Covisint fails to move up into the fast lane

By Jeremy Grant - Financial Times

When Covisint was launched at the height of the dotcom boom, it boasted of "a place where people, products, information, and services come together to transform the automotive industry".

Two years later, the industry is still waiting for that transformation.

Formed by General Motors, Ford and DaimlerChrysler, Covisint was designed to be a giant electronic marketplace where they would carry out procurement through online auctions at a fraction of the cost of traditional methods.

Suppliers and carmakers would work seamlessly squeezing inefficiencies out of the system. Offices sprouted in Europe, Japan and South America.

Buoyed by their vision, the founders - principally the big three US carmakers, later joined by Renault-Nissan, Peugeot-Citroën, Commerce One and Oracle - laid plans for a stock market flotation bankers believed could raise $5bn. Today, however, its listing plans are a distant dream and Covisint is struggling to redefine itself.

Last week, the company lost Kevin English, its chief executive, although both sides said his departure was unrelated to company strategy. One quarter of Covisint's workforce was also cut, leaving a total of just under 300.

"When it was formed it was in the heyday of internet valuations and this was a whole new way of [doing] business that turned out to be wrong," says John Henke, professor of marketing at Oakland University in Michigan.

One of the main aims of Covisint was to offer a one-stop online shop that allowed manufacturers and suppliers to communicate with each other, sharing information such as inventory levels and parts usage patterns.

However, it soon became apparent that suppliers had little trust in a system where price-sensitive information about their business model was readily available to competitors.

Indeed, lack of trust between motor manufacturers and parts suppliers was - and remains - Covisint's biggest problem. Parts suppliers object to the fact that manufacturers will select "preferred bidders" who then bid against each other for the supply contract on offer.

"There are a lot of emotional feelings about it," says Neil de Koker, managing director of the Michigan-based Original Equipment Manufacturers Association, a body that represents parts suppliers.

"It's perceived by many as a tool to beat the incumbent suppliers' prices down without really doing anything.

"If that [motor manufacturing] customer represents 30 per cent of your business and you walk away they could tell you you'll never be a preferred bidder again."

Daniel Garretson of Forrester Research in Boston says: "There's a lot less ability for the auto industry to co-operate than everyone thought. There's a lot of entrenched distrust so it's difficult to bring the layers together in a collaborative process."

He believes Covisint should "cede" the auctions back to the manufacturers, and downgrade the internet hub to a medium for exchanging information and selling systems integration services.

Observers say incoming chief executive Harold Kutner's biggest challenge will be to mollify the estimated 7,000 parts suppliers that use Covisint. Parts suppliers can still take their business to competing sites with no links to the manufacturers.

"The manufacturers have not put a strategy out there that lays out for suppliers how they will do business with the customer through Covisint," says Kevin Prouty, automotive research director at AMR Research in Boston.

"How will Covisint act between the supplier and the manufacturer? There's no roadmap for that yet."

Mr Kutner, a former executive in charge of worldwide purchasing at GM, insists that Covisint is on track for profitability by the fourth quarter. But the broader issue is whether Covisint has a future at all.

The carmakers, who are estimated to have invested $270m in launching Covisint, are standing by the concept.

DaimlerChrysler says Covisint is "one of many key tools that we use in B2B in order to manage relations with our suppliers" because it reduces the amount of time needed to decide where to source parts.

Most observers seem to agree that it does have a future, but that the much vaunted industry transformation was, in the end, hopelessly misplaced.

"The purpose is to take costs out of the system, and it's doing that - just not nearly as quickly as we'd like," says Mr de Koker.

"It's a lot more difficult than people thought."