commerce game and create competitive advantage.

Like the rest of you, we knew the internet was seen by customers as a great thing that could make their lives a lot easier from a procurement standpoint, but also could put those same customers in the driver's seat. The buy-side advantages of internet procurement were pretty obvious and very attractive … and it created much concern for our sales and marketing people.

And while the marketing people were worried about price erosion and "disintermediation," the senior leadership of the company was somewhat skeptical that e-commerce would have any effect on us at all.

Sure, there were some visionaries who saw the upside of e-commerce back in the early 1990s, but I'd be lying if I said our leadership was all on the same page in that regard.

Some of these early evangelists got excited about the prospect of online connections with our customers, even if they were also our competitors. Prior to the formation of Elemica, we saw several opportunities:

• We saw an opportunity to lower our costs to serve.
• We saw closer connections with our customers that would be harder to break once an online connection was made.
• We saw an opportunity to differentiate ourselves on something other than price.

Meanwhile, the landscape was shifting. New start-ups like e-Chemicals and PlasticsNet were emerging and they were making chemical companies very nervous.

We could see a scenario where they would wedge themselves between us and our customers, and then proceed to streamline an inefficient supply chain … and capture all the value themselves. This would have further commoditized our industry and driven our margins even lower.

Like many companies we debated what role we should play independently in this space, as well as what role we'd play in third-party organizations. Of course, the cost of setting up the infrastructure was a major concern. But, at the same time, of course, many independent e-commerce businesses were being formed…and many of them were, quite frankly, worrying us a little, too.

What if they took hold? Would we be forced to hook up with these start-ups or risk losing our favored connections to our customers? Wouldn't they extract all the value out of this new market channel?

As a beginning answer, we began investing some money in a number of start-ups. We suspected a shakeout would ultimately take place, but we were very unsure of what third-party e-commerce horse might win the race. To extend the horse racing analogy, we not only placed win, place and show bets, but covered ourselves with some bets on the field as well.

We also started talking to some customers…always a good idea, right?

We learned that most customers were very apprehensive about the prospect of having to establish online connections with a large number of firms. The cost vs. the benefit didn't look very good in their minds.

We very quickly realized that our approach would have to include some sort of third-party that succeeded at attracting a wide range of significant suppliers that any customer could access at once. That's what our buyers wanted and that's what our customers' buyers wanted.

Now, one of the customers we talked to about this happened to be DuPont. As an aside, you may be interested to know that DuPont is one of our biggest customers, and also a JV partner.

Turns out that DuPont was thinking along the same vein. They were going through the same pains we were in trying to figure out how this whole e-commerce idea was really going to take hold, and how best to set themselves up to be a player.

And we had independently come to the same conclusion: we needed to offer some customers the option of a 1-to-1 link to us, and we also needed to participate in a strong, well-populated third party site so customers could have the one-stop online shopping they desired.

The problem was neither one of us wanted to put ourselves into the hands of a third-party where we had no control and we wouldn't capture any of the value. So we decided the best thing to do was to start our own third-party e-commerce company.

Now, clearly, if this was going to fly and meet our needs and customer needs, a pretty big field of companies would have to join together. Otherwise there wouldn't be enough critical mass to get anyone very excited about the investments they'd have to make to hook into such a hub concept.

This occurred in 1999 and we each went to our boards with the idea.

As you might imagine, getting buy-in to this idea took a very compelling argument. After all, the Internet was only a few years old and, quite frankly, many board level people are not hugely knowledgeable about this type of new technology. Others worried it would drive down our profit margins. Plus, people said, "We can barely get two-party JVs to work; how are we going to form an alliance with our top 10 competitors?"

At a high level, here was our case:

• There's no question about the advantages of online transaction processing and additional online connections between buyers and sellers.
• The customer doesn't want to make dozens of connections and neither do we…it's time and cost-prohibitive. A third-party organization is the most attractive option to the customer and also the most economical way to go.
• Somebody is going to get control over this and extract value from it…and with that value could also come a big disconnect between non-participants and their customers if that third-party doesn't at least include us. Our conclusion? We have to play … and a neutral consortium was the way to go.

Fortunately, the leaders at both companies bought our logic quickly. Our CIO and I were given the assignment to take it forward. This put me in the interesting role of building an alliance of companies that do business together at 8 a.m. and do battle at a customer at 8:15.

Now, who would we recruit? And how would we do it?

We agreed to the following criteria up front. If this was going to work, it had to be big, it had to be global, and it had to be done fast before any of the other third-party companies started to get large commitments for their business models. If that occurred we'd lose any chance to gain significant value from this new channel.

Our first company we wanted to talk to was BASF in Germany to get us started with the Europeans.

We met with them and, just like DuPont, they also were thinking along the same vein. They saw the advantage of this arrangement and signed on in early 2000.

The next step was to identify and sign up other major players who would provide the critical mass that would be so vital to the whole idea.

And the three companies divvied up the task of recruiting other companies around the world. Our list included some 28 of these companies.

We needed an airtight sales story. You can probably imagine the wide range of attitudes and knowledge levels we faced with such a diverse group of companies. In hindsight I can tell you that if ever there was a perfect bell curve of adopters vs. non-adopters, this was it.

Of course, our proposition included all the same points we used with our own boards, but we knew there had to be more as well.

Most important, we agreed we had to offer equal ownership positions to other founding partners. We couldn't erect the same barriers or concerns we saw with the other third-party options — this would kill a lot of the incentive to join us.

I think this willingness to give up control or "first mover" advantage is a key point when putting together any alliance — it certainly was a key point in this situation.

Another key point was to offer the assurance that regulatory agencies were okay with our plan. We went to both the Federal Trade Commission and European Commission with our model and made sure they had no concerns.

Of course it goes without saying that you need good legal counsel in these dealings. There are pretty strict rules of engagement when competitors get in the room together and a knowledgeable legal team can make sure they are enforced.

So these were the elements of our proposal. Now, how did we deliver it effectively and in the very urgent manner we felt was required?

The answer was to enlist the top executives of our firms — we needed fast connections and the show of total support and commitment that their involvement would signal. And we got that kind of help. Our CEO made a number of personal calls for us.

This sales blitz went on during April through August of 2000, and at the end of that period we had recruited 19 more founding partners.

I think you'll agree this was a pretty remarkable achievement.

So, this was how Elemica came to be. What's happened since?

First of all, the shakeout we envisioned two years ago has definitely occurred. In fact the whole start-up dot.com lineup has imploded. At one time there were up to 50 chemical industry e-commerce companies and now there are just a handful — and with only Elemica and ChemConnect having sound value propositions. Most are either struggling for funding or narrowing their scope. In fact, some experts have speculated that in the end there may only be room for one or two e-commerce hubs or marketplaces in the chemical industry.

Elemica now has more than 35 companies committed to the network. Within the past three months, they've doubled to 18 the number of companies that have their ERP systems connected and transacting. There could be as many as 100 companies on the network by year end and, very importantly, Elemica expects to reach the breakeven cash flow point in 2003.

Elemica is also looking at creating connections with hubs in other industries, many of which are downstream chemical customers, such as Covisint in the automotive area and Transora in consumer products.

For now, the next big thing is to accelerate adoption and get more of the partners hooked up. Nonetheless, when we stand back and look at all that's been accomplished since those first discussions with DuPont in 1999, I think you'll agree this really is a good case study of a successful coalition.

Let me summarize what I feel to be the key learnings from this experience.

First, the alliance or coalition business model is a good one in many instances. Industry and geographic boundaries have faded and you simply can't expend the time or resources to develop everything yourself.

Second, forming alliances is hard work. My brief recounting of the Elemica journey does not come close to painting the picture of how much time and effort was expended.

Third, top executive commitment and involvement in alliance formation is absolutely critical. The few anecdotes I shared with you certainly underscore this point, but it cannot be overemphasized. The CEO needs to have those tough conversations: "Are you with us?" Without commitment and involvement…and continuing involvement…at the CEO level, alliances are unlikely to reach critical mass and have much chance for success.

Fourth, once an alliance is formed, the job isn't done. It takes a continued dedication of resources from your company to keep it successful and pointing north. In our case, the next phase is to drive adoption not only from all those companies who signed up, but on a business by business basis within these companies.

Fifth, a cooperative model like Elemica requires partners of different size to remain equals. This means giving up some control and the first mover advantage I mentioned earlier. Even if you are the biggest player you can't act like it or you'll never reach the critical mass that's so important.

Dow really didn't give up much, because we were able to lead and implement the quickest. I chaired the board of Elemica. And Dow was among the first companies to hook up to the network, to influence and mold Elemica's business model and priorities so it reflects our customers' needs, to leverage this with our distributors, and to bring Elemica's fresh thinking back into our company.

The early partners were able to move more quickly because our management had been on board with the concept already. And we already had the strategies in place to take advantage of the Elemica model.

This leads to my sixth key learning: offer your talented people to the new venture, to make sure your perspective is reflected in the new company. Dedicate your own human resources to the cause. In the case of Elemica, an ex-Dow manager is the COO.

Seventh, speed is paramount. Forming an alliance is, in one important way, just like an acquisition. Time is its greatest enemy. Once the idea is formed and conceptually sold, get it executed fast.

Eighth, and by far the most important learning in all of this, you can never go wrong if you understand the customer is driving the bus…and that they have more control than ever before, simply because they have more options than ever before. Once again, if you listen to the customer and form your coalition to serve his or her needs in the right way…not in the way that's just best for you…success is far more likely for everyone involved.

Thank you again for taking time to attend this session. I think it's now time for questions?