Betting on B2B

Back to Contents of Issue: April 2001

Cynomix is betting Japan's trading giants will adopt its system for automating Web-based B2B efforts -- assuming there are such efforts.

by Daniel Scuka

CynomixWHILE THE TOYOTAS, HONDAS, Matsushitas, and Sonys of Japan are continually lionized by the media for their (admittedly) cool cars, robots, and consumer electronics, these companies are struggling to find a way to market their goods on the Net. Retail sales still occur largely via traditional distribution channels, and Japan's Internet B2C market, like those elsewhere, remains in the digital doldrums (entertainment via wireless is one bright exception).

But B2B is another matter entirely. Last year, the Ministry of International Trade and Industry forecast that Japan's B2B market would reach ¥68 billion by 2003; eMarketer foresaw a comparable figure, at $45 billion. How will B2B players link with each other in this burgeoning market? In a 1999 survey of 704 domestic companies in Japan, the Center for the Informatization of Industry (CII) and the Japan Electronic Data Interchange Council (JEDIC) found that 74.9 percent had already introduced some form of electronic data interchange (EDI). Clearly, it's only a small step (conceptually) for Japan Inc. to move its operations onto the Web, and the Goliaths to watch are without a doubt the general trading companies (sogo shosha), long experienced at the electronic integration (albeit mainframe-based) of complex, cross-border trading processes. And when the sogo shosha, their trading partners, and their suppliers get Internet religion and move to webify what they do, Cynomix wants to be one of the first resources they turn to for help.

Cynomix's core offering, eTrade lifeline, will integrate logistics, insurance, finance, and credit control information in a single, Web-based system providing accountable and secure transactions for trading companies and those they do business with. eTrade Lifeline, based on Computer Associates' eBusiness software, will automate all stages of the trade process, including booking cargo vessels, declaration of marine cargo insurance, and preparation of trade and cross-border settlement documents. eTrade Lifeline will also handle Supply Chain Management (SCM) support, Japan domestic settlement, and risk management. The company claims that CA's eBusiness core technology, known as Jasmine ii, can integrate any other platform, database, application, standard, or the Internet using XML (eXtensible Markup Language) and other open communication standards (Jasmine is already double byte--enabled). eTrade Lifeline will integrate Jasmine's data interchange capabilities with other CA products, including Unicenter TNG (an enterprise management solution), eTrust (a security management solution), interBiz (applications for supply chain, financial, and banking functions), and Neugents (self-learning software that predicts business opportunities based on transaction histories).

eTrade Lifeline will be made available as an ASP service and as a licensed installation. "We started in May 2000, so that gives us a half-year lead over any of the competition," says Cynomix president Izumi Konno. "We're aiming for 2,000 user accounts by 2002 and 5,000 later on." The firm has already won their first customers, NI Logistics and Asia Trade Logistics, who signed memoranda of understanding giving them rights to use eTrade Lifeline. In return, NI Logistics will serve as distributor of eTrade Lifeline in Japan, and Asia Trade Logistics will offer its logistics services to eTrade Lifeline users.

While Cynomix may have a head start and a solid line-up of partners, the company faces a challenge in convincing its clients and other trading companies that compete with Cynomix's parent Nissho Iwai to adopt its services. Also, while all of Japan's sogo shosha are looking to develop their own Web-based trading systems, it's not clear they're ready to go Web. "I do not believe that the Japanese trading houses are ready to adapt Web-based trading processes. Many of them still use traders who use phones to match buyers and sellers," says David McQuilkin, a systems integration specialist and director of consulting services at Menlo Park, California--based Asia Pacific Ventures. He adds, however, "I believe all of them see that they must quickly move towards Web-based trading, and all are making major investments in this area."

Company Cynomix Corp.
President Izumi Konno
Location Bunkyo-ku, Tokyo
Phone +81-3-5684-2161
Founded May 2000
Employees 20
Services eTrade Lifeline, a Web-based B2B marketplace system that automates all aspects of trading companies' operations
Investors 50/50 joint venture between trading company Nissho Iwai Corp. and Computer Associates International Inc.
Partners NI Logistics, Asia Trade Logistics, coface, Exodus, Tokio Marine, Deutsche Bank
Competitors TradeKu, (Fujitsu), VerticalNet (Softbank), others
Revenue (2000) Pre-revenue; target launch fourth quarter
Capital ¥400 million

Another experienced industry source (requesting anonymity) was more blunt: "Other trading houses -- longtime competitors to Nissho Iwai -- won't buy from a Nissho Iwai JV. It's not only the competition factor, it's that there's nothing mind-boggling about Cynomix's offering." A November 2000 report from investment house Broadview profiled some 80-plus horizontal and vertical exchanges operating or planning to open this year on Japan's Net, so differentiation is obviously a problem.

Further, B2B online trading efforts in general have been under a lot of fire lately. Exchanges in specific industries are still finding their way in the US; exchanges across multiple industries have fared little better. It's an open question as to whether they can be any more successful in Japan, where companies tend to be even more risk-averse than in the US.

More flack comes from looking at the technological risk -- and the possibility that an exchange operator might choose a technology platform its trading partners fail to adopt. Also, the technology in this arena is going through a major new architecture every six to nine months, and the shosha may not be agile enough to react. "The trading companies must be bold and act, but at the same time, they must be ready to change direction radically within six months," says McQuilkin. The key to success, he says, will be whether online exchanges can offer a low entry cost for their trading partners so that they quickly come onboard. International trading involves multiple partnerships across many industries, and some trading partners will need to adopt multiple systems. "They'll choose those which offer immediate benefits with a low entry cost," says McQuilkin.

Ultimately, Cynomix's offering may succeed if it can solve clients' targeted pain points simply and without requiring migration to the entire system before the trading partner can take advantage of a single application. "The trading partner can choose the application with the biggest payback and lowest cost to start, and then gradually take advantage of other services," says McQuilkin. For example, if a customer can choose to use Cynomix for only encounter and negotiation, without also having to utilize Cynomix's payment processing and logistics, the barrier to entry will be lower. With just this strategy in mind, Cynomix plans to offer portions of the eTrade Lifeline platform on an outsource basis to customers who don't require the full package.

In the meantime, Japan's B2B exchange market remains wide open. It's not hard to imagine that there will yet be some rationalization, but for the next few years, there will be a multitude of vendors, some working better than others. In a new market, competitors will help to educate and validate the market, so the diverse offerings are not a bad thing. The problem will be if they try to lock their trading partners in to the exclusion of the competitors. "This will never work, as the trading partners must deal with all the sogo shosha," says McQuilkin, adding, "Only the sogo shosha that provides the biggest benefit at the lowest cost will win in the end."

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