A Winning Mix

 
 
By Matthew Hicks  |  Posted 2001-08-20 Email Print this article Print
 
 
 
 
 
 
 

E-marketplace ChemConnect pulls ahead of competitors with key merger.

When, in June, independent e-marketplace ChemConnect Inc. announced plans to merge with chemical industry consortia-backed exchange Envera LLC, it could have easily been seen as an act of desperation, an admission of defeat. But it was far from that. Although the consortia behind Envera included industry giants, it was actually ChemConnect that came out on top after the merger. The ChemConnect name and management team survived, as did the independent business model.

So how did ChemConnect manage it, particularly when most other independent e-marketplaces were struggling to find enough cash to survive? By being flexible enough to expand its original transaction-based revenue model to include subscriptions and by taking advantage of the fact that the chemicals industry—with many commodity-oriented products—is well-suited to online trading and auctions. That has allowed San Francisco-based ChemConnect to quickly attract buyers and sellers. In the second quarter of this year, trading volumes on the site reached an annual rate of $3.2 billion, which was a 30 percent increase from the first quarter of this year. The value of the average transaction also rose to $1.3 million from $1.25 million in the earlier quarter.

But ChemConnects survival is not assured. The independent e-marketplace has yet to turn a profit, and it faces major competition from independent e-marketplaces—most notably CheMatch.com Inc.—and at least one remaining consortia-backed exchange, Elemica Ltd. Still, say experts, 5-year-old ChemConnect has demonstrated the beginnings of a winning formula. "In the universe of online trading exchanges, theyre in a great spot," said Leif Eriksen, an analyst at AMR Research Inc., in Boston.

ChemConnect is betting that the merger will help it grab a bigger slice of the transactions in the $1.7 trillion chemicals trading industry by getting customers from each of the merged e-marketplaces to use a fuller breadth of its combined offerings. Envera had concentrated on being a hub for system-to-system integration among buyers and sellers so they could automate their existing relationships by, for example, linking purchasing and enterprise resource planning systems. ChemConnect had been offering three main services—a trading floor for 16 chemicals and plastics commodities, a general exchange to connect new buyers and suppliers, and a hosted auction capability.

"Envera and ChemConnect understood that at some point there would be a need to bring these two parts of front and back of the buying and selling process for chemicals and plastics [together]," said ChemConnect CEO John Robinson. "What drove this combination were our customers saying, Lets get on with it."

While Robinson said he believes the merger makes it one of the only chemicals e-marketplaces with a full sweep of offerings, others question whether the merger will really help the company. Many of ChemConnects customers and investors, such as BASF AG and The Dow Chemical Co., are also members of competitor Elemica, in Wayne, Pa., which, like Envera, of Richmond, Va., is focusing on automating back-end process integration. Those customers will be hard pressed to abandon their allegiances with Elemica, Eriksen said.

But some customers say theyre encouraged by the expanded range of services the merger has brought and may, as a result, increase their use of ChemConnect. Epsilon Products Co., for example, has been using ChemConnect since mid-2000 primarily to conduct buy- and sell-side auctions, said Mark Nikolich, Epsilons vice president of business management, in Marcus Hook, Pa. But, said Nikolich, Epsilon would like to do more.

"What the Envera acquisition does is make ChemConnect a true e-commerce player and allows us the opportunity to do true e-commerce," he said.

Convincing customers such as Epsilon to conduct more transactions through ChemConnect is critical to its success and its ability to reach profitability. But it wont be easy. Epsilon is also considering buying and selling propylene on the online commodity trading floor but, Nikolich said, hes not sure the site has created enough critical mass of buyers and sellers to make it worthwhile.

Despite such questions, ChemConnect is making strong strides. Robinson said he expects that the company will gain profitability by the beginning of 2003 without needing to raise additional funding. Together, ChemConnect and Envera had raised $130 million from venture capital companies and chemicals corporations.

ChemConnects progress toward profitability owes much to the companys moves to broaden its revenue base. Like many independent e-marketplaces, ChemConnect discovered that the transaction fees around which it built its original business model did not make sense for all customers. Beginning in the first quarter of this year, the company began moving toward subscriptions, which has helped make ChemConnects revenue flow more predictable. Most general exchange and auction customers pay a subscription fee, while the commodity trading remains based on transaction fee, said Michele Hincks, ChemConnects vice president of marketing. Envera also is subscription-based with an upfront integration fee that can cost in the hundreds of thousands of dollars, Robinson said.

Whatever the future challenges, ChemConnect has one thing going for it that too many other e-marketplaces have lacked—its in an industry where an independent e-marketplace makes sense. Now ChemConnect must demonstrate that by leading the merger with a consortium player, it can take its business to the next level.

 
 
 
 
Matthew Hicks As an online reporter for eWEEK.com, Matt Hicks covers the fast-changing developments in Internet technologies. His coverage includes the growing field of Web conferencing software and services. With eight years as a business and technology journalist, Matt has gained insight into the market strategies of IT vendors as well as the needs of enterprise IT managers. He joined Ziff Davis in 1999 as a staff writer for the former Strategies section of eWEEK, where he wrote in-depth features about corporate strategies for e-business and enterprise software. In 2002, he moved to the News department at the magazine as a senior writer specializing in coverage of database software and enterprise networking. Later that year Matt started a yearlong fellowship in Washington, DC, after being awarded an American Political Science Association Congressional Fellowship for Journalist. As a fellow, he spent nine months working on policy issues, including technology policy, in for a Member of the U.S. House of Representatives. He rejoined Ziff Davis in August 2003 as a reporter dedicated to online coverage for eWEEK.com. Along with Web conferencing, he follows search engines, Web browsers, speech technology and the Internet domain-naming system.
 
 
 
 
 
 
 

Submit a Comment

Loading Comments...
 
Manage your Newsletters: Login   Register My Newsletters























 
 
 
 
 
 
 
 
 
 
 
Thanks for your registration, follow us on our social networks to keep up-to-date
Rocket Fuel