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E-Business And Supply Chain Management In The Automotive Industry: Preliminary Findings From The Eastern Cape And

Kwazulu-Natal Benchmarking Club Pilot Surveys

Research Report No. 35

Sagren Moodley

Industrial Restructuring Project School of Development Studies (incorporating CSDS) University of Natal

February 2001 ISBN No. 1-86840-424-2

FOREWORD
The Industrial Restructuring Project (IRP) was initiated at the beginning of 1996 as the KwaZulu-Natal Industrial Restructuring Project (KZN IRP). The project initially focused exclusively on KwaZulu-Natal, but is now aimed at supporting industrial policy in South Africa at the national, provincial and local levels. It is facilitated by international experts and is based at the School of Development Studies, University of Natal, Durban. The project has two important features. Firstly, it focuses on critical issues that are impacting on the competitiveness of manufacturing sectors that are under threat from increased international competition and the liberalisation of the South African trade regime. Secondly, it is action-oriented in design. The findings that have been generated have, for example, been presented to numerous industry stakeholders, including government, business associations and trade unions. The project consequently has the support of various regional and national stakeholders. This particular report has arisen out of both new research and the cumulative knowledge that has been generated from previous studies. These cover a number of IRP reports, working papers, journal articles and conference papers. Some of the themes covered include South Africas manufacturing competitiveness, the automotive industry, the clothing and textiles sector, footwear, middle-management capacity, human resource development, institutional support for industrial restructuring, and business services for manufacturing competitiveness. Enquiries regarding IRP material should be addressed to: The Librarian, Centre for Social and Development Studies, University of Natal, Durban, 4041. Tel: (031) 2601031; Fax: (031) 2602359; email: masmith@nu.ac.za. Prof. Mike Morris Director: School of Development Studies

ACKNOWLEDGEMENTS
The International Development Research Centre (IDRC) of Canada provided the funding for this study. Their generous financial support is sincerely appreciated and hereby acknowledged. I wish to express my sincere appreciation to the members of the Eastern Cape and KwaZulu-Natal Benchmarking Clubs who took valuable time to complete the survey questionnaire, and who responded to my email, face-to-face, fax and telephonic inquiries. I would also like to thank the aforementioned Clubs for allowing me to visit their factories. I am grateful to my colleague, Justin Barnes, and to Professor Raphie Kaplinsky of the Institute of Development Studies, University of Sussex, for their constructive comments on an earlier draft. The remaining errors, omissions and weaknesses are mine alone.

TABLE OF CONTENTS
Foreword Acknowledgements List of Figures List of Tables List of Text Boxes PREAMBLE 1. Introduction 2. Key Trends In The Global Automotive Industry 2.1 2.2 2.3 2.4 The Move Towards Greater Collaboration Increased Use Of The Internet Internet-Based Trading Exchanges B2B E-Commerce 27 30 33 2 3 6 7 9 10 14 18

3. The KZN Benchmarking Club 4. The Eastern Cape Benchmarking Club 5. E-Business And The Automotive Supply Chain 5.1 5.2 5.3 5.4 5.5 5.6 What Is E-Business? The Importance Of Networks The Potential Advantages Of E-Business The Importance Of Supply Chain Integration Potential Impact Of The Internet On The Value Chain The South African Context

6. Summary Of Key Findings 7. Conclusions 8. Recommendations 9. Some Policy Implications For Government 10. Future Research Agenda 11. Survey Findings 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 11.10 11.11 E-Business Strategy E-Business Goals IT Audit Purposes For Whic h Firms Use E-Business Tools Key E-Business Drivers E-Business Perceptions How Has The New IT Changed The Way In Which Enterprises Transact Business? Use Of E-Business Technologies In Supply Chain Integration Digital Exchange Networks Benefits Of E-Business Tools Barriers To The Adoption Of E-Business Tools

56 61 67 72 76 80

11.12 11.13

The Impact Of E-Business Technologies On The Firm Projections Of E-Business Growth 118 122

REFERENCES APPENDIX 1: E-BUSINESS QUESTIONNAIRE

LIST OF FIGURES
FIGURE 2.1: FIGURE 4.1: FIGURE 4.2: FIGURE 5.1: FIGURE 5.2: FIGURE 5.3: FIGURE 5.4: FIGURE 5.5: FIGURE 5.6: FIGURE 5.7: FIGURE 5.8: FIGURE 5.9: A Stylised Version Of A Simple Automotive Supply Chain Average Number Of Employees (Component Manufacturers) Average Turnover (Component Manufacturers) Interrelated Factors Giving Rise To E-business Number Of Days Of Total Inventory: Club Members Versus Counterparts (1995 To 1999) Raw Material Inventory Holding: Club Members Versus Counterparts (1995 To 1999) Work In Progress Levels: Club Members Versus Counterparts (1995 To 1999) Finished Goods Inventory Holding: Club Members Versus Counterparts (1995 To 1999) A Simple Physical Value Chain A Simple Internet-Enabled Value Chain An Integrated Value Chain A Virtual Value Chain

International International International International

LIST OF TABLES
TABLE 2.1: TABLE 11.1: TABLE 11.2: TABLE 11.3: TABLE 11.4: TABLE 11.5: TABLE 11.6: TABLE 11.7: TABLE 11.8: TABLE 11.9: TABLE 11.10: TABLE 11.11: TABLE 11.12: TABLE 11.13: TABLE 11.14: TABLE 11.15: TABLE 11.16: TABLE 11.17: TABLE 11.18: TABLE 11.19: TABLE 11.20: TABLE 11.21: TABLE 11.22: TABLE 11.23: TABLE 11.24: TABLE 11.25: TABLE 11.26: TABLE 11.27: TABLE 11.28: TABLE 11.29: The Rise Of Global B2B E-Commerce (US$ billions) E-Business Corporate Strategy Mapping IT For What Purposes Does Your Firm Use E-Business Tools? Principal E-Business Drivers E-Business Perceptions E-Business-Enabled Supply Chain Management Do Your Suppliers Have Access To Real-Time Information Of Your Companys Sales And Stock Levels? Are Your Firms Internal Operations Electronically Integrated With That Of Your Business Partners, Customers And Suppliers? Does Your Company Have The E-Business Capacity To Access Your Suppliers Production Capacity, Available Inventory, Lead Times And Delivery Flexibility? Is The Information Provided Within Your Companys Internal Operations Electronically Linked? The Extent To Which Your Companys Internal Operating Systems Are Integrated With External Electronic Networks? Does Your Company Require Suppliers To Make Use Of E-Business Technologies? Does Your Company Use E-Business Technology For B2B Trade? Does Your Company Outsource Non-Core Functions? When Awarding Contracts to Small/Micro Firms And Emerging Black Contractors Does Your Company Consider The E-Business Capacity of Such Firms? Does Your Company Seek External Advice From IT Research And Advisory Firms? Does Your Company Have An In-House IT Department? Are You Aware Of Any Joint Internet Initiative In The Automotive Industry? Is Your Company Linked To Any Internet Initiative For Supplier Interactions? Assessment Of The Potential Benefits Of An Internet-Based Integrated Procurement System What Are The Potential Disadvantages Of An Internet-Based Integrated Procurement System? The Importance Of Openness And Trust In Electronic Trading Hubs Advantages Of E-Business Tools E-Business Obstacles Effects Of E-Business Technologies On The Firm Degree Of Overall Success In The Implementation Of E-Business Technologies Projections Of E-Business Growth In 2005 (% Of Purchasing Operations Put On The Internet) Projections Of E-Business Growth In 2005 (% Of Total Business Which Will Be Web-Based) Projections Of E-Business Growth In 2005 (% Of Supplies Purchased Through Web-Based Auctions)

TABLE 11.30: Projections Of E-Business Growth In 2005 (% Of Total Goods & Services Procured Through E-Business Technologies) TABLE 11.31: Projections Of E-Business Growth In 2005 (% Reduction In Paper Invoices) TABLE 11.32: Projections Of E-Business Growth in 2005 (% Of customers And Suppliers That Will Have Access To My Companys Real-Time Sales And Inventory Data)

LIST OF TEXT BOXES


BOX 5.1 : BOX 5.2 : BOX 11.1: BOX 11.2: BOX 11.3: Types Of E-Business The Potential Advantages Of E-Business For The Automotive Industry Corporate Goals Glossary of IT Terms How Has The New IT Changed The Way In Which Your Firm Does Business?

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PREAMBLE
This section of the report has a developmental focus, and should be read as a prelude to the main report, which looks at the issue of e-business and supply chain integration in two automotive Benchmarking Clubs, in an upper-middleincome developing country, viz . South Africa. Here, we contextualise the study in a highly stylised development frame of reference. This is crucial because the linkages between development themes such as the prospects for knowledge-based industrial development ; the diffusion of information and communication technologies (ICTs); the potentials and opportunities for spreading the gains of globalisation; and value chain analysis in the Third World have recently come under intense academic scrutiny in the inter-disciplinary field of development studies. Moreover, the international development agencies are also beginning to pay more careful attention to these issues in their work. This spate of interest has been sparked by the new Internet-based IT, which is believed to be an essential tool for manufacturing competitiveness; as it conditions power, knowledge and creativity in an increasingly networked economy. IT change has been a hallmark of economic development, especially over the last three decades. The rapid evolution of the Internet as a global information and communication medium is an important aspect of that technical change process. The US Department of Commerces (1999) policy document, The Emerging Digital Economy II, highlights a strong positive correlation between IT and national prosperity. 1 Econometric studies also show a close statistical relationship between the diffusion of IT, productivity and competitiveness for industries and firms (see Dosi et al. 1988; Jorgenson and Stiroh 1995; and Kwon and Stoneman 1995). 2 The Internet is the most visible manifestation of the shift to a networked economy, and has the potential to revolutionise the way in which companies function and compete in both highly industrialised and developing countries. The Internet is based on an open network system, and offers opportunities, in theory, for developing country manufacturing companies for catch-up and forging ahead types of development.3 According to Panagariya (2000: 969):
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IT is responsible for about one third of real economic growth in the US over the past 5 years (US Government Working Group on Electronic Commerce 1999). 2 The economic data, however, do not tell an unambiguous story about IT and productivity (see Brynjolfsson and Yang 1996). A debate has been raging over the so-called productivity paradox which asks how productivity growth could have slowed during the 1970s and 1980s at a time of phenomenal technological improvements, price declines, and real growth in computers and related IT equipment (Moulton 1999: 2). Moulton (1999) argues that the productivity paradox may be partially explained by measurement problems and poor data quality. But as more reliable datasets are released and new methodologies are used, some researchers have found positive effects of IT on output and productivity in industry- and firm-level studies (see Kwon and Stoneman 1995; and Jorgenson and Stiroh 1995). The paradox may also be due partly to a lag in productive applications of the new IT. 3 IT could serve as a unique opportunity for some developing countries to leapfrog whole stages of industrial development. Singapore is an excellent example of a developing country which has successfully

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Given the cost savings offered by Internet technology and relative ease with which it can be provided, they [i.e. developing countries] can now skip several stages of technological development through which developed countries had to go. Stated differently, developing countries are much farther inside the current technological frontier and, therefore, have larger potential benefits from moving to it. The new imperative for Third World companies is to connect to global value chains or face marginalisation, or in extreme cases even be excluded from the mainstream of economic development. The policy challenge for developing country manufacturers is, therefore, how to leverage, consolidate and deepen their links with the global economy; and how to take advantage of the potentials of globalisation. In the era of trade liberalisation and global production systems that operate through ICT-dominated cross-border, inter-firm networks 4, the concordant effects of marginalisation and exclusion are likely to be a combination of: deepening poverty; high unemployment; widening inequality; a weak and rapidly eroding export base; and low and even negative growth rates. Incorporation of Third World companies into global-scale value chains is, therefore, of paramount importance to foster rapid economic development through access to leading-edge technology, business practices and markets. Inclusion in global value chains alone are, however, no guarantee of poverty reduction. For instance, adverse forms of inclusion may produce immiserising growth and increases in poverty (see Kaplinsky 2000). This notwithstanding, industrial development options for less developed countries (LDCs) hinge increasingly on leveraging ICTs as a means of promoting upgrading within global value chains. In other words, theoretically, the right portfolio of ICTs have the potential to enable developing country companies to become internationally competitive in more knowledge-intensive sectors, and simultaneously become more fully integrated into the global production system. In most LDCs, production has taken place in relatively closed import-substituting markets, often characterised by significant supply constraints. The shift towards an Information Economy and a more open, globalised trading environment has resulted in many companies experiencing great difficulties in meeting the needs of more demanding domestic customers, and particularly external markets. The challenge for developing country companies, therefore, is to harness ICTs for economic development, and to exploit the systemic and productivity-enhancing possibilities inherent in the new ICTs. It may well be that knowledge-based ICT development could offer a new trajectory for Third World companies to:

access advanced country markets; attain a deeper, visceral integration into global value chains;

exploited the IT revolution through a comprehensive knowledge-led development policy, and has subsequently leapfrogged entire stages of development. 4 A central development concern is: Who is included and excluded in these networks?

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upgrade within global, national and local value chains; create and extract value in the most efficient and effective manner; raise their international competitiveness; and maintain control of their competitive advantages.

In the highly industrialised countries, the new ICTs are transforming the way companies manage the supply chain. In the future, it is likely to pervade and shape all aspects of companies supply chain operations and strategies. Developing country companies will, therefore, need to make greater use of integrated, networked IT to streamline, integrate and synchronise key supply chain operations (such as procurement, order fulfilment, etc.) if they are to be competitive in the New Economy. With a flexible and robust IT platform in place, companies in developing countries will be better placed to pursue new ICTenabled, value-creating business opportunities in an increasingly networked global business world. Only then will developing country companies be in a position to harness information and knowledge located both inside and outside the company to improve supply chain performance. The challenge, then, for manufacturers in developing countries is to use ICTs to get closer to the companies employees, suppliers, customers and business partners. This is a tough agenda. At present, the geographic distribution of connections to the Internet and the diffusion of ICTs, heavily favours the highly industrialised countries (see Mansell and Wehn 1998). Sometimes, real-time network infrastructure simply does not exist in the developing world, and access to Internet connectivity often remains limited to simple store-and-forward email facilities. Many LDCs have low PC penetration rates, and lack the telecommunications infrastructure necessary to take full advantage of the Internet. 5 Apart from a poorly developed telecommunications infrastructure, many LDCs lack the availability of inexpensive telephone service and regular power supply. Internet access is also expensive and unreliable. Further, access to Internet markets depend on the availability of a substantial pool of skilled labour capable of working on or near the frontier of computer technology (Panagariya 2000: 970). Moreover, the benefits of business-to-business (B2B) e-commerce depend largely on demand and supply factors in a particular LDC. Continuing disconnectedness in the poorer LDCs is likely to leave their firms less competitive in the networked global marketplace. We, however, are cautiously optimistic that as telecommunication networks get rolled out and are improved in developing countries, and Internet possibilities become more familiar to

E-commerce can, under certain circumstances, grow quite rapidly even in an environment of low telephone line density, as the Indian experience of enclave growth in Bangalore illustrates.

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manufacturing companies, the potential for developing country6 companies becoming more connected to the global economic system is fairly high. But it will take many years before the poorest LDCs in Africa, for example, are able to benefit from the Internet. For upper-middle-income developing countries, like South Africa, however, e-business presents important new opportunities to achieve a more level playing field vis--vis more advanced economies, as it diminishes in-place advantages of space, cost, communication, information, and speed. But first, developing countries will have to create and consolidate knowledge-based assets, and build a vibrant IT-based services sector to integrate into the knowledge-based global economy. 7 Although the developing world is only at the initial stage of getting wired to the Internet, there is some evidence that use of the Internet and the associated IT is evolving rapidly in the Third World (Daly and Miller 1998; Mansell and Wehn 1998). For example, corporate networks and the Internet, e-commerce, computerised systems for just-in-time (JIT) manufacturing, and robotics are increasingly being used in the developing country business context (see Cassiolato 1996; Mansell et al . 1999; and Wu 1995). Daly and Miller (1998: ix), in their survey of a sample of 113 International Finance Corporation (IFC) clients in developing countries, conclude that corporate Internet use is extensive, considering deficiencies in telephone networks in many countries and the relative newness of the technology. But this sanguine view of corporate Internet use in developing countries is tempered by their evidence that developing country companies have not found wide operational need for the Internet in their operations, certainly lagging that in more industrialised countries (Daly and Miller 1998: 12).

Especially the middle- and upper-middle-income developing countries. China, however, is an exception. There has been an explosive growth in Internet use over the last two years in China, which is projected to reach 30 million in 2003 (Bajpai and Radjou 1999: 23). 7 See Bajpai and Radjou 1999 and Bajpai and Dokeniya 1999, who provide an insightful discussion of ITled growth policies in the state of Tamil Nadu in India.

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1. Introduction
The automotive industry involves multiple players in long, complex, global supply chains. The relationships within and between automotive supply chains in the past tended to be fixed, linear and clearly demarcated. Enormous potential, therefore, exists in creating an environment in which relationships between these players can be more direct, cost efficient and interactive. Supply chain management 8 encompasses a wide set of interdependent, cross-industry business strategies that can reduce costs, expand revenue and increase market share through improved efficiency and effectiveness of the supply chain. The increased value is realised by collaboratively balancing all resources, and optimising the flow of goods, services and information from source to endcustomer. Supply chain integration is now regarded as an indispensable element for success in manufacturing, and it is believed that supply chain superiority will provide a decisive competitive advantage. And as integration increases, joint resource dedication will follow. In the new information-based economy, firms compete on the basis of supply chain competitiveness rather than as individual entities. Industrial supply chains that are able to minimise frictions between the participants will gain competitiveness through price reduction and speed of response. The ideal being the creation of a dynamic and flexible network of customer/supplier relationships and information flows that is activated by customer demand and can respond rapidly and reliably to consumers preferences. The impetus for supply chain integration is driven by the new information and communication technologies (ICTs) based on microelectronics, telecommunications, computers and network-oriented software which have provided the infrastructure for the new global Information Economy to operate.9 Network-oriented ICTs through the compression of space, time and knowledge allow for unprecedented speed and complexity in the management of the automotive supply chain. Electronic networks comprise the technological architecture of the new global economy. IT10 convergence between back office (i.e. finance and administration; operations planning and execution; purchasing; product development; research and development; human resources; and inventory/asset management) and front office (i.e. sales, marketing and customer service applications) systems to produce an integrated supply chain that can respond rapidly to changes in customer demand is now a reality, thus making it possible for all of a firms IT to be tightly integrated and architected for the Internet.
8

Supply chain management is concerned with how information can be used to change how and when products are moved in the value chain to increase efficiency. 9 It is important to note, though, that supply chain management (SCM) has roots which precede e-business. 10 We use the term information technology (IT) to refer to computers, software, telecoms and the Internet.

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It is expected that the Internet will have a fundamental impact on how business is conducted, on firm behaviour and on industry structure.11 It is argued that ebusiness technologies are a critical source of value creation12 in the Information Economy, and thus provides the firm with a distinctive competency in the marketplace. E-corporations have the potential to redefine traditional value chains and develop complex knowledge-sharing systems that connect pricing, product and design information with suppliers and customers. Theoretically, ebusiness holds great potential for revamping traditional supply chains to improve data flow and streamline operations. An e-corporation recognises the power of strategic partnerships with its business constituencies. The alliances foster the complete transaction loop from product search to shipping confirmation with inventory updates, and assists in connecting to the market. The e-business revolution in the global automotive industry is being driven largely by three of the worlds biggest automakers to consolidate and advance their global competitive positions.13 It is these multinational corporations (MNCs) which have taken the lead in adopting innovative applications of network-based IT which are at the cutting-edge of e-business. Given the importance and magnitude of these changes, we at the IRP 14 are particularly keen on understanding the impact that e-business has had on the South African automotive industry. This is especially important since, apart from consultancies, e-business developments in the South African automotive industry are largely undocumented. This report focuses on the crucial link between e-business and the automotive supply chain in the Eastern Cape and KwaZulu-Natal (KZN) provinces of South Africa. We are particularly interested in separating reality from the hype and intoxicating rhetoric found in the business media. Our objective is to provide insight into - and an in-depth understanding of - how automotive firms that belong to the Eastern Cape and KZN Benchmarking Clubs are responding to, transforming and gaining value from e-business applications. This is also a prime area for SME focus. Unfortunately, the small sample size used in the pilot phase was not amenable for in-depth research on the feasibility of e-business for emerging black contractors and small and micro enterprises. This limitation in our study will be rectified in the next phase of the research agenda. This pilot study is guided by the following primary research questions:


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What are the key drivers of e-business in the South African automotive industry? How does top management in the automotive industry perceive e-business?

See, for example, US Government Working Group on Electronic Commerce (1999). Mainly because of the payoff in productivity, speed, supply chain integration, better planning, lower inventories and more efficient logistics. 13 General Motors, Ford and DaimlerChrysler. 14 The IRP refers to the Industrial Restructuring Project which is based at the School of Development Studies (incorporating the Centre for Social and Development Studies), University of Natal, Durban.

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For what purposes do automotive firms use e-business tools? What types of IT has each firm invested in? What kind of impact has e-business had on each company? What are the benefits of e-business for the enterprise? To what extent is each firm practicing e-business-enabled supply chain management? What are the barriers or obstacles to the adoption of e-business technologies in each enterprise?

The empirical data for this study was generated through five different lines of inquiry:

A questionnaire containing both open and closed-ended questions was answered by the IT director or an appropriate senior manager/director in each firm (see Appendix 1). The questionnaire was pre-tested on a small sample of firms in Durban, and reviewed by industry experts at the School of Development Studies. Discussions with key informants who are experts on the automotive industry, both in South Africa and internationally. Factory visits to automotive assemblers and component manufacturers in both the Eastern Cape and KZN. Active participation in Benchmarking Club workshops in both the Eastern Cape and KZN. A survey of the e-business literature, including the business press, academic publications and Internet resources.

It is difficult to forecast how the Internet revolution will unfold, as it is very much a blurry, fast-moving target. Further, e-business is still at a very early stage in its development, and its outcome is far from certain. The notion that Internet application may lead to a sustained higher level of economic efficiency is still very much at the level of theory, and will need to be explored in practice. However, a number of international companies such as General Motors, Ford, Cisco Systems, and Dell Computer, which have taken the lead in adopting Internet-based systems, are beginning to report positive results in two key areas: value creation and cost control. This notwithstanding, rigorous independent research is still needed in order to get a clearer picture of the problems and the potential of e-business. This pilot study contributes to this goal. The aim of this Report is to provide a preliminary analytical foundation to help focus the policy debate, and to prepare the foundation for further research work. At best, a pilot study can provide a window on broad issues, and it can frame questions and hypotheses. Accordingly, this report does both. The objective of this pilot survey was quite modest. The researchers set out primarily to obtain a

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general impression of the uptake of e-business in the Eastern Cape and KZN automotive industry, and to map the IT architecture in each firm. We plan to write an extended, more focused research proposal based on the findings of the pilot study. Moreover, the research findings were presented by the researchers to members of the KZN and Eastern Cape Benchmarking Clubs, at workshops held in Durban and Port Elizabeth respectively. 15 The club members provided valuable feedback on the findings, which are integrated into this report. The report is organised as follows:

This, the First Section of the report, introduces the key issues at stake, highlights the reports research focus, and establishes the research parameters. Section Two briefly reviews some of the key trends in the global automotive industry, especially that which pertains to the Internet and ebusiness. Section Three provides a brief description of the KZN Benchmarking Club, concentrating on its terms of reference and some of the major challenges facing its members. Section Four presents a snapshot of the Eastern Cape Benchmarking Club, along the lines of Section Three above. Section Five provides the conceptual foundation for the present study, and presents a consistent theoretical calculus for the analysis of the survey findings. In this section we define what is meant by the term ebusiness; briefly discuss the importance of networks; review potential benefits of e-business for the automotive industry; examine the issue of supply chain integration in the automotive industry; briefly consider the likely impact of the Internet on value chains; and tentatively look at how ebusiness has been received by the South African automotive industry. Section Six presents a synopsis of the main research findings. Section Seven, the conclusion, ties the report together by flagging the cardinal points emanating from the research. Section Eight presents a set of recommendations for the club members with regard to improving their e-business performance. Section Nine briefly sketches the policymaking challenge for government. Section Ten identifies several areas where original and fundamental empirical research is both possible and desirable. Section Eleven comprises the core empirical component of this report; it presents and analyses the findings in full, in terms of the analytical framework established in Section Five.

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The empirical findings were also disseminated through articles in the Eastern Cape and KZN Benchmarking Club Newsletters.

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2. Key Trends In The Global Automotive Industry


2.1 The Move Towards Greater Collaboration
The automotive industry can best be described as a producer-driven supply chain with multi-layered production systems that are organised hierarchically into tiers (Gereffi 1999) (see Figure 2.1 on the next page). The governance structure of the automotive supply chain has changed somewhat during the last two decades. Previously, subsidiaries of transnational assemblers developed local supply networks. Today, original equipment manufacturers (OEMs) and 1st tier suppliers tend to form parallel global networks based on the global lead sourcing/follower supply model (see Kaplinsky 2000: 28-29). The transnational OEMs are the major players in co-ordinating production networks, including their backward and forward linkages. OEMs are the key economic agents because they have the power to exert control over backward linkages with raw material and component suppliers, and forward linkages into distribution and retailing. Vehicle assemblers are putting immense pressure on the supply chain, reducing margins to such an extent that it is becoming difficult for the component manufacturers to sustain their strategic investment levels. Apart from cost reductions, the assemblers are also making increasing demands for enhanced productivity, quicker delivery times and time to market. In order to improve the overall efficiency of their operations, assemblers are now taking an active role in specifying the production and quality systems of their suppliers (Humphrey 1999). This has been prompted in no small part by innovations in internal production flow and quality assurance (such as just-in-time [JIT] production) which necessitate close integration of production schedules, logistics and quality procedures between OEMs and their suppliers. Simultaneously, component manufacturers 16 are being encouraged by the OEMs to invest in IT to support the assemblers own e-business initiatives. There is a global trend towards greater collaboration between vehicle assemblers and component manufacturers in design, research and developing components. This signals a move from the sequential and arms-length pattern of relationships that existed previously between assemblers and their component suppliers. For example, over the last few years, assemblers have shifted more of the responsibility for product design and production to their 1st tier suppliers. These new sourcing patterns have replaced the traditional supply chains and revamped the relationships that OEMs have historically had with their suppliers. In many
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The global automotive component industry is currently facing the threat of shrinking profit margins and lower volumes as a result of slackening demand from the OEMs, a steady rise in raw material prices, excess capacity in highly industrialised countries, and increasing fuel prices. Rapidly shifting industry trends are forcing automotive component firms to redesign their supply chains and expand their supply chain management initiatives.

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cases, producer-driven value chains are being driven by 0.5 and 1st tier suppliers rather than OEMs (Raphie Kaplinsky, personal communication).
FIGURE 2.1 : A Stylised Version Of A Simple Automotive Supply Chain

Consumers

Dealer Networks

OEMs/Assemblers

0.5 Tier Suppliers 17

1st Tier Suppliers

2nd Tier Suppliers

3rd Tier Suppliers

Lower-Tier Sub-Suppliers

There is a very real problem of excess global production capacity in passenger vehicle output, especially in the stagnant markets of some highly industrialised countries. Concomitantly, the automotive industry has become intensely competitive, with the worlds automakers actively seeking ways 18 to improve the
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During the last two years, the automotive industry has witnessed the emergence of a group of super suppliers who constitute the 0.5-tier of production. The 0.5-tier (such as Johnson Controls) operate at the interface between the assemblers and tier-one suppliers. The 0.5-tier suppliers tend to engage with the assemblers on collaborative projects such as modular design and production. Roughly speaking, they are both component manufacturers and modular assemblers. 18 This includes IT applications. For example, Scott Merlis, speaking at the University of Michigan's annual automotive conference, estimated that General Motors, Ford and DaimlerChrysler will save approximately US$ 18.5 billion during the next five years by shifting design and engineering to the Internet. It is expected that this will cut vehicle-development times to 18 months (from 36 months) without sacrificing safety, performance or fuel efficiency (www.theautochannel.com). There are some industry experts, however, who are skeptical of such lofty claims, and doubt whether the gains are likely to be so large, and at so little cost. For example, a study by KPMG, the accounting and consultancy firm, the expected cost savings of e-commerce for the automotive industry have been exaggerated (www.ft.com).

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competitiveness of their products; cut development, production and marketing costs of all their future models; standardise models and rationalise platforms; and restructure their operations in order to get new models to the market sooner than their competitors. This, in turn, has had a major impact on those firms who are manufacturing principally for OEM supply. For instance, industry analysts have witnessed, in recent years, a frenetic consolidation (through acquisitions and mergers) in the automotive component manufacturing business, and a discernible shift towards source designing and modular production. 19 The latter entails greater strategic collaborative efforts (especially in R&D) between automotive component manufacturers and the OEMs.20 Also, 0.5 and 1st tier suppliers increasingly take on the responsibility of managing the rest of the supply chain. The incentive for the automotive component manufacturers is the awarding of longer-term global lead sourcing contracts by the OEMs. Moreover, the role of 1st tier suppliers (of modules/sub-assemblies to the OEMs) has shifted from that of being simply automotive component manufacturers to that of system integrators or network co-ordinators in the supply chain (Barnes 1999a). This means that the co-ordination and synchronisation function of the 1st tier suppliers vis--vis the sourcing of components from a greater number of lower-tier (2nd, 3rd, etc.) component suppliers has become accentuated. In sum, the supply chain pipeline for the OEM/OES (original equipment manufacturer/supply) market can be traced from the lower tier suppliers who supply components to the 1 st tier suppliers, who then integrate the product into a module/sub-assembly, which is then channelled to the OEM on a just-in-time (JIT) basis. Recently there has also been a significant trend in the global automotive industry toward increased outsourcing or deverticalisation. Global automotive firms are increasingly focusing on their core competencies/distinctive capabilities, and tend to outsource low value-added manufacturing activities, peripheral parts of their business, and particular sets of sub-processes in which they are not specialists. The trend towards outsourcing of non-core functions underscores the importance of robust and reliable inter-firm links, and the growing importance of interdependence between firms in the automotive industry.

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Modular production refers to the supply of complete units, such as sub-assemblies, rather than individual components. 20 The notion of assemblers developing close relationships with their 0.5 and 1st tier suppliers makes sense considering the critical role played by the latter in the making of an automobile. The building of close relationships does not, however, preclude the exercise of power by the OEMs. Tensions, therefore, do exist.

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2.2 Increased Use Of The Internet


According to a study by KPMG 21 and the Economist Intelligence Unit, the automotive industry is lagging behind financial services, chemicals, pharmaceuticals, electronics, consumer markets and communications in terms of e-business progress (www.ft.com and www.just-auto.com). 22 Nonetheless, the major players in the global automotive industry are beginning to increasingly adopt the Internet for car retailing, electronic trade exchanges (Section 2.3) and inter-business e-commerce (Section 2.4). The growing importance of the Internet in the global automotive industry is captured and reflected in the following quote by Jacque Nasser, CEO of Ford: The Internet is transforming every piece of our company and our industry. Well push this transformation even further to bring sustainable results to our customers, our suppliers, and our dealers (Business 2.0: An Intelligence Magazine, 01/01/2001, p.158). Jack Smith, GMs chairman argues that: A year ago, everyone was all over us about what we were doing with the Internet. A lot has changed and reality has set in. One could say that it was overblown and theres nothing to it, but we dont feel that way. The Internet is a way the customer will interact with the dealer...[and] the manufacturer with the dealer. So we continue to stay very focussed on development of an Internet strategy. We see it as a powerful opportunity to take a lot of time and cost out of the equation (www.ft.com). The leading assemblers are actively using the Internet as a tool to market their vehicles. This is not altogether surprising, considering that, according to A.T. Kearneys analysts, as much as 50% of vehicle buyers in the US have been influenced by information gained through conducting research on the Internet (www.cartoday.com). General Motors, for instance, has set up an e-commerce unit in 1999, called e-GM. The objective of which is to increase GMs Internet marketing efforts to rapidly grow online vehicle selling. Ford, however, has introduced a novel marketing ploy through its website (www.fordvehicles.com), which is designed to provide online shoppers with comparison tools which list features of Ford vehicles side-by-side with its competitors. However, the leading assemblers have gone beyond Internet marketing. An example of an OEM which is at the forefront of e-business would be DaimlerChrysler. DaimlerChrysler has recently announced the introduction of an Internet-based programme called FastCar. The FastCar project will allow DaimlerChrysler to leverage Internet technology, interconnecting the company's
21 22

The accounting and consultancy firm. E-business progress was measured by advances in technology and the degree senior management was involved in implementation.

22

design; engineering; manufacturing; quality; finance; procurement; supply; sales; and marketing activities. FastCar is the e-architecture which it is believed will provide real-time transparency to the product development process; increase its speed (i.e. cut development cycles) and precision (i.e. test parts and assembly processes before they are used for production); reduce waste from the administrative, supply and logistics processes. ; and increase product quality. FastCar also provides the digital tools to communicate throughout the company and with DaimlerChryslers supplier network. DaimlerChrysler has also recently consolidated its Internet business activities into a new unit called DCX Net to improve coordination and efficiency in areas ranging from purchasing to sales (www.just-auto.com and www.theautochannel.com). Nissan North America is in the second phase of a two-year project to use the Internet to integrate customer relationship management (CRM) software with its marketing and customer retention systems (www.nissandriver.com). Nissan plans to use the Internet to connect its call centres and fulfillment departments to its dealerships in North America. The goal is to access customer information, analyse data and demographics, profile buyers, and do data mining via the Internet. Dana Corporation is one example of a component manufacturer which is operating at the e-business frontier. Dana is currently implementing a Virtual Time Engineering (VTE) programme, and a web-enabled global e-procurement and supply chain management system to enable the company to more efficiently manage its US$ 8 billion in annual world-wide purchases (just-auto.com). Dana Corporation is one of the world's largest suppliers to vehicle manufacturers and their related aftermarkets. The company operates some 320 major facilities in 32 countries and employs more than 80 000 people. The company reported sales of US$ 13.2 billion in 1999 (www.dana.com). General Motors, Ford and DaimlerChrysler also plan to exploit web-based technology for business-to-employee (B2E) activities (www.ft.com). The objective is to intensify electronic communications with their respective workforces through heavily subsidised Internet access. Thereby, making it easier to channel corporate communications and information at the coal-face, and enabling employees to access the companys knowledge base (www.cartoday.com).

23

2.3 Internet-Based Trading Exchanges


In the global automotive industry there has been a discernible trend towards Internet-based electronic trading communities which introduce new suppliers and customers to each other. B2B online-trading exchanges for supply chain interactions in open, Internet-based markets are an attempt to transform industry supply chains that have worked in the same way for decades. Increasingly, global supply chains in the automotive industry are being formed and facilitated by online exchanges. Delphi Auto Systems, North Americas largest automotive parts maker, recently announced that it would take an equity stake and join the European online automotive exchange, TecCom. The move will give Delphi access to the US$ 80 billion European automotive spare parts market and help it to find customers outside its main buyer and former parent, General Motors (Financial Times, 6 September 2000). Similarly, other large suppliers, such as Johnson Controls, the interiors and seating group, are developing their own e-business platforms (www.ft.com). Covisint, the giant Detroit-based global automotive virtual marketplace for procuring supplies, has been developed by General Motors, Ford and DaimlerChrysler, and has been recently joined by Renault-Nissan. Oracle and Commerce One are the main technology providers for the exchange, and have equity stakes in Covisint. Covisints founding companies plan to move all their business to the joint electronic exchange with a turnover of US$ 250 billion and 60 000 suppliers ( The Economist , 23-29 September 2000). The major global automotive suppliers have already publicly expressed their support for Covisint. 23 It has been estimated that dealing with suppliers online could reduce the cost of making a vehicle by as much as 14% (The Economist , 23-29 September 2000). Apart from serving as a central marketplace for car components, supplies, services and information procurement, Covisint is aiming to offer integrated supply chain management, product development, production planning, and is also negotiating links to other online trading hubs (such as Metalsite.com, esteel.com and MetalSpectrum). It is envisioned that universal and unified supply chain enterprise networks such as Covisint could provide the basis for a common communications network for the global automotive industry. In a few years time, this concept will supposedly enable companies to reduce the number of lowvalue business processes, both upstream and downstream, by having their business partners perform such operations. This is in line with the growing trend towards outsourcing in the global automotive industry that was identified in Section 2.1.
23

These companies include: A.K. Steel; ArvinMeritor; Autoliv; BASF; Dana Corporation; Delphi Automotive; Denso International America; Dura; Ernie Green Corporation; Federal Mogul; Flex-n-Gate; Freudenberg NOK; Johnson Controls Inc.; Lear Corporation; Magna International; Plastech; Tower Automotive; Visteon; and Yazaki International.

24

The launch of Covisint, however, has been delayed due to regulatory problems (antitrust issues, etc.) in the US and Germany. There was some concern that dominant virtual exchanges will reduce free competition and lead to the establishment of cartels. This has raised fears about the possibility of collusion and price-fixing by the big companies (Financial Times, 11 September 2000). The collective buying power of industry giants could theoretically be used to drive down suppliers prices and squeeze some of them out of the market. However, after careful deliberation, both the US Federal Trade Commission (FTC) and the German Bundeskartellamt (cartel authority) decided unanimously not to block Covisint. The aforementioned regulatory agencies argued that the Covisint venture, i.e. the formation of potentially the world's largest e-business trading exchange, held great promise for reducing costs and increasing efficiencies in the automotive industry, even while it increases the power of the assemblers. GM, Ford and DaimlerChrysler also plan to launch a joint internet portal, called CollisionLink, which will allow dealers and their wholesale customers, such as collision and mechanical repair shops, to source original equipment parts electronically (www.ft.com). This is a joint venture with Bell and Howell, which will be the lead technology partner. The B2B electronic-based ordering system for OEM replacement parts and service will initially be introduced in North America in early 2001, thereafter it will be rolled out globally. It is envisioned that the B2B Internet-based system will eventually support all dealer wholesale parts transactions, and will automate and integrate the supply chain between the OEM, its dealers and collision and mechanical repair workshops. The global market for automotive parts and services is estimated to be worth US$ 550 billion annually (www.cartoday.com). CollisionLink aims to cut costs and increase efficiency by speeding up and automating the ordering and fulfilment processes between parts dealers and repair shops. General Motors, Ford and DaimlerChrysler aim to control a bigger share of the worlds collision repair business, to increase sales of OEM parts, and to give their franchised dealers a competitive edge over the independent parts manufacturers (www.cartoday.com).

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2.4 B2B E-Commerce


The hype in the media focuses on business-to-consumer (B2C) Internet interactions along the lines of the retail dot.com companies (e.g. Amazon.com, Musica.co.za, etc.). This is commonly referred to as e-commerce, thereby creating the misconception that Internet-based e-commerce is primarily a consumer business. However current trends seem to indicate that e-commerce is likely to be dominated by business-to-business (B2B) e-commerce (typically a supplier, manufacturer or distributor) in the near future, both in terms of volume and the number of firms affected (see Table 2.1 on the next page). There is a great deal of variation, however, in the numerous B2B e-commerce estimates of management consultancy and market research firms. The huge variance is due to differences in how e-commerce is defined and how it is measured (see OECD 1999). According to Gartner Group, which is an authoritative source on measures of the Internet economy, the world-wide B2B market for all industries and sectors is expected to grow from R870 billion in 2000 to R43.7 trillion in 2004, representing 7% of the forecasted R630 trillion total global sales transactions (F&TNet 2000: 30). These figures are, however, speculative, and therefore should be viewed cautiously. Many astute observers believe that B2B e-commerce, linking buyers and sellers electronically along the supply chain, is set for a rapid take-off in the automotive world.24 The longer and the more complicated the supply chain, as is the case with the automotive industry, the bigger the potential gains from B2B ecommerce are likely to be. Table 2.1 shows that the automotive sector is the second largest industry in vertical B2B world markets, and it is growing at a rapid pace. It is therefore safe to assume that, based on current projections, B2B trade in the automotive industry is likely to flourish in the years to come.

24

See www.just-auto.com and www.cartoday.com.

26

TABLE 2.1: The Rise Of Global B2B E-Commerce (US$ billions)


INDUSTRY Computing & Electronics Motor Vehicles Petrochemicals Utilities Paper & Office Products Shipping & Warehousing Food & Agriculture Consumer Goods Pharmaceutical & Medical Aerospace & Defence Construction Heavy Industries Industrial Equipment Total 1998 20 4 5 7 1 1 0.3 1 0.6 3 0.4 0.1 0.1 $43bn 1999 50 9 10 15 3 3 3 3 1 7 2 1 1 $108bn 2000 121 23 23 32 6 7 6 6 4 15 3 3 2 $251bn 2001 229 53 48 63 14 15 13 13 9 26 7 5 5 $500bn 2002 319 114 97 110 31 33 27 26 20 34 14 9 9 $842bn 2003 395 213 178 170 65 62 54 52 44 38 29 16 16 $1,332bn

Source: Forrester Research quoted in Intelligence: Business in the Internet Age, May 2000, p.51.

The key trends identified in this section of the report emphasise the centrality of IT in improving the operational efficiency and overall organisational effectiveness of automotive companies. In particular, there is a heightened need for automotive companies to:

Maintain flexible internal infrastructures that allow their organisations to adapt quickly and effectively to changing market conditions. Set up an appropriate (i.e. customised and robust) IT infrastructure in order to engage in B2B e-commerce, and to participate in Internet trading exchange networks. Fully network every aspect of their internal and external business operations. Use the Internet to: move business processes online; connect to suppliers, customers and partners; understand and respond better to their customers; and empower their employees with the rapid delivery of mission-critical business information. Reduce information asymmetries by adopting seamless business-tobusiness (B2B) electronic communication. The objective here is to exchange richer and more timely information between trading partners, and to send information deep into the value chain. Proactively engage in IT-enabled supply chain integration and rationalisation.

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3. The KZN Benchmarking Club


The KwaZulu-Natal Benchmarking Club was initially formed by a group of eleven automotive firms in November 1997, and has subsequently increased to twelve members. The Club has as its prime objective the continuous improvement of its members operational competitiveness through the generation of comparative domestic and international benchmarks. 25 During the time of the e-business survey, the Club consisted of twelve members: eleven automotive component manufacturers (viz. Autoplastic; DCM; Feltex; G.U.D. Filters; Hesto Harnesses; Natal Die-Casting; Ramsay Engineering; Shurlok; Smiths Manufacturing; Venture; and Webroy) and one vehicle assembler (viz. Toyota South Africa). However, one of the component manufacturers was unable to participate in the e-business survey because the firm in question was operating in crisis mode and undergoing a disruptive restructuring process. The net result of which meant that all benchmarking club activities relating to this firm were temporarily suspended during this hectic period. Nevertheless, the eleven club members that comprised the sample for this study are representative of the major players in the KZN automotive industry. The OEM, Toyota SA, is the major assembler in KZN and the ten automotive component manufacturers are the key component manufacturers in the province. However, it is important to emphasise that club members are firms who are seeking to improve their competitiveness through a learning network. This is a feature which potentially distinguishes them from the provinces other automotive component manufacturers who are not part of the Club. This, however, does not mean that the other component manufacturers are not striving to become worldclass manufacturers in their own way. 26 The component manufacturing firms that are part of the KZN Benchmarking Club supply to Toyota SA (both OEM and OES distribution channels), the other two KZN OEMs (viz. MAN Trucks and Bell Equipment27), and to OEMs based in the Eastern Cape and Gauteng (Barnes 1999b). In addition, the independent aftermarket (operating in relatively stable technology products such as batteries, air filters, etc.) and the export market are also significant markets for club members. The automotive components manufactured by club members can be broken down into the following categories: bonnet and gear locks; automotive trim; metal forming/pressing; electronics; foam/plastic/rubber moulding; engine parts; and heat transfer. Club members firms are located mainly in the Southern Durban industrial basin, Pinetown and Pitermaritzburg.

25 26

The Eastern Cape Benchmarking Club has a similar mandate. Again, the same applies to the Eastern Cape Benchmarking Club. 27 An articulated dump truck manufacturer.

28

The ownership profile of the automotive component manufacturers that are part of the KZN Benchmarking Club comprises mainly of subsidiaries of South African owned holding companies, with the exception of three firms: two privately owned independent South African companies, and one owned by a US multinational. In view of the global trends in the automotive industry (such as networking, consolidation, the design and marketing strength of MNC operators, etc.) and given that the South African automotive industry is relatively small, it is highly unlikely that South African automotive component companies supplying to the OEM/OES market can continue indefinitely as independent 1st tier component firms. The prospects of independent 1st tier component firms becoming locked into closer relationships with multinational corporations (MNCs), or even being acquired by MNCs, is therefore quite high. The Durban-based OEM, Toyota South Africa, is a largely locally owned firm with the Toyota Motor Corporation (Japan) owning only 27.8% of the company. It assembles almost exclusively for the domestic market. In 1998, Toyota SA exported only 1037 passenger cars (down 13.7% on 1997 figures) and 1813 commercial vehicles (down 30.3% on 1997 figures) (NAACAM 1999: 12). Toyota SA is one of two remaining South African owned major vehicle assembles.28 Toyota is generally regarded as the most successful vehicle manufacturer in South Africa in terms of both passenger and commercial vehicle sales, in which it is the indisputable market leader (Barnes 2000). Notwithstanding this, Toyota SA reported a R94.9 million loss from ordinary operations for the first half of 2000, 108% higher than for the same period in 1999 (www.cartoday.com). Toyota SA has rather weak networking links to global value chains. Toyota SAs connectedness appears to be largely local, primarily because its licensing agreements prevents it from accessing Toyota Japans global networks. Toyota SA has not yet been incorporated into Toyota Japans global sourcing operations. Toyota SAs 1 st tier suppliers, for instance, have not forged an equity relationship with Toyota Japans lead source automotive component manufacturers. In addition, Toyota Japan and its global lead source component suppliers have not initiated and secured manufacturing operations in South Africa, unlike the German-owned OEMs. It may well be that in order for Toyota SA to succeed under the MIDP 29 it may need to become a full subsidiary of its source company and be integrated into global supply and distribution networks (Business Report , 12 September 2000). Toyota SAs competitors are wholly owned subsidiaries of their overseas parent companies and therefore have a direct link to global supply and distribution
28 29

The other South African majority-owned OEM being Delta Motor Corporation. In September 1995 the government launched a Motor Industry Development Programme (MIDP) to promote greater integration of the domestic automotive assembly and component industries into the global automotive arena. The primary objective of the MIDP was to improve the international competitiveness of the South African automotive sector, and to grow the assembly and component industries, especially through exports. The MIDP is operational until 2002.

29

networks. Unlike VW and BMW 30 who have been instrumental in facilitating component export contracts, Toyota SA does not act as a major conduit for automotive component exports for its suppliers, many of which are clustered around its Prospecton plant in Durban. 31 However, Toyota SA through its official dealerships controls the replacement market for automotive components. This provides a channel into the original equipment supply (OES) market for those club members who manufacture replacement parts. The lack of global exposure will make it increasingly difficult for Toyota SA and its automotive component manufacturers to sustain the inevitable waves of international competitiveness pressures that will cascade over them. In the new globally networked operating environment, component manufacturers who are heavily dependent on Toyota SA will be at a serious competitive disadvantage vis--vis the more outwardly-oriented automotive component manufacturers based in KZN, Eastern Cape and Gauteng. Inclusion in the global automotive supply network is critical for survival.32 However, the KZN automotive components industry as a whole is not locked exclusively into the domestic automotive market. On the contrary, Barnes (1999b) shows that export volumes have increased significantly over the last few years. The recently promulgated African Growth and Opportunity Act (AGOA) in the US should enable the South African automotive industry to strengthen exports to the United States. Apropos AGOA, South African produced vehicles will, subject to certain conditions, qualify for duty free and quota free access into the US from January 2001 to December 2008.

30

BMW plans to export approximately 37 000 units of the 3-series in 2001 to various international markets (mainly the UK, US and Japan). It is estimated that about 400 South African supplier companies will benefit from BMWs export venture (www.cartoday.com). 31 Many of the latter are also club members, and hence respondents in this IRP e-business survey. 32 Only then will suppliers be able to compete for business from other assemblers, develop strategic alliances to gain broader geographical coverage, and gain access to technology and designs that are essential for winning contracts.

30

4. The Eastern Cape Benchmarking Club


The Eastern Cape Benchmarking Club was formed in 1999, and consists of seven members: one OEM (viz. Delta Motor Corporation) and six automotive component manufacturers (viz. Gemtec; Spicer Axle; the two Shatterprufe plants 33; Guestro Automotive Products; and Guestro Forge).34 One automotive component manufacturer was unable to participate in the IRP e-business survey. The two Shatterprufe plants completed one questionnaire as they have a similar IT infrastructure and similar IT management systems. Similarly, the IT director at Guestro Automotive Products (GAP) filled out one questionnaire for both GAP and Guestro Forge. The seven club members are concentrated in the Port Elizabeth-Uitenhage automotive industrial zone. The automotive components manufactured by club members can be broken down into the following categories: laminated windscreens and toughened door and rear glasses; rear driving axles; front and rear hubs and spindles; propshafts; suspension products; steering gear assemblies and components; closed die hot forgings; axle shafts; CV joints; tow hooks; cylinder heads; and intake manifolds. The component manufacturers supply to the OE, domestic, P&A, and export markets. The ownership profile of the component manufacturers is as follows: one is a subsidiary of a foreign company, and the others are subsidiaries of domestic companies. In recent years Delta Motor Corporation has experienced a growth in direct sourcing from foreign suppliers. The Eastern Cape OEMs supplier base can be summarised as follows: 42.7% of Deltas raw material and component suppliers are international firms, 29.7% of suppliers are local (i.e. located in the Eastern Cape), and 27.6% of suppliers are national (i.e. located in South Africa but outside the Eastern Cape). Of Deltas five major component suppliers, three are foreign-based 35 and the remaining two are located in the Eastern Cape36. Four of Deltas five major domestic component suppliers are located in the Eastern Cape (viz. Port Elizabeth, Queenstown and Uitenhage), with the other located in Gauteng (viz. Johannesburg). Collaboration and consultation with domestic suppliers usually takes the form of workshops, joint ventures and supplier development programmes. 37 Delta Motor Corporation is a South African majority-owned OEM38 producing passenger cars and commercial vehicles primarily for the South African market.
33 34

Struandale and Neave Township, Port Elizabeth, respectively. Guestro Automotive Products and Guestro Forge are part of the Dorbyl Automotive Technologies Group, the largest automotive component manufacturer in Southern Africa. 35 Japan (Isuzu Motor Ltd.), Germany (Adam Opel AG) and Brazil (General Motors of Brazil) respectively. 36 Lear Corporation (Port Elizabeth) and Spicer Axle (Uitenhage) respectively. 37 Supplier development programmes tend to focus on domestic suppliers with quality and/or supply problems, as well as suppliers with export potential. 38 Present ownership of Delta: 51% local management and 49% General Motors.

31

For example, in 1998 Delta exported only 350 passenger cars (down 44.7% on 1997 figures) and 1600 commercial vehicles (down 16.1% on 1997 figures) (NAACAM 1999: 12). Delta has a technical agreement with the Detroit-based General motors (GM). Within the scope of the technical agreement, Delta has substantial independence from GM vis--vis sourcing components. Delta, however, is crafting a closer relationship with General Motors (GM), an OEM which is at the forefront of the e-business revolution. The impact of this relationship on Delta are likely to be:

Joint supply negotiations. Greater export opportunities. Realignment of the organisation to core business processes. Consolidation of material supplies. Greater participation in business-to-business (B2B) trade. Electronic dissemination of supplier quality procedures. Business-to-customer (B2C) transactions by allowing online ordering of vehicles and stock visibility in P&A. More stress on global sourcing and integration with GMs World-wide Purchasing Group. This could lead to re-sourcing.

Figure 4.1 (on the next page) provides an indication of how important the automotive component manufacturers are as a source of employment in both KZN and the Eastern Cape. Figure 4.1 includes the average employment figures for thirteen (out of a total of nineteen) 39 club members only, all of whom are automotive component manufacturers. The average employment figures would be boosted considerably if we were able to get accurate employment figures for the 2 OEMs (viz . Delta and Toyota SA). Figure 4.1 shows that average employment levels peaked in 1996 (455.00 for the Eastern Cape and 263.50 for KZN). Thereafter it has steadily declined, reaching a low of 216.04 in KZN and 335.0 for the Eastern Cape.

39

12 KZN club members and 7 Eastern Cape club members.

32

FIGURE 4.1
Average Number of Employees (Component Manufacturers) 500.00 No of Employees 400.00 300.00 200.00 100.00 0.00 1994 1995 1996 1997 1998 1999 Eastern Cape (N=5) KZN (N=8)

Source: IRP Database

Figure 4.2 below illustrates the average turnover figures for the club members, and hints at the potential contribution that the component manufacturers in the Benchmarking Clubs make to the regional and national economy. It is important to bear in mind that Figure 4.2 does not include the turnover figures for 6 component manufacturers and the 2 OEMs.40 According to Figure 4.2, average turnover figures for the Eastern Cape Benchmarking Club peaked in 1997 (R 99 737 000), and thereafter it has steadily deteriorated. By contrast, average turnover figures for the KZN Benchmarking Club has improved between 1996 (R 47 345 922) and 1999 (R 60 779 499).
FIGURE 4.2
Average Turnover (Component Manufacturers) 120,000,000 100,000,000 Rands 80,000,000 60,000,000 40,000,000 20,000,000 0 1995 1996 1997 1998 1999 Eastern Cape (N=3) KZN (N=8)

Source: IRP Database

40

Some club members regard turnover figures as strictly confidential within the Club (and not to be publicly divulged), while others are reluctant to reveal their turnover figures to the IRP researchers. Hence, the missing cases.

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5. E-Business And The Automotive Supply Chain


5.1 What Is E-Business?
E-business is electronic business, and, as such, it is not a new invention. 41 What is relatively new, however, is the application of Internet technology to open up a world of low-cost online opportunities for companies of all sizes. The Internet creates the possibility for a new era of networked economic activity with its own, unique set of competitive dynamics, and digitally-based economic arrangements. Today, the focus is on networks that use open, non-proprietary Internet protocols and the Internets key infrastructure applications (i.e. email, the World Wide Web, HTML, and the browser). This differs from earlier forms of e-business technologies such as EDI which required pre-existing relationships, expensive and complex custom software, and dedicated communication links In many cases, the system required strictly compatible equipment (OECD 1999: 28). E-Business is essentially an Internet application. The Internet is an ubiquitous, interactive system based on a multipurpose digital computing platform which allows the simultaneous exchange of information in digital form among an infinite number of nodes, each with its own computing power (Kenney and Curry 2000). The Internet is a prime example of a radical disruptive technology 42 that has the potential to induce structural transformation, and disrupt and change the way business is done. This is in contrast to a sustaining technology which offers the company predictable improvements. The new e-business technology refers to the IT of the Internet revolution a common foundation, standards-based tools, platform-independent browsers, and network-facilitated communication and collaboration. E-business entails a new economic morphology, organised around tele-communicated networks of computers which are at the heart of information systems and communication processes. At the core of the connectivity of the global economy, and of the flexibility of informational production there is a new form of business organisation based upon networks and tooled by IT: the e-corporation. An e-corporation is a flexible, adaptive organisation, able to evolve with its environment. E-business is believed to be in full coherence with the productive, creative logic embedded in the digital Information Economy. An e-corporation recognises the power of strategic partnerships with its business constituencies. 43 The alliances foster the complete transaction loop from product search to shipping confirmation
41

For example, large corporations in South Africa have, for many years, been using electronic data interchange (EDI) supplied by value-added networks (VAN) operated over leased telephone lines. 42 Examples of disruptive technologies include: the steam engine; electricity; internal combustion engine; the transistor; telegraph; railroad; automobile; airplane; and telephone. 43 Brown (1996: 27) lists the following types of strategic alliances: licensing agreements; joint ventures; buyer-seller relationships (such as JIT production); R&D alliances; marketing agreements/dual marketing; franchising; consortia between companies; and joint access to technology and markets.

34

with inventory updates. An e-corporation is essentially an enterprise which is designed for success in the Information Economy. 44 E-business brings into play an organisations resources and partners in new and innovative ways to clear strategic advantage. However, the potential of e-business goes far beyond new technologies. It has the potential to impact and engage all aspects of a business (strategy, process, organisation and systems) to extend the business beyond its current boundaries. In this sense, e-business is a source of significant strategic advantage. Although the precursor of the Internet appeared in the late 1960s, e-business is primarily a product of six significant transformations in the economy (see Figure 5.1): the globalisation of markets; shift towards an economy based on knowledge and information; the growing prominence of ICTs in the economy; innovations in business organisation and practice ( viz . JIT, TQM, Knowledge Management, outsourcing, strategic alliances, etc.); the liberalisation of the telecommunications sector in OECD countries; and technological innovations such as email, the World Wide Web, Internet browsers, and the expansion in the volume and capacity of communication networks (viz. optic fibre, digital subscriber line technologies, and satellites). These six factors are yoked together, and are closely linked to the emergence of e-business.
FIGURE 5.1 : Interrelated Factors Giving Rise to E-Business
Technological Innovation Telecom Regulatory Reform

E-BUSINESS

Globalisation Of Markets

Shift Towards An Economy Based On Knowledge And Information

The Growing Prominence Of ICTs In The Economy

Innovations In Business Organisation And Practice

44

The New Economy is global and it is based on business networks. Information and knowledge form the building blocks of the New Economy, and it is IT which provides the technological architecture which amplifies and focuses brain power (rather than muscle power, as was the case in the Industrial Revolution) through rapidly proliferating information-rich connections.

35

A consistent definition of e-business is presently lacking in the literature. The following definition is provided to help focus the policy debate. E-business refers to a suite of information and communication technologies, software, protocols and standards for networking between computers, which is embedded within business processes. Simply put, e-business is thus any business process performed via a computer-mediated network (see Box 5.1 for the different types of e-business). Business refers to all activity that generates value both within a firm (internally) and with suppliers and customers (externally). Economic value 45 is added to internal and external business processes through the use of flexible, multi-interface connections emerging through digital, electronic networks. Ebusiness is thus not, as media hype would have it, only about buying and selling over the Internet, but improving business performance through network connectivity to improve service and reduce costs, open new channels, transform competitive landscapes (Fortune, 25 October 1999), and identify new value streams.
BOX 5.1: Types Of E-Business There are at least six different types of e-business, viz.:

business-to-business (B2B) business-to-customer (B2C) business-to-employee (B2E) business-to-government (B2G) customer-to-customer (C2C) (i.e. consumers auctions as epitomised by the auction site eBay.com) consumer-to-business (C2B) (i.e. reverse auction sites such as Priceline.com)

B2G, C2C and C2B e-commerce are outside the scope of this study, and will not be explored further in this report.

E-business and e-commerce tend to be used interchangeably in the literature. The two terms often get conflated into an amorphous textual reading. This conceptual confusion often leads to policy incoherence. We argue that ebusiness transcends e-commerce. E-commerce refers to business transactions on the Web, and is seen primarily as a way to increase external revenues and business. E-business, on the other hand, refers to the full range of business transformations brought about by the use of electronic networks. E-business thus has a much more ambitious goal, which goes far beyond buying and selling over the Internet, or e-commerce, and deep into the processes and culture of an enterprise. It involves every aspect of a companys business, and it is expected to create a much more interactive business environment to improve business performance.
45

Value is measured in terms of prospective capital growth rather than profit rates.

36

While the business media tend to focus on the retail business-to-consumer segment of e-commerce (i.e. Amazon.com, Borders.com, etc.), it is really business-to-business (B2B) e-commerce which dominates the market, and it is growing rapidly, albeit from a small base. Inter-business e-commerce can be divided into two categories: open marketplace-based trade and direct trade between partners. The former takes place at various Internet-based auctions or exchange sites, whilst the latter occurs either through a firms website which has an online purchasing function or an EDI-type network. Presently, much of the B2B ecommerce transactions are US based. But this will change over time. B2B ecommerce is likely to spread globally and grow rapidly because of its potentially significant impact on business costs (associated with inventories, sales execution, procurement, and distribution), and its assumed increase in productivity gains.

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5.2 The Importance Of Networks


In his magnum opus devoted to the analysis of economy and society in the Information Age, Manuel Castells (1996, 1997 and 1998) lucidly documents the rise of the network society and the culture of virtuality. 46 Castells, adopting a maximalist approach, correctly states that the information mode of development is the current phase of capitalist development. It is this information mode that transforms production and gives rise to a society fundamentally based upon networks of information exchange. And the Internet, as a global matrix of interconnected computer networks, is emblematic of the power of information flows, and intra- and inter-firm linkages in knowledge-intensive industrial development. In the Information Age, the critical organisational form in the automotive industry is networking. A network is a dynamic nexus of inter-dependent units (Castells 1996, 1997 and 1998). In a network it is IT which provides the fundamental basis for organising instrumentality. And it is the ubiquitous Internet, with its openended structure, which provides the technological medium that enables global production networks to function in business. As highlighted in Section 5.1, ebusiness technologies are a critical source of value creation in the Information Economy. The most critical distinction for a firm in this organisational logic is to be or not to be in the network. Firms that are not anchored in the networking logic are at a serious competitive disadvantage, and at risk of being bypassed or eliminated from the mainstream of economic development. In sum, a firms fate depends on its positioning in the network. The bedrock of e-business is, therefore, the network , which is the physical interconnection of IT devices to enable seamless information transfer and access within the enterprise, and be extensible across the entire supply chain. This ensures maximum benefits to applications in the supply chain process. The ebusiness network should be seen as an evolutionary, complex web of connections between firms which are online. It is argued that the value of being networked increases exponentially with the number of connections, while the costs only increase linearly. 47 Gereffi (1999) views the co-ordination of the entire value chain as a key source of competitive advantage that requires using networks as a strategic asset. Improving competitiveness requires both intra- and inter-firm restructuring which places strong emphasis on the linkages between firms, i.e. to the value chains and clusters within which enterprises are embedded. There is thus a shift away from primarily firm-centred activity to a network-centric focus (see Castells 1996), in which companies will have to conceive of themselves as located within

46 47

The culture of virtuality refers to the culture that is embodied within the network society. This proposition is attributed to Bob Metcalfe, founder of the networking vendor, 3Com ( Financial Times, 18 October 2000).

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a shifting network of suppliers, competitors and customers their boundaries will accordingly be highly fluid. E-corporations believe that they have discovered a competitive advantage in making information and knowledge available to their networked partners. Such networks enable trading, sharing and enhancing knowledge to build value for mutual benefit. Firms work in a strategy of shifting alliances and partnerships, specific to a given product, process, time and space. Moreover, these cooperations are based increasingly on sharing of information. New ICTs based on microelectronics, telecommunications, computers, and network-oriented software have provided the digital nervous system for this New Economy to operate, and have moved computer networks to the centre of the international economic infrastructure. Network-oriented ICTs through the compression of space, time and knowledge allow for unprecedented speed and complexity in the management of the automotive supply chain. Interconnected digital networks enable firms (the insiders) to weave the constituent elements of the supply chain into competitive production systems. The flexibility of the Information Economy, for example, makes it possible for OEMs to source their components anywhere in the world, in an endlessly variable geometry of value searching. This implies avoiding economically valueless, and circumventing devalued, territories or firms. Thus the system is exclusionary.

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5.3 The Potential Advantages Of E-Business


Finding the most valued uses for the Internet in business will probably take some time. The forces and issues in play are only beginning, and the final outcome on business models and market structure is still uncertain. Hence, it is difficult to forecast how the specific applications of the Internet will unfold, and to predict the ultimate magnitude of the changes set in motion. Nonetheless, some salient, theoretical advantages of e-business for the automotive industry are discussed below, while for the sake of brevity, a fuller list of potential benefits of e-business for the automotive supply chain is to be found in Box 5.2. The discussion which follows is based on the possibilities of the Internet for supply chain integration, as put forth by IT specialists, industry experts and advocates of the Internet in the business literature. It is envisioned by proponents of the Internet that much of the benefits of ebusiness are likely to be derived from the new possibilities that the Internet offers for communication and distributing information in real-time. The benefits of ebusiness can be categorised into two key areas: viz. the potential for value creation and cost control. An important caveat is that e-business does not offer a friction-free mode of exchange devoid of transaction costs. The emergence of intermediaries, and the costs associated with establishing trust and reducing risks inherent in Internet trade, alone scuppers Bill Gates vision of the Internet as a tool for friction-free capitalism. In principle e-business tools have the potential to lower operational costs through automated order and fulfilment processes, provide the ability to transact business and access information in real-time, and connect to new and existing markets. The potential for reduction in supply chain costs through online purchasing represents a significant profit opportunity across the value chain. Since real-time information on forecasts, selling and inventory levels travel immediately through the supply chain, companies are more likely to maintain lower inventory levels without increasing the risk of part shortages. Stockpiles of inventory within the supply chain for just-in-case events are, therefore, minimised because demand information is directly available to the entire supply chain. The links between internal primary data repositories and business applications, and those of a firms partner have the potential to allow faster product development and distribution with higher product quality. It is claimed that engineering change orders will update the bill of materials database which feeds customer configuration and manufacturing systems. These systems, theoretically, will be shared with key suppliers in real-time, allowing co-ordinated action and faster time to volume. Enhanced customer satisfaction is likely to accrue since customers have access through the Internet to independently browse and price products, order and configure them, view shipment schedules, monitor delivery and receive copies of invoices.

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The potential system-wide gains in efficiency to be reaped when firms are linked across the automotive industry is substantial. Furthermore, significant reduction in costs associated with inventories, sales execution, procurement, and distribution are expected. Achieving these efficiency gains is contingent on a number of factors, however, such as: access to e-business systems and the needed skills, a firms path dependencies, and firms willingness to open up their internal systems to suppliers and customers. The latter raises policy issues concerning security and potential anti-competitive effects as firms integrate their operations more closely (OECD 1999: 75-76). The Internet has the potential to bring about substantial savings in inventory carrying costs, primarily through forecasting demand more accurately. Each stage of the automotive value-added chain, for example, holds considerable inventories. Ford, for example, has deployed an Intranet48 which connects 120 000 workstations at offices and factories around the world. It is believed that the Intranet has contributed to reducing the time needed to get new models into full production from 36 to 24 months (OECD 1999: 63). Plans are already afoot to extend the Internet system in order to significantly reduce inventories and fixed costs. The ultimate objective is to tighten the supply chain, and manufacture on demand. While most of the evidence supporting e-business-enabled supply chain integration is anecdotal, speculative and theoretical, hard empirical evidence, particularly from the US, is slowly beginning to surface. Pilot tests of an EDI system extended across the Internet to a large number of suppliers and OEMs by the US Automotive Industry Automation Group (AIAG) and the Manufacturing Assembly Pilot (MAP) programme, would seem to support the merits of digital supply chain integration: The pilot generated a 58 per cent reduction in lead times, a 24 per cent improvement in inventory levels, and a 75 per cent reduction in error rates. When deployed more widely in 2000, it is expected to save the US automotive industry an estimated $1 billion a year (OECD 1999: 63). Improved demand forecasting and replenishment of stocks via the Internet is estimated to lead to a reduction in overall inventories of US$250-$350 billion, or about a 20 to 25% reduction in current US inventory levels. While this estimate is probably optimistic, pilot studies on the US auto market obtained a 20% savings, and even a 5% reduction would have a significant economic impact (OECD 1999: 13-14).

48

Internet-based network for company-use only.

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BOX 5.2: The Potential Advantages Of E-Business For The Automotive Industry

Improves supply chain management. Boosts revenues. Cuts production cycle times. Improves customer service. Broadens market share. Creates interactive relationships with customers and suppliers. Delivers new products and services faster and better. And at a lower cost. Improves market transparency. Improves communication between trading partners (i.e. inter-company relationships), and within the enterprise itself (i.e. intra-firm relationships). Allows businesses to move beyond exchanging orders into more complex collaboration in design, fulfilment and co-ordination. Enormous cost savings are expected from areas such as standardisation and process efficiencies. Increased value is realised by collaboratively balancing all resources and optimising the flow of goods, services and information from source to end customer. Drives supply chain harmonisation. Allows closer synchronisation of the supply chain with the aim of reducing inventory and shortening cycle times. Increases value with preferred suppliers. Online e-commerce allows for more efficient supply chain management by cutting out layers of middlemen. Allows significant cumulative savings in procurement costs, both by making it easier to find the cheapest supplier and through efficiency gains. The transaction costs of placing an order online is much less than a phone and fax ordering system, and there are likely to be fewer errors in orders and invoicing. Consolidates information on supplier performance. Cuts inventory requirements. Information networking reduces the need for firms to keep large stocks. Improves planning certainty.

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Because the Internet is a new technology in business, there is a lack of reliable empirical evidence (especially statistical data) to either confidently support or reject the benefits listed in Box 5.2. The advantages of the Internet will need to stand up to rigorous empirical tests, which are contingent on the availability of reliable statistical data. The essence of Box 5.2 can be distilled into the following key benefits of the Internet:

the payoff in productivity speed lower cycle times supply chain integration better planning reductions in inventories more efficient logistics more efficient and effective customer service lower purchasing, sales and marketing costs new sales opportunities

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5.4 The Importance Of Supply Chain Integration


John Dobbs of Cambridge Technology Partners defines value chain integration as a process of collaboration that optimises all internal and external activities involved in delivering greater perceived value to the ultimate customer (The Economist , 26 June 1999). One of the hallmarks of successful e-business is integration of the value chain. Supply chain integration is generally regarded as an indispensable element for success in manufacturing, and it is believed that supply chain superiority will provide a decisive competitive advantage. Manufacturers now realise that they must bring more to the table than merely improved processes. They must adapt quickly to increasingly unpredictable shifts in market demand, achieving greater efficiencies in product development, sourcing, production and distribution. A company can only achieve this by interacting closely with its suppliers, customers and business partners. Supply chain integration works on the premise that no one firm can be internationally competitive when its customers and suppliers are not. Organisations are moving away from competing as independent businesses to competing with their supply chain against other supply chains. E-business and supply chain management are all about using Internet technologies to increase the efficiency of entire value chains by co-ordinating the actions and strategies of all parties involved. Automotive firms that exploit network-enabled supply chain management will be able to be far more responsive to their customers, suppliers and market conditions, as well as lower the cost of goods and transactions right across the chain, from the primary supplier through to the end-user. The uptake of this is that firms jointly manage inventories across the supply chain, forecast sales together, and plan collaboratively to keep levels of component and completed product inventory down to a bare minimum. Paul Bell, a senior executive at Dell Computer, describes inventory as the physical embodiment of bad information (The Economist , 11-17 November 2000, italics added). Lee Price, Chief Economist in the US Commerce Departments Office of Policy Development, describes inventories as A substitute for information: you buy them because you are not sure of the reliability of your supplier or the demand from your customer (The Economist , 11-17 November 2000, italics added). Similarly, McGuffog (1999: 1) argues that inventory, excess capacity, waste, write-offs and stock-outs are the key consequences of information-related uncertainties. The ideal situation is when the only inventory that exists is in transit. The objective of supply chain management, then, is to improve the total performance and cost-effectiveness of an organisation by optimising speed and certainty and maximising the net value added by all relevant processes (McGuffog 1999: 1, italics added). Dell Computers Internet-enabled build-to-order business model known as direct sales 49 could serve as a template for a new organisational model in the Internet
49

Retailers are bypassed altogether.

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Age (see Magretta 1998). This is a radical example of a pull strategy in supply chain management, where Dell has largely eliminated the non-value added steps in its supply chain. However, it needs to be borne in mind that Dell is a oneproduct company which has about 200 suppliers, with 30 companies contributing to about three quarters of its total purchasing. Dell, which offers over ten million computer configurations on its website, uses the Internet to virtually integrate the value chain in order to leverage relationships with both customers and suppliers. Dell is sharing information with its suppliers in a real-time fashion. Simultaneously, information from Dells customers flows all the way through manufacturing to Dells suppliers (Magretta 1998: 79). These tightly co-ordinated information linkages would not be possible without customers and suppliers working with Dell as partners. According to Michael Dell, We sometimes know more about a customers operations than they do themselves (Magretta 1998: 79). Dells computer sales increased substantially from 1996 (US$ 5.3 billion) to 1998 (US$ 12.3 billion), and by 2000 it reached a staggering US$ 25.3 billion (Gereffi 2000: 9). Internet sales account for about 50% of the companys transactions. The success of Dells build-toorder model represents a challenge to current build-to-stock business platforms in the automotive sector. 50 The performance of an enterprise depends heavily on its ability to respond with speed and certainty to the challenges and opportunities that are presented by its suppliers, competitors and customers. In their survey of 225 international51 companies representing a wide range of industry groups 52, Handfield et al. (1999: 71) discuss a number of company objectives for supplier integration. According to Handfield et al. (1999: 71) the most important objectives that emerged are:


50

Reduce design or development time Reduce procured item cost Improved procured item quality Reduce design and development cost Access and improve product technology

Our point is not to elevate Dell Computer as a model for the automotive industry, but rather to illustrate the power of an Internet-based assembler/production system. Cisco Systems, is another company which has reengineered its business to take advantage of the productivity improvements made possible by the Internet. Cisco Systems, an IT solutions company, uses the Internet to receive orders; deal with customerservice issues; recruit and screen job applicants; virtually integrate its financial systems into the business processes; improve its manufacturing processes; and outsource most of its production (Reinhardt 1999). Through networked IT applications, Cisco connects chip manufacturers, logistics companies, employees, systems integrators, and customers. The Virtual Close Internet Business Application, an Intranet-based analysis system, enables Cisco to digitally scrutinise any aspect of its business world-wide. In 1995, Cisco took 15 days to close its books, now it can be completed within the hour. 51 Asia, Australia, Canada, South America, US and Western Europe. 52 Including: aerospace; automotive; chemicals; computers and electronics; consumer products; industrial equipment; medical products and services; process industries; telecommunications; and government services.

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Develop a long term supplier relationship Improve product features More effectively use human resources at the respondents business unit and at the supplier Improve customer service Reduce technological risk Reduce financial risk Access and improve process technology Improve respondents business units position as a preferred customer to the supplier Comply with environmental regulations Comply with other government regulations

All of the respondents agreed that supply chain integration had a positive impact on the aforementioned objectives. The Handfield et al . (1999) study is important because it underscores the paramount importance of the strategic factors that are driving supply chain integration in the automotive and other manufacturing sectors. E-business has the potential to redefine traditional value chains, and develop complex knowledge-sharing systems that connect pricing, product and design information with suppliers and customers. The new IT has the potential to coordinate across company boundaries to achieve new levels of efficiency and productivity. It offers the possible advantages of a tightly co-ordinated supply chain that has traditionally come through vertical integration. An e-businessenabled supply chain puts in place an open network infrastructure and standards-based technologies that could facilitate communication, collaboration and the sharing of knowledge with customers, employees, partners and suppliers. Partners should be treated as if they are inside the company. The supply chain becomes more competitive as a result of lowered total system costs and improved responsiveness to unplanned events such as a change in competitors prices, the potential loss of a valued customer or supplier, or a new market opportunity. Let us look briefly at the comparative inventory performance of Eastern Cape and KZN club members against their international counterparts. This comparison is based on close benchmarking of like-for-like component manufacturers. Inventory performance is a value chain issue par excellence. Inventory level measurements provide a rough proxy for the level of integration in the supply chain. The key inventory control measures considered are:

Total inventory levels Raw material inventory levels

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Work in progress levels Finished goods inventory levels

The objective is to present an outline of the variance in inventory performance amongst club members and their international comparators. Figure 5.2 clearly shows that whilst improvements in number of days of total inventory have been significant, the general performance of club members is still well below what is required for international competitiveness. The figures suggest that whilst raw material (Figure 5.3) and work in progress (Figure 5.4) levels have on average improved significantly, finished goods inventory holding (Figure 5.5) has significantly deteriorated at many club members. This, however, is in most cases, reflective of an increase in exporting growth rather than actual performance deterioration per se, i.e. many club members are holding on to increased finished goods stock because of monthly or bi-weekly shipping schedules to foreign customers.

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FIGURE 5.2
Number of days of total inventory: Club members versus International counterparts (1995 to 1999)
80 70 60 50 Days 40 30 20 10 0 Club members (n=12) International firms (n=12)

1995 58.88 46.84

1996 66.77 40.02

1997 66.08 40.90 Year

1998 61.29 39.01

1999 52.00 35.05

Source: IRP Benchmarking Data.

FIGURE 5.3
Raw material inventory holding: Club members versus International counterparts (1995 to 1999)
45 40 35 30 Days 25 20 15 10 5 0 Club members (n=12) International firms (n=12)

1995 34.49 23.65

1996 39.44 25.61

1997 39.59 22.32 Year

1998 31.16 20.76

1999 26.94 18.07

Source: IRP Benchmarking Data.

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FIGURE 5.4
Work in progress levels: Club members versus International counterparts (1995 to 1999)
16 14 12 10 Days 8 6 4 2 0 Club members (n=12) International firms (n=12)

1995 14.63 7.40

1996 14.51 6.63

1997 12.23 6.88 Year

1998 11.27 6.20

1999 8.93 5.34

Source IRP Benchmarking Data.

FIGURE 5.5
Finished goods inventory holding: Club members versus International counterparts (1995 to 1999)
20 18 16 14 12 Days 10 8 6 4 2 0 Club members (n=12) International firms (n=12) 1995 9.77 12.81 1996 12.82 12.16 1997 14.27 11.70 Year 1998 18.87 12.05 1999 16.14 11.64

Source: IRP Benchmarking Data.

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Nonetheless, Figures 5.2 to 5.5 above clearly show that club members have a supply chain problem, in that they lag their international counterparts, as it pertains to inventory performance. The operational competitiveness of club members is being constrained by poor inventory performance. E-business offers club members the possibility of closer synchronisation of the supply chain with the aim of reducing inventory and shortening cycle times. For example, real-time information networking potentially cuts inventory requirements, by reducing the need for firms to keep large stocks.

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5.5 Potential Impact Of The Internet On The Value Chain


The traditional value chain is seen in terms of a series of arms-length, valueadding links from raw materials to end-customer (see Figure 5.6). In other words, the traditional value chain consists of a sequence of activities with clearly demarcated points of input and output. This value chain model (i.e. Figure 5.6) deals with information as a supporting part of the value-adding process, and not as a source of value itself. Contrast this with the virtual value chain (i.e. Figures 5.7, 5.8 and 5.9) where the value-adding steps are performed through and with information. The Internet-enabled virtual value chain, on the other hand, is non-linear (see Figures 5.7 and 5.8). Rayport and Sviokla (1994, 1995) argue that firms today compete in both the physical world of goods (the marketplace) and the virtual world of information (the marketspace). To quote Rayport and Sviokla (1995: 83), the virtual value chain consists of a matrix of potential inputs and outputs that can be accessed and distributed through a wide variety of channels. With the virtual value chain, information can be captured in real-time at all stages of the value chain, and can be analysed electronically to improve performance at each stage of the value chain, and co-ordinate across it. In a value chain that is completely networked, the Internet connects every node in the value chain (i.e. the pull system becomes operational) (see Figure 5.7). Gereffi (2000: 2) argues that: The new digital era of globalization is characterized by an explosion in connectivity that is melting the informational glue that holds corporate value chains and global value chains together. With virtual integration, the links are no longer stand-alone, rather there is a proliferation of strategic, information-defined inter-relationships between the various players in the value chain (see Figure 5.9). Cross-enterprise virtual integration blurs the traditional boundaries and roles of the players in the value chain (see Figure 5.9). The linkages between firms tend to become fluid; interactive; pervasive; customised; spontaneous; and potentially mutually beneficial. Further, the digital, electronic links enable the firm to become more flexible and responsive to change. The virtual value chain should be seen as an integrated system (see Figure 5.8) rather than as a set of discrete though related activities (see Figure 5.6) (Rayport and Sviokla 1995: 78). Firms use the Internet to integrate the value-added chain which can extend from the supplier of raw materials to the final consumer (Figure 5.8). Figure 5.8 shows how the integrated IT systems in place provides firms with the ability to visualise their value chains from end-to-end, i.e. as an integrated whole. The firm can add real value by focusing on what it does best and then collaborating with other firms involved in the overall supply chain. The Internet

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facilitates collaboration both within and between firms by dynamically sharing information in real-time (see Figure 5.9). Figure 5.9 illustrates how the Internet enables the networked or virtual organisation to connect, dynamically in realtime, the supply and demand side of the company. The Internet creates the possibility for firms to communicate, transact and collaborate with enhanced flexibility, and at a lower cost. The firm focuses on its distinctive capabilities, and then forms strategic alliances with other firms in the overall value chain. According to Brown (1996: 251): Part of the reason for stronger buyer-supplier relationships has been the increasing concentration of the firm on what it does best, rather than being responsible for all activities in the supply chain. Increased dependence upon suppliers thus becomes a requirement of the firm, and has a major impact on the buyer-supplier relationship. For example, in the automotive industry, the buyer-supplier relationship which has traditionally been adversarial is now moving towards a closer collaborative relationship, as a defence against the complexity and uncertainty of markets (see Section 2.1).

FIGURE 5.6: A Simple Physical Value Chain

Design

Production Raw Materials, Inbound Logistics, Transforming Inputs, Packaging, etc.

Outbound Logistics, Marketing, & Sales

Consumption & Recycling

Physical Value-Adding Stages

Linear rather than Interactive

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FIGURE 5.7: A Simple Internet-Enabled Value Chain


The Internetworked Business: Virtual Integration Through Internet Connectivity

Design

Production Raw Materials, Inbound Logistics, Transforming Inputs, Packaging, etc.

Outbound Logistics, Marketing, & Sales

Consumption & Recycling

Seamless, Digital Information Flow Through an Ever-Changing Open Network

Flexible, Interactive Links ~ The Internet is Blurring the Boundaries in the Value Chain

FIGURE 5.8: An Integrated Value Chain


Overlap indicates flexible, responsive digital links between the value-adding stages

Raw Materials

End Consumer

Web-based IT Integration of the upstream and downstream businesses

High-Capacity Networking Capabilities

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FIGURE 5.9: A Virtual Value Chain


Virtual Integration: Seamless, Internet-Enabled Information Flows

Business-to-Business (B2B) Supply Chain Links

Business-to-Employee (B2E) Information Links

Business-to-Customer (B2C) Communication Links

Supply chain management E-procurement Stock management Integrated forecasting Quality systems management Extension of a firms Intranet to suppliers (i.e. deployment of an Extranet)53 Etc.

Deployment of an Intranet (i.e. a network internal to the firm that uses the transmission control protocol/Internet protocol [TCP/IP]) which streamline the firms internal business functions, and connects workstations (including remote employees) Web-based Internal business processes Internet-connected frontoffice systems and processes Internet-connected backoffice systems and processes Cross-functional orientation Etc.

E-commerce (i.e. e-sales) Customer service Customer relationship management Interactive marketing Demand forecasting Orders management Extension of a firms Intranet to customers (i.e. deployment of an Extranet) Etc.

The Diffusion of Information Within the Firm ~ Intra-Firm Collaboration (Intranet) Suppliers Inter-Firm Collaboration and Networking Virtual Extended Enterprise (Extranet) Customers

53

Internet-based networks for use by a company and its business partners.

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5.6 The South African Context


South Africas automotive component industry has had to struggle to survive since it lost the protection of the previous regimes local content tariff barriers. The new internationally competitive business environment of trade liberalisation and globalisation has had a profound impact on the domestic automotive industry. In addition, the South African automotive industry has been hugely influenced by the profound changes taking place in the global OEM and OES market (see Section 2). This is due largely to the rapid reintegration of the industry into the world automotive arena after a lengthy period of trade isolation and government protection. Discussions with key informants crystallised around the need for value chain participants to adjust their IT plans to align them with each other. The industry experts expectations for the future are that supply chain integration will become even more important in South Africa. They see e-business as the leading-edge of a trend that will rapidly diffuse through the South African automotive industry. The key informants emphasised the need for the automotive sector to commit itself to e-business and to build strong relationships with their trading partners based on state-of-the-art IT links. They believed that the informational mode of assembler-supplier relationships will confer a substantial competitive advantage to the South African automotive industry. The potential of the Internet to streamline supply chains, open new revenue streams, process orders more effectively, increase efficiencies and improve stock management was also mentioned. The onus is on the OEMs and component manufacturers to acquaint themselves with the expertise; procedures; processes and systems of their focal suppliers in order to improve communication; reduce errors; reduce concept-tocustomer development time; and understand capabilities (see Section 2.1). Some component manufacturers are adopting a strategy of partnering with overseas leading-edge technology providers in order to compete for contracts. Also, many South African component manufacturers are now actively seeking international markets for their products. The repositioning of the component manufacturers has been encouraged in no small degree by the governments import rebate credit facility. This development underscores the importance of establishing reliable, scalable and secure domestic and international digital communication links. E-business has descended on the business world with a flurry of buzzwords and hype, but with little demonstrable action in the South African automotive industry. To reiterate, e-business in the automotive sector is being driven largely by three of the worlds largest automakers, viz. Ford, General Motors and DaimlerChrysler. It is these companies which have taken the lead in adopting innovative applications of network-based IT which are at the cutting-edge of ebusiness. Although, the South African automotive sector is at a higher stage of e-business development than many other sectors (such as furniture, textiles,

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etc.), it still has a long way to go before it catches up with the North American (i.e. Ford and GM) and German (i.e. DaimlerChrysler) automakers who are global e-business leaders with high levels of IT penetration. South African company directors are only beginning to realise the significance of e-business. Many still have a shallow understanding of the Internet phenomenon. The automotive industry in South Africa has greeted the ebusiness revolution with muted enthusiasm rather than apprehension. But once the major vehicle assemblers implement a cohesive, coherent e-business regime, a ripple effect is likely to take place down the value stream. The number and variety of revenue projections for inter-business e-commerce are overwhelming. B2B e-commerce forecasting is done, for the most part, by market research firms who tend to use divergent definitions (of e-commerce) and methodologies. For illustrative purposes, we will quote one reliable source. The research firm, Acuity Media Africa reports that B2B trading in South Africa has increased from a diffident R15 million in 1997 to R207 million in 1998, and a substantial R3.9 billion in 1999 (Business Day, 19 October 2000). This figure, however, applies to all industries in South Africa, not just the automotive industry. But, it nevertheless, flags the growing significance of B2B e-commerce in South Africa, and potentially the automotive industry. In line with global trends (see Sections 2.3 and 2.4), B2B e-commerce procurement hubs have been planned or are in operation in South Africa. For example, Andersen Consulting and Impress Software are planning an automotive e-marketplace to provide a common trading and communication platform for the South African automotive industry (www.cartoday.com). Moreover, SparesNet.com, a South African venture is already trading on the Internet. Also there has recently been a move towards e-commerce on the retail side, for example, the McCarthy dealership is already trading on the Internet. The emarketplaces share one basic aim: to create an integrated supply chain for the automotive industry. The question that arises is: Has e-business achieved a critical mass in the South African automotive industry, or is it still in its formative phase? Furthermore, has the pace of change been more incremental and cautious or has it been meteoric? The answers to these questions are revealed in the survey findings presented in full in Section 11 of this report, and the key findings, of which, are summarised in Section 6 below.

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6. Summary Of Key Findings


In this section of the report the key findings of the e-business survey are summarised. The intention here is not to overwhelm the reader with a long empirical section, but rather to enable the reader to grasp the important issues in a succinct manner. Section 11 of this report provides an unabridged version of the empirical aspects of the study for the benefit of the reader who wants to delve deeper into the research findings. A substantial 66.7% of club members have some sort of e-business strategy in place. This is quite high considering the newness of the technology in the developing world. It appears, however, that most of the enterprises are not yet able to fully and coherently define their tactical and strategic e-business needs and objectives. This largely underscores the majority of club members confusion about e-business and its relevance to business strategy. Only 33.3% of club members explicitly reported e-business technology goals. Most of the club members had no concrete plans to adopt e-business-enabled supply chain management in their enterprises, although supply chain issues were implicitly articulated in some cases. There was no mention, for instance, of establishing an integrated web-based IT architecture to integrate front and back office systems for the purpose of optimising supply chains. Many club members are still using the first wave of e-business technologies 54, such as Electronic Data Interchange (EDI) (73.3%), Material Requirements Planning (MRP) (66.7%), and Manufacturing Resource Planning (MRPII) (40%); all of which have reached an inflection point. The new generation of corporate IT applications, viz . E-Commerce (0%), Customer Relationship Management (CRM) (6.7%), and Supply Chain Management (SCM) (13.3%) have not made a big impact on club members. Only 13.3% of club members are presently using Enterprise Application Integration (EAI) tools, and none of them are currently using, or even plan to use, eXtensible mark-up language (XML) 55 to integrate IT applications across and between value chains. Although all club member have access to the Internet, none of them where using the Internet for supply chain integration. The fact that club members connect with the Internet, however, does not imply that Internet use is extensive. Also, the number of employees within the firms who have access to the Internet is quite small. Only, three firms are currently using an Intranet, and one club member reported that it has an Extranet in place. None of the firms have adopted e-commerce applications, viz. Internet application development tools,

54 55

See the glossary of IT terms in Box 3, Section 11.3. XML is an open Internet protocol and coding standard enabling documents and data to be served, received and posted over the Internet.

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supplier-facing platforms, portals, trading exchanges, customer-facing platforms and commerce servers. Most of the club members are at the stage of basic online brochureware. Companies have developed static information on a website, with minimal ability for any interaction beyond email, company background, and in a limited number of cases, the placing of orders. It would appear as if too much emphasis is being placed on establishing a web presence and too little stress is placed on ensuring that the IT infrastructure is able to support online procurement, trading, marketing and customer sales. None of the club members have a fully integrated ebusiness where the customer-facing front-end of its website is effectively integrated with back-end systems linked to key suppliers and third parties. Internet use is confined mainly for marketing and lead generation rather than for business transactions. Respondents cited inadequate systems integration and the lack of standards for sharing B2B e-commerce data as the main barriers to automated order entry. Club members make use of e-business tools principally for communication (100%); order processing (86.7%); design (80%); engineering and technical (80%); inventory management (80%); production (80%); logistics (73.3%); marketing (60%); and sales (60%). Limited use of e-business technology was also reported for procurement (46.7%); application integration (40%); services and support (40%); management of distribution channels (33.3%); and research (33.3%). Club members identified globalisation (73.3%); customer requirements (73.3%); closer integration with suppliers (73.3%); business flexibility (53.3%); agility (53.4%); increased competitiveness (66.7%); connectivity (66.7%); and other (86.7%) as being the key drivers impelling firms in the automotive sector to adopt e-business technologies. The other key drivers include: links with overseas technology partners; joint ventures; closer integration with customers; market expansion; customer retention; improved efficiencies; customer information exchange; supplier information exchange; fostering innovation; accelerated speed to market; increasing market share; and an accentuated need to streamline business processes. Furthermore, a number of second-gear drivers were also mentioned by the respondents, viz. spread of the Internet (46.7%); standards (40%); trade liberalisation (33.3%); and consolidation in the automotive industry (20%). The perception data yielded mixed responses as far as the club members commitment to e-business is concerned. The main reason for this is that a large percentage of club members understanding of e-business is still somewhat fuzzy. A significant 80% of club members believed they will become more dependent on e-business in the next few years. Further, 66.6% of club members felt that building Internet capacity is a high priority for their companies. Yet, only 33.3% of club members believe that companies in the automotive sector who shun e-business are likely to lose market share. Only 46.7% of respondents

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believe that e-corporations constitute a strong competitive threat to their own companies if they do not become e-business literate themselves. The majority of club members (66.7%) recognise the risk of intermediaries in B2B trade, and of online procurement networks, to their companies, if they do not possess the requisite Internet savvy. It appears as if a significant proportion of club members (60%) do not fully understand the subtle distinction between e-business and ecommerce. Moreover, only 46.7% of club members understood that e-business is not primarily about technology investment. The vast majority of club members (80%), though, were able to grasp a fundamental feature of e-business, namely that it is primarily about collaboration and partnership between different stakeholders. Club members claimed that the new IT has changed the way in which their enterprises transact business, especially in the following ways: the capacity and speed of electronic digital communication; reliance on back-office software; the growth of network computing; computer-aided design; Internet use for information purposes; resource planning and releasing demand forecasts; greater connectivity to customers and suppliers; shift towards process-based manufacture and pull production; logistics; online procurement and sales; supply chain synchronisation; and customer requirements. Only 33.3% of club members currently use e-business technology for supply chain functions. Most club members (93.3%) suppliers do not have access to real-time information of club members sales and stock levels. The vast majority of club members internal operations are not electronically integrated with that of their business partners (86.7%), suppliers (86.7%) or customers (80%). Only 20% of club members possess the e-business capacity to access their suppliers production capacity, available inventory, lead times and delivery flexibility. A third of club members are still not using electronic technologies and infrastructure to connect their internal operations and processes through automation. The majority of respondents stated that their internal operating systems [i.e. purchasing (86.7%); design (86.7%); production (86.7%); marketing (80%); and logistics (80%)] are either not integrated or are marginally integrated with external electronic networks. Only 26.7% of club members claimed to put pressure on their suppliers to make use of electronic communication links, particularly EDI. Further, the majority of club members (80%) are not yet using e-business tools for online purchasing, although 46.7% of respondents claimed that they engage in some form of online B2B selling. Only 6.7% of club members are involved in B2C selling. The little B2B e-commerce which is taking place is occurring primarily through EDI-type networks, rather than through Internet-based systems. Only 40% of club members outsource non-core functions to small/micro firms and emerging black contractors. None of the club members, however, consider the e-business capacity of small companies when they award outsourcing contracts. This relates to the fact that only peripheral activities are outsourced.

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Also the chances of small and micro enterprises actually being web-based and engaging in B2B e-commerce are pretty low, more so, considering that the large firms who are at the apex of the value chain are themselves only beginning to become aware of the potential of e-business. Most of the club members (66.7%) claimed to be aware of Internet-based trading networks in the automotive industry. Only 46.7% of club members are currently linked to one or more Internet-based procurement platforms. Club members expect that the biggest benefits of digital automotive parts exchanges are likely to be: speedy transactions (66.7%); procurement cost savings (60%); the setting of standards (60%); value chain integration (46.7%); and quality improvements (46.7%). According to club members, the main drawbacks of an online trading hub are likely to be: a rationalisation of the supplier base (73.3%), monopoly (66.7%) and privacy concerns (66.7%). For electronic marketplaces to succeed in the automotive industry, 93.3% of club members claimed that openness, transparency and trust must be the hallmarks of a successful procurement platform. For club members, the major benefits of adopting e-business tools for their companies include: reducing the cost of information (80%); other (80%); the shortening of inventory control (73.3%); order-ship-bill cycles (53.4%); supplier information exchange (46.7%); improvement in competitive position (46.7%); penetrating international markets (46.6%); and increasing market access (46.6%). The other benefits includes: lower costs; greater value; speed combined with flexibility; and improved decision making and execution. Club members mentioned a number of obstacles to e-business transformation. The main blockers are: low use of e-business by customers and suppliers (86.7%); more pressing corporate priorities (66.7%); security concerns (60%); lack of accepted standards (53.3%); lack of e-business skills (53.3%); senior executives who do not support IT (53.3%); and uncertainty over the returns which e-business will deliver (53.3%). Club members are currently extracting the most value from e-business tools in the following areas: design (73.3%); operations and logistics (66.7%); managing customer relationships (60%); and production systems (53.4%). Supply chain issues like outsourcing (33.4%), collaboration and partnerships (26.6%), interaction with suppliers (20%), and value chain integration (20%) have not recorded high degrees of positive impact. This is mainly because firms are not using e-business tools for supply chain applications. Only 33.4% of club members consider the adoption of e-business in their companies as a success. A substantial 60% of club members experienced a mixed outcome, the implementation of e-business in their enterprises can only be described as partially successful. While this is an interesting observation, we cannot read too much into it, considering the incipient and incomplete nature of

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e-business adoption in the two clubs. Moreover, it is only over time that more meaningful assessments of the success of e-business can be made, using appropriate, and precise measurement techniques.

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7. Conclusions
This report has focused on the emergence of e-business in the automotive industry, the promise it contains, and some of the challenges it poses. With all the current focus on the Internet in the popular press and academic publications, it is sometimes easy to forget that e-business is still in its infancy. Business media headlines, for instance, seem to suggest that the entire global automotive industry is rushing headlong for e-business technologies, especially the Internet to reinvent their corporations. However, it is important to keep in mind that despite how quickly e-business has changed the North American automotive industry landscape, it is still a new paradigm in developing countries, and indeed even in most highly industrialised countries. 56 It seems as if the Internet is not yet a strategic priority among club members. There does not appear to be a sense of urgency to apply the Internet to their businesses. This is symptomatic of club members general lack of awareness of Internet-based business opportunities and, by implication, the creation of economic value in the Internet Economy. In other words, most club members do not yet have a clear understanding of the contribution that the new IT might bring to the firm, and how it might support the firm in the market. Such complacency can be highly perilous, especially since business history is replete with examples of companies that failed to transform their businesses in the light of a technological revolution (see Thurow 1999). The Internet has been hailed as a cornerstone of the ICT revolution, and is expected to redefine supply chain management. It has frequently been argued that the Internet forms the backbone of e-business infrastructure to access, analyse, report and share information in a complete web-enabled environment. But this is an ideal-type situation, at best a long-term view in a developing country like South Africa. It was, therefore, not surprising to find that none of the club members are operating a fully web-based architecture which is hooked into a common information system. It may well be argued that there are probably very few, if any, developing country manufacturing companies which are fully Internet-aligned la Dell Computer. The Internet is currently being used primarily for marketing, email and information searches, rather than for transacting business between enterprises. We expect this situation to change over the next few years as the Internet begins to take root in the IT consciousness of the firm, and as the lead firms in the value chain begin to set e-business standards. Club members are primarily using their websites as online brochures. The Internet is not being used to sell products, provide customer support or reduce operating costs. As a result, club members may be missing potentially important Internet-related opportunities for expanding market access, cutting costs, increasing productivity, and strengthening relationships with customers, suppliers
56

On the latter see Goldstein and OConnor (2000).

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and business partners. By not making the transition to Internet-based business, club members may be placing themselves at risk of becoming less competitive in the globally interconnected market, impacting on both their current market positions and long-term viability. Moreover, as automotive MNCs integrate the Internet into their cross-border business operations, club members run the risk of being excluded from global supply chains if they are unable to establish electronic ties with the major players. In the strict sense of the term, therefore, none of the club members in their present incarnation can be described as virtual e-corporations. They are in the process of transforming their businesses, i.e. they are currently in a transitional phase. But this is taking place from quite a low IT base. Therefore, the complex transformation process of creating a completely web-based, integrated IT system is going to take a fairly long period of time; it is going to be incremental rather than supersonic; and it is likely to be a long learning curve for the firms in question. In sum, e-business technology has been slow to get going in the South African automotive industry, but once it reaches a critical mass the technology is likely to spread faster. B2B e-commerce has not yet taken off in the Eastern Cape and KZN Benchmarking Clubs. This is problematical because B2B e-commerce in the automotive industry will vastly outstrip B2C e-commerce both in terms of volume of business and the number of firms affected. Presently, club members are still discovering how to do online procurement, logistics and administrative processes between firms, and how to deal electronically with their customers and suppliers. This is likely to be a complex and disruptive process, much harder than IT proselytisers would have us believe. Besides, it will take time for club members to transform their internal and external structures to take full advantage of the potential opened up by the Internet. The fairly low percentages of e-trade suggest that B2B and B2C e-commerce are a nascent market in the South African automotive industry. This is not altogether surprising when one considers that only a third of American manufacturing firms are using the Internet for procurement or sales; despite the fact that the US has invested more, and earlier, in the new IT than the other highly industrialised economies (The Economist , 23-29 September 2000). A major reason for the slow start in B2B trade is that club members need to have a robust and customised IT infrastructure in place before they can engage fully in B2B trade. As already mentioned in other sections of the report, club members are still developing integrated working IT systems. Finally, the spread of Internet connectivity, which is a key driver of e-commerce internationally, does not appear to be a prime driver of e-business in the Benchmarking Clubs. It would appear that club members are reluctant to grant their customers, suppliers and business partners full access to their databases and to the inner workings of the firm. This reluctance to allow trading partners inside the

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corporate machine stems from the firms fear that its weaknesses will be exposed, and it also suggests a lack of a certain amount of trust between the trading partners. The net effect of which is that virtual collaboration and a vision of shared destiny between the trading partners are blocked. We argue that e-business capacity is rapidly becoming a necessary condition for connecting to demanding international markets, particularly OECD; participating in B2B e-commerce and global trade networks; and upgrading in global value chains. Club members who do not invest in e-business may face the likelihood of not being able to compete against world-class firms. 57 In other words, ebusiness is not a matter of choice, rather it is increasingly becoming a primary competitive differentiator. This is mainly because ICTs enhance the drive for competitive advantage in the new economy. How rapidly and effectively Eastern Cape and KZN automotive firms embrace the new IT will affect their viability in the global economy. E-business competence signals to potential customers that the automotive firm in question possesses a certain level of IT and commercial sophistication. Thus differentiating the e-corporation from competitors who are not as Internet savvy. In other words, the e-corporation gains a competitive edge over its rivals who are not as adept in e-business, when linking into B2B supply chains. E-business offers club members a choice between the high road to informational productivity or the low road to economic competitiveness through price competition and tight margins.58 In the New Economy, value migrates (or accretes) to the things that are not commoditised, such as relationships with customers and suppliers, and the ability to aggregate customers across the globe the very issues that are central to e-business and supply chain management. The upshot is clear: value-added is dominated by information manipulation. In other words, comparative advantage lies with the application and control of knowledge rather than on cost advantage. We have already noted that e-business has the potential to make the company more responsive, more efficient and more competitive throughout all areas, from purchasing to sales. E-corporations forge alliances not only to bridge capabilities and geographic gaps, but also to create new value and outsource uncompetitive services. How automotive component manufacturers and vehicle assemblers use the new IT will increasingly separate the winners from the losers, i.e. a digital divide is likely to emerge between companies. The divide may possibly take the form of a continuum (rather than a dichotomy), in which enterprises may fall somewhere between two extreme points, viz . Techno-elites or Neo-Luddites. The companies that make the IT adjustment to effectively and imaginatively deliver an integrated architecture that will support dynamic-data sharing among diverse software applications and among trading partners world-wide, stand to
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Of course, investment in e-business will not, in and of itself, guarantee competitiveness. There is still the question of mastering the skills, Internet-based business models, organisational changes, etc. 58 In development parlance, the latter trajectory is likely to lead to a race to the bottom.

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emerge at the forefront in the Networked Economy. On this issue, firms would do well to follow King Canute 59 in recognising the futility of trying to resist the tide, and instead seek out ways to harness e-business to their advantage. While it is true that several of the automotive component manufacturers surveyed can be described as IT laggards, most firms appear to be clustered in the intermediate stage of IT development. At present, there is no one firm which can be described as a true IT leader. Nor is there any significant difference in ebusiness capacity between the two Benchmarking Clubs, and between the OEMs and the component manufacturers. Until sufficient numbers of their main customers and suppliers participate in e-business initiatives, there is little incentive for individual firms to become engaged in e-business themselves. 60 This notwithstanding, we believe that the catalyst to ignite B2B e-business in the South African automotive industry will come as the assemblers and the 1st tier suppliers take the lead in implementing IT systems that their suppliers will have to integrate with in order to trade. Another factor that could possibly increase the uptake of e-business is that of a defensive reaction by club members to competitors who are successfully exploiting the benefits of e-business, especially the potential for value creation and cost control. Issues like connectivity, inclusivity and synergy do not appear to be defining features of electronic communication among club members. This is because the interoperability of e-business applications and their extensibility to other IT devices, applications and technology is not assured. Tight integration required to make better decisions faster, and to efficiently and effectively close the loop and execute across the extended enterprise, is lacking. There appears to be a tension in the mindset of the firm. On the one hand management espouses aspirations of an outwardly-oriented globally competitive enterprise, influenced in no small part by the governments Motor Industry Development Programme (MIDP). Yet, paradoxically, firms IT ethos tends to be insular. The latter result is a cause for concern. Clearly, club members have not paid enough attention to IT trends and may be overlooking a significant element of business performance. To reiterate, e-business is about collaboration and partnership, something which the Eastern Cape and KZN Benchmarking Clubs are innately concerned with. However, the empirical evidence clearly reveals that club members have not yet formed electronic communities to:


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Integrate both internal and external business processes. Streamline and optimise their supply chains. Automate procurement through the Internet.

Danish king of England, 1017-35, who demonstrated to fawning courtiers his inability to stop the rising tide. Thus demonstrating the limited powers of human beings, even if they be kings. 60 Achieving a return on e-business investment in a small market with a limited number of online customers and suppliers is difficult.

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Seamlessly integrate their partners, suppliers and customers into their online operations. As a result, they are unable to capture, analyse and exchange real-time information with the different stakeholders in order to make better, more informed business decisions.

The long-term growth and prosperity of the South African automotive industry is inextricably linked to its ability to first gain entrance into, and then consolidate its presence in, global supply chains. E-business competence is increasingly becoming a prerequisite for membership of international supply chains. International companies are unlikely to source from South African companies who are not e-business literate, unless such companies can offer other significant cost advantages to balance out the cost reductions that come from ebusiness. This is highly unlikely because the pressure on prices is already quite severe, and any more tight squeezes, we believe, can seriously harm the growth trajectory of the South African automotive industry. E-business is becoming increasingly important for developing country companies, including South African firms. It is likely to be the new locus of value creation in the information-defined arena of the global economy. Moreover, ebusiness influences how economic value is created and extracted in the Information Economy. Given the rapid pace of technological change and the advantages of being an early market participant, developing country firms that defer e-business investments will find themselves far behind the market leaders. As Kaplan (1986: 92) warns with a lesson from business history: The companies that in the mid-1970s invested in automatic and electronically controlled machine tools were well positioned to exploit the microprocessorbased revolution in capabilities much higher performance at much lower cost that hit during the early 1980s. Because operators, maintenance personnel, and process engineers were already comfortable with electronic technology, it was relatively simple to retrofit existing machines with powerful microelectronics. Companies that had earlier deferred investment in electronically controlled machines fell behind: they had acquired no option on these new process technologies. Many developing country companies, including South African, are currently striving to raise their international competitiveness; connect and deepen their links to global markets and trade networks; upgrade their position within global, national, and local value chains ; restructure their operations in order to become world-class manufacturers; progressively capture and harness upstream, high value-added activities; and to chart a more knowledge-intensive industrial development trajectory. All this is happening in the midst of an ICT revolution propelled by digital processing. It seems as if Third World companies will need to strategically adopt and integrate those aspects of the new IT into their firms, which are increasingly becoming necessary to compete successfully in todays global economy.

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ICTs are enhancing the drive towards globalisation, and are polarising the business world into those companies which are tightly connected, and those on the periphery of the global economy which are either not connected or are loosely connected essentially a form of technological apartheid is beginning to take shape. Although the financial costs of joining the global information economy are likely to be high, the economic costs of not joining are likely to be much greater. The new Internet-based IT represents a major opportunity for developing country companies that can access and use it effectively, and a threat to those companies that cannot.

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8. Recommendations
During the period of the IDRC funded e-business survey in the Eastern Cape and KZN, we found that most Benchmarking Club members were in the initial phase of reconfiguring and upgrading their IT infrastructure to prepare the foundation on which to build an e-corporation. Throwing money at IT, however, just for the sake of e-business is deeply problematical. It is essential, therefore, that club members have a thorough understanding of the new Internet-based IT, especially how it can be used in supply chain integration; for upgrading within global, national and local value chains; for pursuing value-added activities; and looking for and exploiting value shifts in the market. Club members also need to ensure that they have the support skills and capabilities necessary for using the new IT. Extensive international experience has shown that new organisational techniques and changes in the firms relationship within its productive chain (i.e. with both customers and suppliers) are a necessary precursor to the productive utilisation of IT in the automotive industry (see Hoffman and Kaplinsky 1988; and Womack et al. 1990). Furthermore, club members should be particularly cautious about IT suppliers who proselytise about the new IT, without necessarily being experts in its application. Otherwise, IT will merely be an expensive excursion up a blind alley. Building local B2B trading communities that will allow South African automotive enterprises to transact online with their local suppliers and customers appears to be a priority. There is a need to establish a common trading standard, so that suppliers do not have to build many interfaces. For example, club members will need to define common standards for information like point-of-sale and inventory data so that each company can interpret the others material. If, however, at any place in the supply chain there is a collapse or break in the electronic interface, then the potential advantages of e-business (see Section 5.3) are dissolved. This is why the building of robust electronic trading communities in South Africa is crucial. A regulated telecommunications environment, such as South Africas, is a blocker to e-business success. For example, the monthly rates for a 64K leased line in South Africa is ten times the cost of the US (Business Report , 28 November 2000). Further, Telkoms public telecommunication networks are based largely on the traditional circuit-switched and time-division multiplexing technologies, designed primarily to carry voice rather than rich multimedia content. Further, South Africa does not have the high-speed cable and ADSL (Asymmetrical Digital Subscriber Line) networks of the US. Telkom will need to make significant investments in optical technology such as dense, wave-division multiplexing in order to increase its bandwidth and network speed. Otherwise, the growth of ebusiness in South Africa is likely to be impeded. Club members, in turn, will need to upgrade to wireless local area network (LAN) technologies. This is imperative

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since sales via e-commerce transactions will gain momentum over the next 2-3 years, fuelled by the adoption of the wireless application protocol (WAP)61 standard as a global specification. The public Internet does not always provide the reliability needed for businesses to run mission-critical applications. Many Internet Service Providers (ISPs) oversubscribe their facilities, making for unpredictable throughput. Transmission delays are often caused by sub-optimal routing, and end-to-end traffic delivery is subject to each intervening providers best-effort approach. The reliability of ISPs is also variable in South Africa. Moreover, local calls are not free. In addition, the network architecture is susceptible to rapid changes beyond the control of the automotive industry. Furthermore, network congestion tends to have a negative cascading effect. Three caveats are, however, necessary here:

Firstly , transmission capacity and user connection speed will continue to increase as telecommunications operators build out broadband networks using the latest optical fibre technology, fuelled in no small part by greater competition and deregulation in the industry; Secondly , much of the bandwidth restrictions confronting firms today can be overcome through use of broadband satellite communication; and Thirdly , as bandwidth expands, costs will fall.

Club members need to take cognisance of developments to create low-cost, high-bandwidth and low-latency connections, as they are likely to resolve present Internet difficulties. While Internet-enabled supply chain management is still in its early stage of development in the Eastern Cape and KZN automotive industry, it could well serve as a catalyst for change, enabling firms to build stronger links with their suppliers and customers. The ideal would be to see club members combine ebusiness technology with advanced supply chain integration to maximise both profitability and customer satisfaction. However, internal process efficiency and effectiveness is a necessary first step before club members can use e-business tools to leverage a broad base of collaborative supply chain opportunities. Suffice to say that the vision of an integrated virtual e-business in the Eastern Cape and KZN automotive industry is a long way off. The convergence between back office and front office systems, all the way through to the Internet, is integral to e-business. The ultimate aim is to produce an integrated supply chain that is electronically connected, and can respond rapidly to changes in customer demand. It will enable club members to move beyond current static relationships with trading partners. In this way, club members can move from reactive
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WAP is the XML-based specification that enables Internet access over mobile devices.

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asynchronous interactions to a more collaborative relationship. Each firm in the supply chain should receive customer demand forecasts electronically, and they need to use collaboration functionality to either accept or challenge these forecasts. The trade-off in e-business depends upon the degree of functional integration between dispersed business activities. Companies business plans must aim to extend automation along the supply chain, and integrate existing systems in a manner that avoids duplicate function and maintains usability, performance and reliability. For this, club members will need an integrated infrastructure to support their business applications. Since only an integrated IT application suite can deliver on the e-business strategy. According to Larry Ellison, the Chairman of Oracle, ERP focuses on automating processes, not on getting information to key decision-makers (The Economist , 26 June 1999). Simply implementing the ERP application is no guarantee of improving the bottom line through more efficient supply chains. Club members should, therefore, make increasing use of Web-based applications that complement their ERP and MRPII systems, and improve the productivity of the overall system. The need to be pervasive, to be part of an e-business ecosystem, rather than trading in linear fixed-supply chains, is forcing ERP and MRPII, as the core internal business platforms, to look outwards. Hence, it is imperative that ERP and MRPII be extended into Web-enabled customer relationship management and supply chain management. The ideal situation is when a companys IT infrastructure supports all aspects of the extended electronic enterprise, enabling the company to inter-operate and collaborate with any number of business partners (see Figure 5.9). None of the firms have adopted e-commerce applications , viz. Internet application development tools, supplier-facing platforms, portals, trading exchanges, customer-facing platforms and commerce servers. The model for e-business is a hybrid structure. Companies, therefore, need to adopt Internet-based applications that integrate the functions of, for example, CRM, SCM and E-Commerce, to get a panoptic view of their business right across the supply chain. Ideally, the new applications, such as E-Commerce, should form part of a common, centralised, Internet-enabled architecture. Club members also need to reach back through the supply chain to their suppliers and their suppliers own suppliers in order to ascertain whether procurement lead times will allow a customer order or demand forecast to be met by the required date. This is based on what is on hand, current demand already committed, what is already in transit, and what can be manufactured or purchased. For this a firm needs customer-facing and supplier-facing Internet platforms to leverage trading exchanges.

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All things considered, the new network-based IT offers South African automotive companies the potential means for unlocking their full economic potential and for re-organising their businesses, from the online procurement of inputs to more decentralisation and outsourcing. We, therefore, recommend that club members circumspectly embrace e-business opportunities in their strategies and corporate direction. Club members need to pay serious attention to the alignment of IT and business strategy to leverage the capabilities of IT that can potentially transform their business. This is important as club members strive for competitive advantage in a highly pressurised, diverse and changing marketplace. There is, however, no blueprint or silver bullet that club members can take to be ready for e-business. They need, however, to go beyond the traditional view of just looking at their own corporate capabilities; and understand that their growth and profitability will increase by managing and improving the end-to-end process that delivers products to the customers. There are two critical success factors of e-business, centred around the networking of internal and external business interactions, which club members will need to seize and rapidly exploit in order to be globally competitive. Firstly, collaboration functionality between the enterprise and outwardly focused portals in order to strengthen the bonds between an enterprise and members of its extended value chain is crucial. Apart from enhancing inter-enterprise electronic communication, club members will also need to focus on their intra-organisational process capabilities to promote connectivity of the internal business processes in order to tie transactional flows together within the organisation. 62 The breaking of intraenterprise information barriers is a prerequisite for fostering knowledge-sharing and the leveraging of expertise across the organization. To reiterate, we recommend that club members improve the functionality of the companys information and communication infrastructure, to create an efficient, flexible platform for doing business with outside firms. Club members will need to expand and deepen the reach of their companys internal and external sharedindustry IT platform. Tight linkages between organisational and interorganisational systems will, therefore, need to be promoted. E-business cannot be justified on faith alone, it will be by results that it will be finally judged by (i.e. what it actually achieves, rather than what it might do). Undoubtedly, some of the defining characteristics of the Internet era have still to emerge and develop. This will take years to play out. For example, in the 1980s the US automotive industry wasted many billions of dollars chasing illusory gains from Computer-Integrated Manufacturing (CIM) (Raphie Kaplinsky, personal communication). 63 This sobering lesson from business history reminds us of the
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These two critical success factors are interdependent components, and are pivotal to successful integrated decision processing. 63 To be fair, although CIM was a radical new process technology when it was introduced in the 1980s, it does not match the profound transformative potential on the structures and strategies of international business that the Internet-based IT promises. The power and prospects of the new digital era of globalisation is well documented in Cohen et al. (2000).

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dangers of fetishising the technology itself, what Bessant (1993) calls technophilia. In other words, club members must look critically at the actual benefits (both tangible and intangible) to be derived from e-business for their company and for the value chain itself, and not accept at face value what the proponents of e-business tell them. After all, it is easy to be seduced by the dazzling range of IT options available on the market. The Internet is not in itself a panacea or a quick-fix solution for all supply chain difficulties, rather the idea is to use the technology to enable workers to solve problems. For example, the Internet cannot possibly compensate for poor production/operations performance. Thus, there is still a place for a good measure of old-fashioned, face-to-face human contact.

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9. Some Policy Implications For Government


The hype surrounding e-business needs to be tempered by the reality that a large percentage of South African firms have yet to access the Internet for integrating their internal business systems, and for inter-firm value chain interactions. Nonetheless, the emergence of the Internet-based economy opens up a broad range of difficult and uncertain policy issues which demand attention. It is important to stress, though, that the Internet is evolving, and the present Internet may well become a different set of technologies, standards and protocols in the future. Further, we need to accept that while the Internet has made significant progress in business, it remains an infant technology. The setting of policy is risky and particularly vexing when one is dealing with a dynamic phenomenon that is evolving and changing rapidly. This underscores the need, therefore, for policies to be crafted very cautiously, and very circumspectly. The policy agenda for government is briefly discussed below, with the caveat that given the dynamic nature of the Internet, policy issues offered at this stage can only be preliminary. In light of this, only preliminary policy issues are discussed, rather than an exhaustive portfolio of concrete policies. The Internet is expected to make a large impact on the organisation of work. Greater emphasis will be placed on flexibility and adaptability. New channels of knowledge diffusion are likely to be opened, human interactivity in the workplace will change, and workers functions and skills are likely to be redefined. Furthermore, new models for organising production and transacting business are likely to emerge, and workplaces are likely to be restructured (OECD 1999: 10). These issues represent significant policy challenges for government, and also other stakeholders such as business associations and trade unions. The policy decisions made by government and the other stakeholders are likely to have a major impact on the kind of environment in which e-business will develop. In South Africa the productivity potential of the digital economy is constrained by a lack of critical infrastructure, especially electric and telecommunications. Without the needed infrastructural investment South Africa may find itself falling behind in an increasingly networked world. The South African Government (SAG) needs to take active steps to set policies which facilitate Internet development. Expanding and upgrading the electricity grid and the telecom infrastructure should be a major government priority, especially the roll-out of broadband infrastructure. The SAG will, therefore, need to actively spur the deployment of advanced information infrastructure in the country and digital connections, such as cable modem, DSL (Digital Subscriber Line) and ISDN (Integrated Services Digital Network). Moreover, fostering a competitive market for broadband networks and services should be high on the governments agenda.

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The Department of Communication will need to ensure that its policies assure open and competitive markets, and deregulation in the telecommunications industry. Apart from stimulating effective competition in the telecoms sector, the SAG should also consider using public subsidies and tax breaks to fund the construction of high-speed Internet networks in disadvantaged areas in south Africa, where there is unlikely to be sufficient commercial demand for high-speed Internet access. This is one way of stimulating broadband access to correct for market failure, reduce the digital divide, and encourage SMEs64 to embrace the Internet. As large firms embrace e-business, SMEs are under pressure to do likewise in order to be able to do business with the larger firms. The government will therefore need to formulate policies targeted specifically at SMEs. The UK government, for instance, is already considering subsidising e-networks (www.ft.com). As e-business becomes more widespread in the South African economy, it is likely to drive changes in the labor market. Expanding Internet-usage and ebusiness will contribute to increased demand for IT workers (viz. computer scientists, engineers, programmers and systems analysts), changing skill requirements for some non-IT occupations, and raise the minimum skill requirements for many lower skilled jobs. E-business is very much part of a broader national trend that requires more skills in the work place and an improved basic education in mathematics and science. The new ICTs are already creating new occupations and redefining old ones. There is concern that e-business will result in the displacement of jobs, and perhaps even a loss of traditional (old economy) jobs. Preliminary analysis by the OECD (1999) and the US Department of Commerce (1999), for instance, do not support this concern at this stage. Observations on the impact of e-business on employment creation are, however, speculative, since e-business accounts for only a small share of total economic activity. Moreover, the potential of ebusiness is still to be fully realised. E-business underscores the need for a multi-skilled workforce committed to a lifetime of learning and retraining in order to remain flexible in rapidly changing labour markets (US Department of Commerce 1999: 37). Firms ability to function in electronic environments will depend to a large extent on the flexibility and adaptability of their workers. There is, therefore, likely to be a move away from bureaucratic work organizations to flexible cells and teams. Hence, the need for a flexible, multi-skilled work force. Skills needed to support e-business and to perform business processes online will need to be passed on to workers. Government in partnership with the private sector will, therefore, need to take a

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The developmental significance of SMEs is widely recognised in the inter-disciplinary field of development studies, and will not be explored further here..

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proactive role in designing and implementing training programmes to make workers computer and Internet literate. Initiatives designed to increase the IT skills base will, therefore, need to be introduced. This is urgently needed because there is bound to be a greater demand for IT skills (upskilling of the labour force), technically trained information professionals and technicians in the digital economy. The Department of Education, for instance, should seriously consider providing education and training to entrepreneurs and knowledge workers, expanding the pool of highly trained scientists and engineers, and generally, increasing digital literacy in the wider population, preferably starting at primary school. This can take place through schools, vocational training centres, technical colleges, technikons, universities, etc. In addition, the Department of Labour will need to carefully look at its labour market policies, as this is likely to impact on the way in which workers adjust to markets which are likely to be exposed to significant ICTinduced changes. The Department of Arts, Culture, Science and Technology (DACST) could, for example, take the lead in broadening public understanding of the evolution and growing significance of the Internet and the Information Economy. In addition, public investments in science and technology, advanced engineering, research and development is important to create the intellectual and human capital needed for the use and development of advanced ICTs. A re-examination of the Department of Trade and Industrys (DTI) policies pertaining to ICTs, commerce and trade, and its support of traditional commercial practices and procedures, is also needed. The DTI will need to elevate ebusiness to a higher position on the policy agenda, as is the case in the US and other OECD countries. The DTI will need to adopt new measures to promote the use of e-business processes within the private sector, and perhaps even within its own administrative processes as well. Policy initiatives designed, inter alia, to promote technology transfer for businesses interested in adopting Internet technology, providing small business technical support, facilitating export development and promotion (via e-commerce), and facilitating the diffusion of ebusiness best practices in the private sector, are pressing priorities. The DTI must work closely with business to maximise the potential of e-business in South Africa. The DTI will need to closely monitor developments in the electronic marketplace in order to prevent or remove barriers to full participation by South African firms, especially SMEs and emerging black firms. However, much of the DTIs supply side policies were formulated with a much different image of commerce and trade in mind. The DTI will now have to grapple with the issue of how to organise markets in the Information Economy. Achieving the efficiency gains promised by the Internet is contingent on a number of factors, including access to networked IT systems and the requisite skills, and firms integrating their operations more closely with that of their customers and

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suppliers. The latter, of course, raises policy issues concerning potentially anticompetitive effects as firms integrate their operations more closely. This is another issue which the DTI will have to closely monitor. Government also needs to make substantial investments in rule-making. The Internet economy is global. Therefore, government should ensure that compatible rules are in place which allow national electronic networks to operate as a single large global system. In other words, government assures connectivity to the interconnected global network through national rules which are in consonance with international rules such as the WTO. E-business highlights the need for a consistent regulatory environment concerning issues like tax law, commercial codes, customer protection, security, privacy, intellectual property rights, etc. This is needed to establish the conditions to enable e-business and e-commerce to reach its full economic potential in South Africa. There is a role for government to promote the development and availability of ICTs and access to advanced networks by, for example, tweaking existing telecommunications policy and through other more appropriate policy instruments (see OECD 1999: 19). The US government policy on e-commerce is guided by three principles: private sector leadership, avoidance of unnecessary restrictions, and a minimalist government role (US Department of Commerce 1999). The first and third principle are likely to be problematic in a developing country like South Africa, where the automotive industry has been slow to take up e-business, and where there is an uneven development of critical infrastructure. The second principle, however, is relevant for South Africa. And Government should avoid imposing undue restrictions on the diffusion of e-business, rather it should maximise the efficiency dividend for the economy by removing barriers in the uptake of e-business in key-sectors. Finally, from a development perspective, a prime concern for government is to focus policy geared to including potentially excluded social groups in the Internetbased information systems. Otherwise, a widening digital divide between Internet haves and have-nots is likely to be the outcome. A coherent national strategy designed to close the digital divide is warranted. Government could also take a lead role in adopting the new ICTs to increase efficiency, and to increase access to its goods and services for all South Africans. E-commerce could, for example, be used in government procurement.

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10. Future Research Agenda


Rigorous research is needed in order to get a clearer picture of the problems and the potential of e-business in the South African automotive sector. There is considerable room for original and fundamental empirical research on e-business and supply chain issues in the South African automotive industry. In this section of the report we identify a number of areas for future research. As already mentioned in the introduction, the framing of research hypotheses and questions is an important output of this pilot study. Accordingly, sets of issues for an extended study are summarised below. The following four hypotheses emerge quite clearly from this exploratory study, and will need to be rigorously investigated in an extended study, using a larger and more representative sample:

H1: Effective integration of suppliers into the supply chain is a key factor for automotive assemblers and component manufacturers to achieve the improvements necessary to become internationally competitive. H2: Running an e-business requires an integrated IT system. The convergence between back office and front office systems, all the way through to the Internet, is integral to e-business. H3: Eliminating both intra- and inter-enterprise information barriers is a prerequisite for success in the automotive industry. H4: E-business is a necessary condition for global competitiveness.

The preliminary findings of the exploratory study suggest that we need to look at impact of the Internet on value chains. Therefore, one major recommendation for further research would be to conceptualise the next phase of the e-business research explicitly in terms of the value chain paradigm. The Global Commodity Chain (GCC) theoretical construct has been put forth by the influential Duke University sociologist, Gary Gereffi, and has been elucidated at numerous international conferences and workshops 65, and in academic publications (see Reference Section below). The predictive and explanatory power of the GCC framework, we believe, will add depth and rigour to the e-business study. The pilot study was based on a small sample of firms that belong to the Eastern Cape and KwaZulu-Natal Benchmarking Clubs. For the next phase of the research, we recommend that a bigger and more representative sample be used, consisting of a cross-section of South African auto retailers; assemblers; and 1st, 2nd and 3 rd tier automotive component suppliers. This is needed in order to better
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See www.ids.ac.uk/ids/global/bella.html.

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understand the impact of e-business on the whole value chain, and not just on isolated segments. For example, does the new IT reinforce existing relationships in the value chain or does new kinds of relationships emerge? Our survey results capture and reflect the early stages of e-business adoption in the Eastern Cape and KZN Benchmarking Clubs. Detailed follow-up studies are therefore crucial to trace the evolution of e-business in this important manufacturing sector, which is a significant generator of revenue and an important source of employment in both the KZN and Eastern Cape provinces. This is vital in an upper-middle-income developing country like South Africa, where industrial employment is still considered as having the potential to raise the living standards of the poor. The aim would be to build a rich database focused on the critical success factors of e-business, which will feed directly into ongoing training programmes and establish standardised best practice. The objective is to create a database which will be annually updated. This will be tracked through questionnaires, baselines studies and trend analysis. Tracking the impact of the Internet may well require new economic measures and measurement techniques. In addition, we will need to sharpen our analytical tools. Using benchmarking methodology, a composite index of e-business capacity needs to be created. This will enable companies to plot their performance over time. Moreover, the e-business database can help companies by showing them where their weaknesses are and where improvements could be made. Thus, club members will be able to identify weaknesses and capability gaps, and prioritise initiatives. In this way, enterprises will be able to gain a realistic assessment of their e-business development through diagnostic reports. There is a dire need to establish and promote best practice standards. It is imperative that an assessment model be created which offers something previously unavailable to the Eastern Cape and KZN automotive business community: a comprehensive, yet credible way to benchmark e-business performance. Club members should be able to benchmark their position against that of their competitors.66 A framework needs to be developed to help club members structure their ongoing e-business operations in such a way that their progress can be measured against their competitors, their market and their industry but also against the companys own expectations and those with whom it does business. In sum, a yardstick will need to be created for measuring e-business development. The proposed methodology would consist of a mixture of case-study, survey and facilitated benchmarking. We also recommend an assessment of each companys structures and workstyles, not just IT practice. E-business is often only seen as a technology issue, and not as a question of leadership and adaptability. For example, an enterprise
66

Measurement, along with continual benchmarking, is fundamental to achieving best practices and return on investment.

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may have made big strides in electronic selling, without fully understanding how e-business can sharply reduce development cycles for new products, slash administrative overheads and seamlessly link people and information. More importantly, it may have a culture that resists innovation. Essentially, do the club members have the open cultures and agile structures needed for e-business to flourish? We also recommend that a gap analysis be undertaken, in which club members original expectations of their IT systems and what these systems have actually delivered are mapped out. How do the firms assess e-business performance: financial return, customer-centric metrics, etc.? Do companies have a system in place to assess the success of their e-business programmes? Do club members have any quantitative or qualitative methods to measure ebusiness performance? A recurring theme in this report is that the sharing of inter-company information is of paramount importance in the process of supply chain integration. Therefore a crucial research question that emerges from this study is: Are the 2nd and 3rd tier suppliers IT roadmap aligned with that of 1st tier component manufacturers and the OEMs? In other words, is there a move towards convergence of IT roadmaps between the different players in the value chain? E-business penetration in South Africa has been quite shallow. A key research question then is : How and when can IT be used optimally in the South African automotive industry? A certain amount of historical reflection is probably needed here, as well as reflecting on the idiosyncrasies of each company. Also, how can automotive companies translate Internet technology into economic value and, more broadly, into sustained economic growth? As a counterfactual, the following research question is important: Should the development of e-business be treated as a goal in itself? Since resources have alternative uses, researchers should compare the rate of return in e-business to those in other business activities before committing resources to IT. Research is urgently needed to rigorously assess the impact of e-business on productivity in the automotive sector, and to explore the notion that this application may lead to a sustained higher level of economic efficiency. The notion that e-business may lead to sustained systemic efficiency gains also needs to be explored. Another area for future research would be to use firmlevel data to analyse the competitive behaviour of e-business adopters on the domestic and international markets. Has e-business changed the firms competitive advantages? A case can be made for the Department of Trade and Industry (DTI) to provide support and actively encourage the automotive industry to become ecorporations. The question that policymakers need to critically interrogate is: What institutional support can the South African government provide for e-

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business initiatives to bolster the comparative advantage of South African automotive firms? A limitation of this pilot study is that the sample was too small for us to draw conclusions about the feasibility of small and micro enterprises, and emerging black businesses, becoming involved in e-commerce activities. Not enough is known about this important segment, making it a prime area for future research. In the next phase of the research, we intend selecting a larger sample of small and micro enterprises, who are engaged in sub-contracting relationships with automotive firms, in order to track their e-business development in a more thorough manner. And also to chart what possibilities the Internet holds for them in terms of leveraging market opportunities; tapping into B2B e-commerce trade; value chain upgrading; becoming more tightly linked into B2B supply chains; harnessing value-added activities; etc.

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11. Survey Findings


To reiterate, this section of the report presents and analyses the empirical data which was generated primarily through an IRP-designed questionnaire, which was administered to the IT director or an appropriate director/senior manager of each firm (see Appendix 1). This survey data is complemented, where appropriate, with information garnered from discussions with key informants in the automotive industry; automotive factory visits in both the Eastern Cape and KZN; active participation in Eastern Cape and KZN Benchmarking Club workshops; and a survey of the e-business literature, including the business press, academic publications and Internet resources. The combination of research methods was used to facilitate triangulation of the research findings. The survey findings are presented in a structured manner. In order to provide a coherent analytical framework, this section is divided into a number of subsections: viz.:

E-business strategy E-business goals IT audit Purposes for which club members use e-business tools Key e-business drivers E-business perceptions How IT has changed the way in which club members transact business How IT is used in supply chain integration Digital exchange networks Benefits of e-business technologies Impediments to the adoption of e-business tools The impact of the new IT on the firm Projections of e-business growth

The sub-sections should be seen as a heuristic device to generate preliminary observations, and to guide the reader by flagging important aspects of ebusiness as it pertains to the club members.

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Ultimately, the survey findings shed light on the research questions set forth in Section One of the report, and is repeated here for the benefit of the reader:

What are the key drivers of e-business in the South African automotive industry? How does top management in the automotive industry perceive e-business? For what purposes do automotive firms use e-business tools? What types of IT has each firm invested in? What kind of impact has e-business had on each company? What are the benefits of e-business for the enterprise? To what extent is each firm practicing e-business-enabled supply chain management? What are the barriers or obstacles to the adoption of e-business technologies in each enterprise?

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11.1 E-Business Strategy


TABLE 11.1: E-Business Strategy
RESPONSE Yes No TOTAL Frequency 10 5 67 15 Percent 66.7 33.3 100.0

Table 11.1 above shows that a substantial 66.7% of club members have some sort of e-business strategy which they intend translating into practice. This is quite high considering the newness of the technology in the developing world. These strategy documents, however, vary widely in levels of formality and sophistication. On close scrutiny, we found that five of the documents contained a broad competitive growth trajectory for the companies in question, in which IT was tacked on in an ad hoc way as a potential value-creator. Those documents which purported to be e-business vision statements were often quite shallow in their conception, 68 and not very technically and strategically coherent. In three cases, a narrow, technical view of IT was taken, rather than a wider strategic view of IT capability. While club members acknowledge the need to develop an e-business strategy, many remain confused by the hype surrounding e-commerce. E-business is the connective tissue between business goals and the IT components that enable them. E-business, therefore, necessitates a comprehensive strategy that automates a companys constellation of relationships business partners, competitors, customers, employees and suppliers into a unified value chain, all based on transmission control protocol/Internet protocol (TCP/IP) and Web applications. The objective of which is to integrate the front office and the back office operations of the firm, with the Internet as a strategic foundation. This leitmotiv did not underpin any of the firms programme statements that we had the opportunity to study. It appears that most of the firms are not yet able to fully define their tactical and strategic e-business needs and objectives. This clearly underscores the majority of club members confusion about e-business and its relevance to business

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The Eastern Cape Benchmarking Club consists of 7 members, and the KZN Benchmarking Club has 12 members. Thus making a total of 19 club members. Two club members, however, were unable to participate in the e-business survey. Moreover, Shatterprufe is one company with 2 plants in different locations in Port Elizabeth. The 2 Shatterprufe plants have the same IT infrastructure, and thus one completed questionnaire was returned for both plants. Similarly, both GAP and Guestro Forge are counted as one respondent. This is justified on the basis that both GAP and Guestro Forge are part of the Dorbyl Automotive Technologies group, have the same IT systems in place, and are run along similar lines. 68 As compared to Dell Computer, and the leading-edge global assemblers such as Ford, General Motors and Daimler-Chrysler.

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strategy. In effect, they have fallen short of the ideal-type e-business model in their corporate strategy. 69

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Dell Computers build-to-order business model is probably the closest example of an ideal-type exemplar of e-business-enabled supply chain management. For more detail see Gereffi (2000: 9) and Magretta (1998).

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11.2 E-Business Goals


Each club member was asked to list its enterprises IT goals. Box 11.1 (on the next page) reveals that most of the club members had no concrete plans to adopt e-business-enabled supply chain management in their enterprises, although supply chain issues were implicitly articulated in some cases. Firm 15 is an outlier in this respect, it seems to have given a high priority to supply chain issues (such as inventory control; collaboration both up and down the value chain; demand forecasting; online customer interaction; supply chain planning; improving the distribution channel; greater visibility in the supply chain; etc.) in its IT goals. From the responses in Box 11.1, there is no mention of establishing an integrated Web-based IT architecture to integrate front and back office systems for the purpose of optimising supply chains. Most of the goals concentrate on the idiosyncratic concerns of each club member. Moreover, most of the firms seem to be focusing on output advantages of e-business, i.e. responding to customers rather than on supply chain management per se. Five club members explicitly reported e-business technology goals: the consolidation of EDI links (Firms 1 and 3); Intranet connectivity (Firm 3); standardisation of software (Firm 3); use of the Internet to reach export markets (Firm 6); establishing an e-commerce portal (Firm 13); and the consolidation of ERP (Firm 8). Two club members mentioned explicitly that they have no specific e-business goals (Firms 5 and 14), and another claims to be adopting a reactive wait and see strategy (Firm 6). Most of the other goals concern the use of IT to improve exports; reduce costs; raise efficiency; improve the operational competitiveness of the firm; increase profits; deepen communication with customers; improve customer service; reach new markets for the companys products; and the use of IT for business intelligence purposes.

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BOX 11.1: Corporate Goals

Firm 1: Establish and consolidate EDI links with customers, manufacturers and 1st tier suppliers. Firm 2: Customer relationships. rapportdistribution of informationbuilding customer

Firm 3: Standardising software across the enterprise and the Group consolidating EDI links with customers and establish Intranet connectivity. Firm 4: Improve productivity, efficiency and profits reducing cycle times and costs. Firm 5: Do not really have any specific e-business goalsour goal is to sustain competitive advantage. Firm 6: To get some idea of where e-business is going.systems are confusingthere is a compatibility problemwe are adopting a wait and see approachessentially we are responding to customer requirements. Firm 6: Use of Internet to penetrate export markets. Firm 7: Triple turnover.expansion.exports. Firm 8: To implement the next phase of SAP [an ERP system]. Firm 9: To control costs and become more competitive. Firm 10: To find new market opportunitiesincrease productivity and shareholder value. Firm 11: Increase business through exports obtained via our new owners. Firm 12: To provide operational management with the most accurate and timeous information so that they can perform their tasks efficiently emphasis on no waste and improved customer service introduce B.I. for profitability and option studies. Firm 13: A pilot e-commerce site is under construction. Firm 14: No specific e-commerce goals our focus now is on training. Firm 15: Increase exports; optimise production efficiencies and inventory levels; redesign the vehicle distribution process; move towards meeting customer demands in acceptable time frames; achieve our promises to customers; greater collaboration with suppliers; improve visibility and planning throughout the supply chain; allow customers to configure and research vehicles online; and improve demand forecast ultimately we aim to align the organisation to our core business processes.

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11.3 IT Audit
A glossary of IT is included in this section of the report (see Box 11.2 below), the intention of which is to provide brief explanations for technical terms used in Table 11.2 below.
BOX 11.2: Glossary of IT Terms

Computer Aided Design (CAD): refers to any computer-enabled method of design. Customer Relationship Management (CRM): an Internet solution that, supposedly, integrates sales, marketing, service, e-commerce and call centre applications enabling a firm to leverage customer intelligence across unified communication channels, to provide a broad and inclusive view of its customer relationships. E-Commerce : Web-based business transactions. Electronic Data Interchange (EDI): enables computers of different types to directly send and receive information via any electronic medium. Enterprise Application Integration (EAI): refer to standardised, integrated operational applications that bring a companys IT together in a coherent whole. Enterprise Resource Planning (ERP): an integrated system of operation applications encompassing contract and order management, distribution, financials, HR management, logistics, production and sales forecasting. Extranet: uses Internet technology to interlink firm-specific Intranets enabling business partners, customers and suppliers to share corporate data (Mansell and Wehn 1998). Internet: a network of computer networks connected together and extending across the globe. This collection of networks provides access to email, databases, computers, etc. using the transmission control protocol/Internet protocol (TCP/IP). Intranet: is accessible only to users of a corporate network (running on public or private networks) which may span multiple business locations. It uses the same software standards as the Internet but it operates behind secure firewalls, so that only authorised users have access. Manufacturing Resource Planning (MRPII): a management planning system which has evolved from MRP. In essence, MRPII includes MRP and adds other management ingredients, such as tooling, routing procedures, capacity availability and man-hours requirement (Brown 1996: 239). Material Requirements Planning (MRP): MRP is a production planning tool, and is a subset of MRPII. Key aspects of MRP include: design data; bill of materials; forecast demand; firm orders; master production schedule; inventory file; purchasing; and other reports (Brown 1996). Supply Chain Management (SCM): electronically links sales, marketing, distribution, manufacturing processes and business partners together for, supposedly, a more unified and timely approach to the market and customer.

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TABLE 11.2: Mapping IT


E-BUSINESS TECHNOLOGY Internet Computer Aided Design (CAD) Electronic Data Interchange (EDI) Material Requirements Planning (MRP) Enterprise Resource Planning (ERP) Manufacturing Resource Planning (MRPII) Intranet Enterprise Application Integration (EAI) Supply Chain Management (SCM) Extranet Customer Relationship Management (CRM) E-Commerce Yes 100.0% 86.7% 73.3% 66.7% 40.0% 40.0% 20.0% 13.3% 13.3% 6.7% 6.7% 0.0% No 0.0% 13.3% 26.7% 33.3% 60.0% 60.0% 80.0% 86.7% 86.7% 93.3% 93.3% 100.0%

Enterprise Resource Planning (ERP) Only 40% of club members have an ERP system in place. This is not surprising considering that ERP is a complicated, expensive big company application, requiring specialist staff to manage it. An ERP system is an integrated suite of software modules that automates internal back office operations for each function within an organisation, such as manufacturing, distribution, finance, purchasing, sales and human resources. The six club members who have ERP have still not integrated their internal systems. These firms tend to be focused on the customer interface, important though it is, without recognising that integrating this with the back office support systems is necessary for delivering on the promise of e-business. ERP has traditionally focused on achieving operational efficiency within the enterprise (i.e. it is inwardly focused), rather than trying to increase the organisations effectiveness outside the enterprise (viz . its external capability). 70 Firms need to be linked with suppliers, partners and customers to create virtual value chains (see Section 5.5). Suppliers need to be linked not just to the extent of being able to accept orders, but also to allow internal systems to be queried. ERP provides an essential backbone for business processes within the organisation, but it will need to be extended out across the Internet.

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E-business requires that organisations open up their internal systems to suppliers, customers and partners over the Internet. E-corporations need to provide instantaneous inventory availability and follow up with details of transportation and delivery date. Thus putting immense pressure on the link to the ERP system.

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MRP, MRPII and EDI Many club members are still using the first wave of e-business technologies, such as EDI (73.3%), MRP (66.7%) and MRPII (40%); all of which have reached an inflection point. EDI is limited in that it provides only very basic information about transactions, is inherently inflexible 71, and is unable to respond quickly to rapid shifts in the marketplace. The interactions between the parties had, of necessity, to be limited to a small number of potential transaction partners. Further, EDI is based on expensive proprietary technologies which tends to lock suppliers and customers together (The Economist , 26 June 1999). Legacy MRP and MRPII systems using a client server-based architecture are likely to become obsolete in the move towards Web-enabled architecture. MRP and MRPII are concerned with automating internal processes and increasing efficiencies within organisations only. These systems do little, if anything, to connect processes among businesses. CRM, SCM And E-Commerce The new generation of corporate IT applications, viz. e-commerce (0%), SCM (13.3%) and CRM (6.7%) have not made a big impact on club members. Several of the club members, however, indicated to the researchers that their companys investment in the new IT will increase over the next 3-5 years. According to its producers, SCM has been designed to link sales, marketing, distribution, manufacturing processes and partners together for, supposedly, a more unified and timely approach to the market and customer (F&TNet 2000). The electronic linkages that are potentially established through SCM attempts to enable companies to forge alliances with suppliers, customers and carriers to reduce operating costs, enhance customer service and expand into new markets. Whether this is actually the case in practice is outside the scope of this report. Our objective here is merely to provide a profile of the IT application packages that club members are currently using, rather than to critically assess the merits of the different software packages. This may well be an issue which could be taken up in the extended research agenda. CRM is a front office application that has been created for the purpose of tying into back office software such as corporate databases which holds potentially large volumes of data on customers, services and other mission-critical information. CRM has been designed to allow companies to create and maintain relationships with customers, an important part of revenue growth. CRM is a new application package which has been promoted by IT companies as a tool that enables enterprises to identify and acquire new customers, enhance the profitability of existing customers, and create long-term relationships with customers. CRM claims to deliver an Internet solution that integrates sales, marketing, service, e-commerce and call centre applications allowing a firm to leverage customer intelligence across unified communication channels to provide
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Unlike the open standards and architecture of Internet computing.

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a broad and inclusive view of its customer relationships. Whether CRM actually achieves what its designers promise is of course a moot point, and is outside the scope of the present study. Internet, Intranet and Extranet Although all club member have access to the Internet, none of them where using the Internet for supply chain integration. The fact that club members connect with the Internet, however, does not imply that Internet use is extensive. Also, the number of employees within the firms who have access to the Internet is quite small. Only, three firms are currently using an Intranet, and one club member reported that it has an Extranet in place. The researchers conducted an Internet survey of club members websites, the results of which show that they are invariably not much more than a front end, an online catalogue with orders being emailed, faxed in, and/or taken over the telephone. Customers are unable to check, for example, on service call status, order shipping status and delivery information via the Internet. Two firms use their websites to take orders and deliver products but have not added any capabilities such as customisation or interactivity to distinguish the service from other types of direct selling. This does not necessarily constitute e-commerce per se because the firms have not developed a fully transactional Internet sales channel. It would appear as if too much emphasis is being placed on establishing a web presence and too little stress is placed on ensuring that the IT infrastructure is able to support online procurement 72, trading, marketing and customer sales. Most of the club members are at the stage of basic online brochureware. Companies have developed static information on a website, with minimal ability for any interaction beyond email, company background, and in a limited number of cases, the placing of orders. None of the club members have an integrated ebusiness where the customer-facing front-end of its website is effectively integrated with back-end systems linked to key suppliers and third parties. The sluggishness of these companies is reflective of the caution with which enterprises view an IT tool that is still developing. Many club members feel that a misplaced step into the B2B e-commerce space will not just result in the loss of substantial investment, they fear that they are also betting the firm on the move. This is exacerbated by the fact that many companies do not understand how their electronic business tracks with the rest of their business. Club members websites were unable to integrate customer databases, supplier databases and call-centre operations. Nor were they able to support multiple payment methods. Internet use is confined mainly for marketing and lead generation rather than for business transactions. Respondents cited inadequate
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By procurement, we mean the purchasing of raw materials, supplies and other company assets.

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systems integration and the lack of standards for sharing B2B e-commerce data as the main barriers to automated order entry. An e-corporation goes further than linking in the order entry system. It also needs to allow customers to check the progress of orders, to link in technical support and other customer services, and to integrate the website to other channels such as call centres, faxes and email. Furthermore, it should be able to take orders and seamlessly transmit information to its procurement system. Enterprise Application Integration (EAI) Tools Only two club members are presently using enterprise application integration (EAI) tools. Moreover, discussions with club members revealed that none of them are currently using, or plan to use, eXtensible mark-up language (XML) to integrate IT applications across and between value chains. EAI tools refer to standardised, integrated operational applications that bring a companys IT together in a coherent whole which, it is claimed, can cut costs and squeeze inefficiencies out of a firms supply chain. E-business, it is argued, will not work without IT systems which are integrated and architected for the Internet. EAI offers the possibility of integrating business processes with real-time transaction links across disparate/diverse applications. Technical compatibility promoting process cohesiveness among different systems is important if an integrated value chain - the foundation for e-business is to be created. Technical incompatibilities dissimilar systems with inherent data leakage between them compromise links built between front-office and back-office systems. Middleware are now available on the market which allows application components to communicate through standardised messages, thereby simplifying the coupling between systems. As a result the integration of disparate applications, it is claimed, becomes increasingly flexible and manageable. Middleware can potentially integrate applications running not only within but also beyond a companys boundaries. Essentially EAI tools are designed by the IT companies to make a firms applications communicate with other systems, and to enable companies to link to their suppliers and customers across the Internet. In order to tie business processes together with workflow systems, club members need a well integrated IT infrastructure. The IT infrastructure of a truly automated and integrated firm must combine several core IT applications in many layers so that information on all transactions can be tracked and monitored from a central location, and provide trading partners with the best opportunities for significant cost savings in procurement and supply. The benefits to be accrued appear to be quite substantial: cost reduction, improved customer service, the creation of new market opportunities, and a compression of the business cycle. Again, we add the caveat again that the situation in practice might be at odds with the hypothetical benefits of EAI tools. Also there are many different EAI tools on the market, some are likely to be better than others in different contexts.

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11.4 Purposes For Which Firms Use E-Business Tools


TABLE 11.3: For What Purposes Does Your Firm Use E-Business Tools?
PURPOSE Communication Order Processing Production Engineering/Technical Design Inventory Management 73 Logistics Sales Marketing Procurement Services & Support Application Integration Management of Distribution Channels Research Yes 100.0% 86.7% 80.0% 80.0% 80.0% 80.0% 73.3% 60.0% 60.0% 46.7% 40.0% 40.0% 33.3% 33.3% No 0.0% 13.3% 20.0% 20.0% 20.0% 20.0% 26.7% 40.0% 40.0% 53.3% 60.0% 60.0% 66.7% 66.7%

Each club member was asked to list the main purposes for which e-business technology is used. As highlighted in Table 11.3 above, club members make use of e-business tools principally for communication (100%); order processing (86.7%); design (80%); inventory management (80%); engineering and technical (80%); production (80%); logistics (73.3%); marketing (60%); and sales (60%). Limited use of e-business technology was also reported for procurement (46.7%); application integration (40%); services and support (40%); management of distribution channels (33.3%); and research (i.e. the use of the Internet for conducting information searches for products, services, etc.) (33.3%).

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Both inbound and outbound logistics.

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11.5 Key E-Business Drivers


TABLE 11.4: Principal E-Business Drivers
DRIVERS Connectivity Globalisation Customer Requirements Other Closer Integration with Suppliers Business Flexibility Agility Internet Trade Liberalisation Increased Competitiveness Standards Consolidation Not Important 20.0% 6.7% 13.3% 0.0% 13.3% 33.3% 26.7% 40.0% 53.3% 20.0% 33.3% 60.0% Marginally Important 13.3% 20.0% 13.3% 13.3% 13.3% 13.3% 20.0% 13.3% 13.3% 13.3% 26.7% 20.0% Important 6.7% 13.3% 20.0% 46.7% 40.0% 20.0% 26.7% 20.0% 13.3% 46.7% 33.3% 13.3% Very Important 60.0% 60.0% 53.3% 40.0% 33.3% 33.3% 26.7% 26.7% 20.0% 20.0% 6.7% 6.7%

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Each club member was asked to list the cardinal e-business drivers in the automotive industry. Table 11.4 shows that club members identified other (86.7%); globalisation (i.e. expanding globalisation strategies by companies) (73.3%); customer requirements (i.e. a growing emphasis on more efficient customer service) (73.3%); closer integration with suppliers (73.3%); increased competitiveness (66.7%); connectivity (66.7%); agility (53.4%); and business flexibility (53.3%) as being the key drivers (marked as either important or very important in Table 11.4 above) impelling firms in the automotive industry to adopt e-business technologies. The other box includes diverse drivers such as: links with overseas technology partners joint ventures closer integration with customers market expansion customer retention improved efficiencies customer information exchange supplier information exchange fostering innovation accelerated speed to market increasing market share an accentuated need to streamline business processes Furthermore, a number of second-gear drivers were also mentioned by the respondents, viz. spread of the Internet (46.7%); standards (40%); trade liberalisation (33.3%); and consolidation in the automotive industry (20%). From the list of e-business drivers, it is clear that most of them impact in some way or the other on the supply chain, even though extending the supply chain management process was not explicitly mentioned. This implies that value chain issues are a concern for club members, and are major organisational market drivers. It is interesting though that these drivers are often not part of the companys corporate goals (see Box 11.1).

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11.6 E-Business Perceptions


Preparing for the e-business market requires a new mind-set to doing business in the Information Age. Hence it is important to understand how the key decisionmakers in the firm perceive e-business and the Internet (see Table 11.5 below). The objective of Statements 1 to 5 is to roughly gauge whether club members perceive e-business as being important for their firms competitive success. Statements 6 to 8 aims to find out whether club members have an accurate conceptual understanding of e-business. From the responses, a case for change management to realign traditional business mind-sets can be made for some club members. It would appear as if the perception data yielded mixed responses as far as the club members commitment to e-business is concerned. The main reason for this is that a large percentage of club members understanding of e-business is still somewhat fuzzy.
TABLE 11.5: E-Business Perceptions
Statements 1. 2. 3. 4. In 3 years my company will be more reliant on e-business Exploiting the full potential of the internet is a high priority for my company Companies in my sector without e-business will be at risk of going out of business E-business corporations in the automotive industry are a serious competitive threat to my company As online intermediaries emerge in B2B trade and more large companies shift their procurement online, suppliers are at risk of being shut out by their customers E-business and e-commerce are essentially the same E-business is more about technology than about strategy E-business companies must be willing to bring suppliers and customers deep into their processes and to develop a similar understanding of their business partners processes Strongly Agree 40.0 33.3 0.0 6.7 Agree 40.0 33.3 33.3 40.0 Neutral 6.7 13.3 40.0 26.7 Disagree 6.7 13.3 20.0 20.0 Strongly Disagree 6.7 6.7 6.7 6.7

5.

20.0

46.7

13.3

13.3

6.7

6. 7. 8.

6.7 0.0 26.7

33.3 13.3 53.3

20.0 40.0 6.7

33.3 40.0 13.3

6.7 6.7 0.0

An significant 80% (i.e. agree and strongly agree columns) of club members believe that they will become more dependent on e-business in the next few years. On the surface, this would seem to suggest that many of the club members regard e-business as being important for their long-term competitive success. A substantial 66.6% ( i.e. agree and strongly agree columns) of club members felt that building Internet capacity is a high priority for their companies. Surprisingly, however, 33.3% of club members still believe that the Internet is not key to their long-term survival. They still do not conceive of the Internet as a source of

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significant strategic advantage that will allow them to focus on their core competencies, and form partnerships with suppliers that can provide other key capabilities. Only 33.3% of club members believe that companies in the automotive sector who shun e-business are likely to lose market share. So the impression created is that e-business competence is not a cornerstone for long-term survival, i.e. it is not a critical success factor. Only 46.7% (i.e. agree and strongly agree columns) of respondents believe that ecorporations constitute a strong competitive threat to their own companies, if they do not become e-business literate themselves. It appears as if the majority of club members are underestimating the power of e-business, especially as a prime competitive differentiator in the global economy. It is also revelatory as far as their commitment to e-business is concerned. The majority of club members (66.7%) recognise the risk of getting shut out of traditional supply relationships by middlemen in B2B trade and online procurement networks, if they do not possess the requisite Internet savvy. It appears that a significant proportion of club members (60%) do not fully understand the distinction between e-business and e-commerce. E-business is about transforming key business processes and deriving value from the Internet and other electronic networks. This goes far beyond buying and selling over the Internet (i.e. e-commerce); it penetrates deep into the processes and culture of an enterprise. The danger is that e-business may fail to live up to todays euphoric expectations if it is used sub-optimally because of a lack of understanding on the part of key top- and middle-level managers. Furthermore, the potential risks of policy errors are high in such an environment of uncertainty. To separate the hype from reality requires one to recognise that the shift to ebusiness requires more than installing new software and technology. Only 46.7% of club members understood that e-business is not primarily about technology investment. Rather, it is fundamentally about a new corporate direction, a new mind-set to doing business in the digital Information Economy. E-business is, in essence, about transforming business models and processes enabled and supported by network-based IT. It is believed that to take advantage of e-business opportunities, enterprises will have to blend elements of technology, process, management and strategy. Expert opinion suggests that an e-business initiative succeeds when it reflects an alignment of all elements. If one part of the equation is ignored, or if the technology is fetishised, the entire project is at risk. Club members will need to take this into consideration. The vast majority of club members (80%) were able to grasp a fundamental feature of e-business, namely that it is primarily about collaboration and partnership between different stakeholders. Over time the unit of strategic

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analysis has moved from the single company to the extended enterprise which consists of a central firm supported by a constellation of suppliers, investors, customers and business partners. Harnessing competencies becomes a function of the collective knowledge available to the whole system. It is claimed that e-business creates the infrastructure for active ongoing dialogue with diverse trading partners.

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11.7 How Has The New IT Changed The Way In Which Enterprises Transact Business?
The results of the IRP survey capture and reflect the early stages of e-business adoption amongst the Eastern Cape and KZN Benchmarking Club members. Internet-enabled supply chain management is still in the early stage of development in the South African automotive industry. It is important to keep in mind that despite how quickly e-business has changed the North American automotive industry landscape, it is still a new paradigm in developing countries. For instance, in South Africa the evidence of real benefits is still scattered and anecdotal. This is mainly due to the slow uptake of the new generation of network-based IT by the automotive industry. We have already seen (IT audit, Section 11.3) that none of the club members are operating a Web-based architecture which is hooked into a common information system. This is not surprising considering that, for instance, very few European firms are fully Webbased. Taking these factors into account, we were not expecting to find that club members have changed the traditional ways in which they conduct business in any radical way (see Box 11.3 on the next page). The changes reported by club members can be distilled into the following broad categories:

The capacity and speed of electronic, digital communication [Firms 1, 3, 4, 5, 8, 9, 10, 12, 13 and 15] Reliance on back-office software [Firms 2, 11 and 12] The growth of network computing [Firms 2 and 3] Computer-aided design [Firm 3] Internet use for information purposes, resource planning and releasing demand forecasts [Firms 3, 4, 7 and 8] Greater connectivity to customers and suppliers [Firms 8, 10, 14 and 15] Shift towards process-based manufacture and pull production [Firm 15] Logistics [Firm 15] Online procurement and sales [Firms 6 and 15] Supply chain synchronisation [Firm 15] Customer requirements [Firms 6, 7 and 15]

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BOX 11.3: How Has The New IT Changed The Way In Which Your Firm Does Business?

Firm 1: Strong focus on electronic communications. Firm 2: Reliance on computers has increased. Networks, emails, ERP systems, etc.. Firm 3: Reliance and dependency on computer systems mainly for communication, design, resource planning, etc.. Firm 4: E-mailing of technical data... Internet: release demand forecasts. Firm 5: Email internal and external communication has improved. Overseas communication has increased. Found a new supplier on the Internet. Firm 6: Customers are requiring internet connection to provide order information. Some overseas purchasing is done by email. Firm 7: New customer requirementsInternet: speed, cutting costs, planning and forecasting. Firm 8: Use of Internet to access company profilescommunication (email) resource planningcollaboration with world class suppliers. Firm 9: A whole new way of communicatinga whole new process of computer literacy. Firm 10: Accessible to customers, connectednessovercome time and space constraints in communicationreal-time communication. Firm 11: Inventory control via MRP system. Firm 12: Accuracy of data and speed ERP consolidated into sales companies across 3 manufacturing sites. Firm 13: E-mail, Internet improved communication links with overseas companies. Firm 14: Better links with OEMs. Firm 15: Faster rate of change and pace of business. Closer association with suppliers. Supply chain synchronisation. Shift towards pull rather than push production. Process focus rather than functional silos. Increasing need and ability to fulfil customer wants. Additional sales channel. Use of e-mail in all relationships. Online procurement in export markets. Online sales and stock visibility in P&A. Logistics tracking. Vehicle tracking. Faster problem resolution with source plants.

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11.8 Use Of E-Business Technologies In Supply Chain Integration


TABLE 11.6: E-Business-Enabled Supply Chain Management
RESPONSE Yes No TOTAL Frequency 5 10 15 Percent 33.3 66.7 100.0

Table 11.6 reveals that only 33.3% of club members currently use e-business technology for some supply chain management purposes. It is important to stress however that the aforementioned firms do not have a Web-based integrated supply chain in operation. Rather these 5 firms are using IT for some supply chain functions only. The other 10 firms claim that they are not currently using IT for any supply chain management functions. This means that two-thirds of the respondents (66.7%) are not currently reaping any of the potential benefits of e-business-enabled supply chain integration (see section 5.3).
TABLE 11.7: Do Your Suppliers Have Access To Real-Time Information Of Your Companys Sales And Stock Levels?
RESPONSE Yes No TOTAL Frequency 1 14 15 Percent 6.7 93.3 100.0

Table 11.7 shows that 93.3% of club members suppliers do not have access to real-time information of club members sales and stock levels. Suppliers benefit enormously when they have online access to their customers production schedules and sales data, because it enables them to proactively plan the volume and timing of the orders. Dell Computers Internet-based supply chain management regime is an apposite example of this trend (see Section 5.4).
TABLE 11.8: Are Your Firms Internal Operations Electronically Integrated With That Of Your Business Partners, Customers And Suppliers?
STAKEHOLDERS Customers Business Partners Suppliers No 80.0% 86.7% 86.7% Yes 20.0% 13.3% 13.3%

Table 11.8 reveals that the vast majority of club members internal operations are not electronically integrated with that of their business partners (86.7%), suppliers (86.7%) or customers (80%). With e-business, the potential benefits come not just from speeding-up and automating a companys own internal processes but from its ability to spread the efficiency gains to the business systems of its

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suppliers and customers. The ability to collaborate, form alliances and networks to draw on the competencies of supply chain partners - may be just as much of a competitive advantage as the ability to deploy the technology itself.
TABLE 11.9: Does Your Company Have The E-Business Capacity To Access Your Suppliers Production Capacity, Available Inventory, Lead Times And Delivery Flexibility?
VARIABLES Production Capacity Available Inventory Lead Times Delivery Flexibility No 80% 80% 80% 80% Yes 20% 20% 20% 20%

Table 11.9 reveals that only 20% of club members possess the e-business capacity to access their suppliers production capacity, available inventory, lead times and delivery flexibility. This is an important finding, since one of the fundamental changes supposedly stimulated by the Internet is the new dynamic way in which manufacturers across industry will deal with their suppliers and subcontractors. Moreover, effective communications and alliances are essential for rapid response to competition. It appears that the vast majority of club members have not yet implemented networked applications to connect automatically to their supply chain partners. As a result, the potential benefits of breaking information barriers within a company (see Table 11.10) and the elimination of information barriers between companies (see Tables 11.7, 11.8, 11.9, 11.11 and 11.12) remains untapped.

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TABLE 11.10: Is The Information Provided Within Your Companys Internal Operations Electronically Linked?
RESPONSE Yes No TOTAL Frequency 10 5 15 Percent 66.7 33.3 100.0

A third of club members are still not using electronic technologies and infrastructure to connect their internal operations and processes through automation. Their internal processes are largely function-driven (i.e. the silo mentality), to the point where few, if any, of the divisions talked to one another. If a firms back-end systems are not fully operational and linked, it faces the prospect of damage to its reputation and customer relationships. In addition, the lack of comprehensive networking between processes is a formidable impediment to facilitating communications inside the company by sharing knowledge between units, and tying business processes together. Thus making it difficult for companies to empower their employees (including remote employees), customers and partners with the quick delivery of mission-critical information. An integrated electronic data management system to access, interrogate and evaluate critical product and process data gives a company a unique competitive advantage over other automotive firms. In this way companies gain control of all product and process information shared by cross-functional teams, including company personnel, suppliers, partners and customers. In other words, information barriers between different systems and departments dissolve, thus strengthening decision-makers (at all levels of the organisation) ability to better align with the overall organisational strategy and initiatives. In order for pertinent, and accurate information to be accessible at the coal-face, it is claimed that IT legacy systems will need to be Web-enabled and tightly integrated.
TABLE 11.11: The Extent To Which Your Companys Internal Operating Systems Are Integrated With External Electronic Networks?
INTERNAL SYSTEMS Production Design Marketing Purchasing Logistics Not Integrated 73.3% 46.7% 60.0% 60.0% 46.7% Marginally Integrated 13.3% 40.0% 20.0% 26.7% 33.3% Integrated 0.0% 6.7% 13.3% 6.7% 13.3% Very Integrated 13.3% 6.7% 6.7% 6.7% 6.7%

Table 11.11 shows that the majority of respondents stated that their internal operating systems [i.e. design (86.7%); purchasing (86.7%); production (86.6%); marketing (80%); and logistics (80%)] are either not integrated or are marginally integrated with external electronic networks. An e-business, it is argued, must be

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able to integrate and streamline its entire operation from the storefront to the call centre, from suppliers to its warehouse, and from distribution channels to the customers. Only then will it be possible to unify all forms of relevant information from both inside and outside the enterprise into a single intelligent system, to advance competitiveness. By integrating processes both up and down the supply chain, club members will, theoretically, be able to provide products and services faster and cheaper than before, and take advantage of new opportunities to leverage competitive advantages.
TABLE 11.12: Does Your Company Require Suppliers To Make Use Of E-Business Technologies?
RESPONSE Yes No TOTAL Frequency 4 11 15 Percent 26.7 73.3 100.0

Only 26.7% of club members claimed to put pressure on their suppliers to make use of electronic communication links, particularly EDI. The pressure placed on suppliers to adopt IT is normally exerted by the OEMs and 1st tier suppliers in their supplier development programmes. Thus hinting at some form of IT governance in the supply chain by dominant firms who provide strategic and organizational leadership for lower-end network participants (i.e. lower-tier suppliers).74 One component manufacturer in the Eastern Cape lamented that a project geared to encouraging suppliers to make greater use of electronic communication links never got off the ground despite NAAMSA75 and NAACAM76 support.
TABLE 11.13: Does Your Company Use E-Business Technology For B2B Trade?
TYPE OF E-TRADE B2B Selling B2B Procurement B2C Selling No 53.3% 80.0% 93.3% Yes 46.7% 20.0% 6.7%

Despite the highly publicised rise of B2B trading exchanges, it is clear from Table 11.13 that the majority of club members (80%) are not yet using e-business tools for online purchasing, although 46.7% of respondents claimed that they engage in some form of online B2B selling. Only one club member is involved in B2C selling. The little B2B e-commerce which is taking place is occurring primarily through EDI-type networks, rather than through Internet-based systems.

74

We use the term governance to refer to the key actors (i.e. the locus of power and control) in the value chain who shape the e-business profile of particular participants by exerting pressure on them to upgrade their IT capabilities. For a more detailed discussion see Gereffi (2000). 75 National Association of Automobile Manufacturers of South Africa. 76 National Association of Automotive Component and Allied Manufacturers.

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TABLE 11.14: Does Your Company Outsource Non-Core Functions?


OUTSOURCE TO: Small/Micro Firms Emerging Black Contractors No 60% 60% Yes 40% 40%

From a development perspective, sub-contracting relationships are particularly important for small and micro firms whose growth and long-term survival depends on their capacity to leverage sub-contracting networks. Table 11.14 above shows that only 40% of club members outsource non-core functions to small/micro firms and emerging black contractors. The functions outsourced consist mainly of services such as catering, cleaning, packing and security, as well as some low-tech manufacturing and minor sub-assembly work.
TABLE 11.15: When Awarding Contracts to Small/Micro Firms And Emerging Black Contractors Does Your Company Consider The E-Business Capacity of Such Firms?
RESPONSE Yes No TOTAL Frequency 0 15 15 Percent 0 100 100

We were particularly interested in finding out whether small and micro firms ebusiness capabilities are a factor in enabling them to engage in sub-contracting relationships with club members. None of the club members, however, consider the e-business capacity of small companies when they award outsourcing contracts. This relates to the fact that only peripheral activities are outsourced. Also the chances of small and micro enterprises actually being Web-based and engaging in B2B e-commerce are pretty low, more so, considering that the lead firms in the value chain are themselves only beginning to become aware of the potential of e-business and the Internet.
TABLE 11.16: Does Your Company Seek External Advice From IT Research And Advisory Firms?
RESPONSE Yes No TOTAL Frequency 13 2 15 Percent 86.7 13.3 100.0

A significant percentage of club members (i.e. 86.7%) use IT research and advisory companies. This is not surprising considering the confusing array of IT options available on the market. When there is uncertainty and doubt, club members tend to seek validation for information technology strategies. Interviews with senior management and conversations with key informants suggested that in their eagerness to adopt new e-business strategies, many firms

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often find themselves dragged backwards by the very technologies they employ simply because of a lack of research to ensure the applications used are implemented effectively.
TABLE 11.17: Does Your Company Have An In-House IT Department?
OPTIONS In-House IT Department Only IT Vendors Only Both Neither TOTAL Frequency 4 3 7 1 15 Percent 26.7 20.0 46.7 6.7 100.0

Table 11.17 reveals that in-house IT departments are solely responsible for 26.7% of club members IT operations. Further, 20% of club members only use IT vendors for their IT systems. A substantial percentage (i.e. 46.7%) of club members use both an in-house IT department as well as IT vendors for managing their IT requirements. One club member uses neither an in-house IT department nor does it sub-contract its IT operations. In this small company, the Managing Director is responsible for the companys IT operations. A breakdown of these approaches is presented below:

In-house IT unit only (26.7% of club members): The companys IT department buys the hardware and software required for e-business and injects the skills internally to put the system together. The success of such a strategy will depend in no small measure on the complexity of the project and the level of skill retained in-house. IT vendors only (20% of club members): The company has no IT department, it buys in the technology and expertise it wants from the outside. The enterprise uses an IT vendor to provide a full, integrated end-to-end IT service capability. This is probably an ideal strategy for a small company with a low IT skills base. Combination of in-house IT department and IT vendors (46.7% of club members): Acquiring some or all of the IT and associated services from one or more service providers, but managing the process in-house. Neither IT vendor nor in-house IT department (6.7% of club members): Very few club members are capable of going it alone into e-business without any outside help from an experienced, reputable IT consultancy and vendor. This is especially true when the e-business strategy is evolving from the basic to the more complex, like integrating legacy (especially circuit-based) systems and interconnecting networks.

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11.9 Digital Exchange Networks


TABLE 11.18: Are You Aware Of Any Joint Internet Initiative In The Automotive Industry?
RESPONSE Yes No TOTAL Frequency 10 5 15 Percent 66.7 33.3 100.0

Most of the club members (i.e. 66.7%) claimed to be aware of Internet-based trading networks in the automotive industry. This notwithstanding, one third of club members reported that they were unaware of the development of Internet trading hubs in their sector.
TABLE 11.19: Is Your Company Linked To Any Internet Initiative For Supplier Interactions?
RESPONSE Yes No TOTAL Frequency 7 8 15 Percent 46.7 53.3 100.0

Only 46.7% of club members are linked to one or more Internet-based procurement platforms. Unfortunately, club members were not yet in a position to openly discuss their links with Internet-based procurement platforms. Resource constraints notwithstanding, we plan to explore this issue with club members in the next phase of the research programme.
TABLE 11.20: Assessment Of The Potential Benefits Of An Internet-Based Integrated Procurement System
POTENTIAL BENEFITS Set Standards Cut Costs Speed Up The Purchasing Process Between Manufacturer & Supplier Value Chain Integration Increase Operating Efficiencies Improve Quality Not Beneficial 13.3% 6.7% 13.3% Marginally Beneficial 26.7% 33.3% 20.0% Beneficial 6.7% 33.3% 46.7% Very Beneficial 53.3% 26.7% 20.0%

20.0% 26.7% 26.7%

33.3% 26.7% 26.7%

26.7% 40.0% 40.0%

20.0% 6.7% 6.7%

As highlighted in Table 11.20 above, club members expect that the biggest benefits (i.e. beneficial and very beneficial columns) of digital automotive parts exchanges are likely to be: speedy transactions (66.7%); the setting of standards (60%); procurement cost savings (60%); value chain integration (46.7%); and quality improvements (46.7%).

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TABLE 11.21: What Are The Potential Disadvantages Of An Internet-Based Integrated Procurement System?
POTENTIAL DISADVANTAGES Reduced Supplier Base Monopoly Privacy Concerns Reduced Profits Threat To Long-Term Strategic Alliances Yes 73.3% 66.7% 66.7% 26.7% 26.7%

According to club members the main drawbacks of an online trading hub are likely to be: a rationalisation of the supplier base (73.3%), monopoly (66.7%), and privacy concerns (66.7%). The concerns of club members are by no means unique. Similar drawbacks were attributed to Covisint (see Section 2.3).
TABLE 11.22: The Importance Of Openness And Trust In Electronic Trading Hubs
VARIABLE Trust Openness & Transparency Not Important 0.0% 0.0% Marginally Important 6.7% 6.7% Important 20.0% 33.3% Very Important 73.3% 60.0%

For electronic marketplaces to succeed in the automotive industry, 93.3% (i.e. important and very important columns) of club members believed that openness, transparency and trust must be the hallmarks of a successful procurement platform. These three elements are often lacking in the South African context. The new challenge, therefore, is how to manage openness, transparency, cooperation and trust in an electronic environment. There is a need for a trust model (i.e. trust formulas and security policies) that provides a high level of confidence.

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10.11 Benefits Of E-Business Tools


TABLE 11.23: Advantages Of E-Business Tools
BENEFITS Reduce Cost of Information Other Improvement of Inventory Operations Access International Markets Increase Market Access Improve Competitive Position Increase Revenue Increase Productivity Supplier Information Exchange Attract New Investment The Shortening of Order-Ship-Bill Cycles Reduce Procurement Costs Not Beneficial 13.3% 0.0% 6.7% 26.7% 33.3% 13.3% 26.7% 20.0% 20.0% 73.3% 33.3% 53.3% Marginally Beneficial 6.7% 20.0% 20.0% 26.7% 20.0% 40.0% 53.3% 46.7% 33.3% 13.3% 13.3% 26.7% Beneficial 40.0% 40.0% 60.0% 33.3% 33.3% 40.0% 13.3% 26.7% 40.0% 6.7% 46.7% 20.0% Very Beneficial 40.0% 40.0% 13.3% 13.3% 13.3% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 0.0%

For club members, the major benefits (i.e. beneficial and very beneficial columns) of adopting e-business tools for their companies include: reducing the cost of information (80%); other (80%); inventory control (73.3%); the shortening of order-ship-bill cycles (53.4%); supplier information exchange (46.7%); improvement in competitive position (46.7%); penetrating international markets (46.6%); and increasing market access (46.6%). The other box includes benefits such as lower costs, greater value, speed combined with flexibility, and improved decision making and execution. As already discussed in previous sections (especially Section 5.3) of this report, these are hypothetical benefits. It is important to bear in mind that e-business is still in its initial phase in the South African automotive industry.

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11.11 Barriers To The Adoption Of E-Business Tools


TABLE 11.24: E-Business Obstacles
INHIBITORS Low use of e-business by customers & suppliers More pressing corporate priorities Security concerns Lack of accepted standards IT rapidly changing & proliferating Senior executives who do not support IT Lack of e-business skills Structural limitations Uncertainty over the returns which e-business will deliver Large & uncertain costs Ill-informed management Difficulties with finding & keeping IT staff Organisational constraints Frequency 13 10 9 8 8 8 8 8 8 7 6 6 5 Percent 86.7 66.7 60.0 53.3 53.3 53.3 53.3 53.3 53.3 46.7 40.0 40.0 33.3

Club members mentioned a number of obstacles to e-business transformation: senior executives who do not support IT (53.3%); lack of e-business skills (53.3%); structural limitations relating to shortcomings of the Public Internet (53.3%); uncertainty over the returns which e-business will deliver (53.3%); a lack of clear understanding of the potential of the Internet on the part of key topand middle-level managers (40%); and organisational constraints (33.3%). A significant proportion of respondents (53.3%) are concerned about keeping up with the rapidly burgeoning and changing IT, with information overload and with changing business models. Other barriers to the adoption of e-business mentioned by club members, include: the current low use of e-business technologies by customers and suppliers (86.7%); more pressing corporate priorities (66.7%); lack of accepted standards (53.3%); the large and uncertain costs77 of implementation (46.7%); and difficulties experienced with finding and keeping experienced and qualified IT staff (40%). The concern that the strategic information of a company could be leaked to its competitors has been raised by 60% of club members. Club members also mentioned that proprietary information could be vulnerable to hacking and viruses. However, technology that allows for the creation of firewalls of confidentiality are now available. Also on the market are state-of-the-art encryption and security features to protect a company from hackers and preserve confidentiality. To be confident of secure communications, a company will need to invest in data integrity, authentication of identity and data confidentiality. Virtual Private Networks ( VPNs) are another solution to the security problem. VPNs use the Internet as a backbone through which companies can conduct
77

The costs would include: hardware, software, investment in new business processes, consultants fees and the training of employees.

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secure communications and business with branches, remote employees and business partners. Although VPNs use the Public Internet, they are rendered virtually private through security technologies such as encryption.

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11.12 The Impact Of E-Business Technologies On The Firm


TABLE 11.25: Effects Of E-Business Technologies On The Firm
VARIABLES N/A Marginal Negative Impact 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 6.7% 0.0% Marginal Positive Impact 6.7% 13.3% 26.7% 33.3% 26.7% 40.0% 13.3% 40.0% 33.3% 46.7% 33.3% 53.3% Moderate Positive Impact 33.3% 26.7% 26.7% 40.0% 13.3% 20.0% 26.7% 13.3% 26.7% 26.7% 26.7% 20.0% Strong Positive Impact 40.0% 40.0% 26.7% 20.0% 13.3% 13.3% 6.7% 6.7% 6.7% 6.7% 0.0% 0.0%

Design Operations/Logistics Production Systems Relationships With Your Customers Attitudes Towards Partnerships & Collaboration Organisation Structure & Management Attitudes Towards Outsourcing Interaction With Suppliers Marketing Competitiveness Profits Value Chain Integration

20.0% 20.0% 20.0% 6.7% 46.7% 26.7% 53.3% 26.7% 33.3% 20.0% 33.3% 26.7%

The impact of e-business is profound because of the potential scale of value that it adds to any business. Club members were asked to rate the impact of ebusiness tools on a number of predetermined variables in terms of their own firms experience. Only one club member reported a marginal negative impact on one variable (i.e. profits). No moderate negative, strong negative or neutral impacts of e-business technologies were reported, therefore these columns have been omitted from Table 11.25. Table 11.25 above shows where club members are extracting the most value (moderate positive impact and strong positive impact columns) from e-business tools: viz. design (73.3%); operations/logistics (66.7%); managing customer relationships (60%); and production systems (53.4%). Supply chain issues like outsourcing (33.4%); collaboration and partnerships (26.6%); interaction with suppliers (20%); and value chain integration (20%) have not recorded high degrees of positive impact. This is mainly because firms are not using ebusiness tools for supply chain applications, hence the high not applicable response for variables such as outsourcing (53.3%); collaboration and partnerships (46.7%); interaction with suppliers (26.7%); and value chain integration (26.7%). Table 11.27 below indicates that only 33.4% (successful and very successful rows) of club members consider the adoption of e-business in their companies as a success. A substantial 60% of club members experienced a mixed outcome,

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the implementation of e-business in their enterprises can only be described as partially successful. Interestingly, none of the club members described the early stages of their e-business project as being a failure. While this is an interesting observation, we cannot read too much into it, considering the incipient and incomplete nature of e-business adoption in the two clubs. Moreover, it is only over time that more meaningful assessments of the success of e-business can be made, using more appropriate, precise measurement techniques.
TABLE 11.27: Degree Of Overall Success In The Implementation Of E-Business Technologies
DEGREE OF SUCCESS Very Successful Successful Partially Successful A Failure A Total Failure Not Applicable TOTAL Frequency 1 4 9 0 0 1 15 Percentage 6.7 26.7 60.0 0.0 0.0 6.7 100.0

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11.13 Projections Of E-Business Growth


We asked each club member to provide us with some projections of e-business growth in the year 2005 on a number of predetermined variables. The objective of this exercise was to gain an understanding of each club members impression of the growth prospects of e-business, the uptake of e-business in the automotive industry generally, as well as how sanguine they are of the likely impact of ebusiness on their own companies. We have already shown that the club members have been slow to adopt the new generation of network-based IT (see Section 11.3). The results of the forecasting exercise are reported in Tables 11.27 to 11.32 below.
TABLE 11.27: Projections Of E-Business Growth In 2005 (% Of Purchasing Operations Put On The Internet)
% Of Purchasing Operations Put On The Internet In 2005 40% 50% 60% 80% 85% 90% 95% 100% Missing Cases TOTAL Frequency Percent Valid Percent 14.3 14.3 14.3 21.4 7.1 7.1 14.3 7.1 Cumulative Percent 14.3 28.6 42.9 64.3 71.4 78.6 92.9 100.0

2 2 2 3 1 1 2 1 1 15

13.3 13.3 13.3 20.0 6.7 6.7 13.3 6.7 6.7 100.0

Mean Standard deviation Range Percentiles 25 50 75

71.79 21.18 60.00 50.00 80.00 91.25

Twelve club members stated that in 5 years time 50% or more of their purchasing operations will be put on the Internet. The average projection was 71.8%. This is quite a substantial increase on current levels, but it is important to bear in mind the present low base.

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TABLE 11.28: Projections Of E-Business Growth In 2005 (% Of Total Business Which Will Be Web-Based)
% Of Total Business Which Will Be WebBased In 2005 0% 10% 20% 50% 60% 70% 80% 90% 100% Missing Cases TOTAL Frequency Percent Valid Percent 9.1 18.2 9.1 9.1 9.1 18.2 9.1 9.1 9.1 Cumulative Percent 9.1 27.3 36.4 45.5 54.5 72.7 81.8 90.9 100.0

1 2 1 1 1 2 1 1 1 4 15

6.7 13.3 6.7 6.7 6.7 13.3 6.7 6.7 6.7 26.7 100.0

Mean Standard deviation Range Percentiles 25 50 75

50.91 35.34 100.0 10.00 60.00 80.00

Only seven club members forecasted that in 2005 at least 50% of their total business operations will be Web-based. The average projection was 50.9%, with four club members not answering the question. It has already been argued elsewhere that one of the biggest challenges that enterprises face today is opening applications to the Internet while integrating them with traditional backend applications. Club members who do not integrate technology into the core of their business but decide instead to use technology as an ancillary or parallel business, may experience difficulties in the Networked Economy. Therefore central to addressing New Economy challenges is to find a method for handling Web-based applications as an integrated part of the organisation. The benefits of Web-based business are potentially large and wide-ranging that companies which ignore these opportunities might risk falling behind competitors that have embraced them.

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TABLE 11.29: Projections Of E-Business Growth In 2005 (% Of Supplies Purchased Through Web-Based Auctions)
% Of Supplies Purchased Through Global Web-Based Auctions In 2005 0% 5% 10% 15% 20% 30% 80% 95% Missing Cases TOTAL Frequency Percent Valid Percent Cumulative Percent

5 2 1 1 2 1 1 1 1 15

33.3 13.3 6.7 6.7 13.3 6.7 6.7 6.7 6.7 100.0

35.7 14.3 7.1 7.1 14.3 7.1 7.1 7.1

35.7 50.0 57.1 64.3 78.6 85.7 92.9 100.0

Mean Standard deviation Range Percentiles 25 50 75

20.00 30.26 95.00 0.00 7.50 22.50

Twelve club members forecasted that their company will purchase 30% or less of supplies through global Web-based auctions in 2005.78 The average projection was 20%. This fairly low projection rate can be largely accounted for by two factors: firstly, Web-based spot markets are still a new, experimental concept; and secondly, club members continued preference for engaging in extendedterm contracts often lasting for a year or more. Using the Internets reach and ubiquity to sell off perishable or time-sensitive stocks of goods and services, and commodities which are amenable to public spot markets rather than being traded through extended-service contracts 79, by auction is an increasing trend in the e-business world. Visteon, the Ford-owned components supplier, is already buying parts from suppliers at global web-based auctions. GE Appliances, the household goods unit of the US conglomerate General Electric, is pushing all its suppliers to join its online purchasing system in a bid to cut its US$ 3 billion annual materials budget. Moreover, Covisint, the giant Internet-based trade exchange, is currently in the

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None of the club members are currently purchasing operating and manufacturing inputs through Webbased auctions. 79 See The Economist, 21 October 2000.

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process of conducting its first auction, following successful pilots in September 2000.80
TABLE 11.30: Projections Of E-Business Growth In 2005 (% Of Total Goods & Services Procured Through E-Business Technologies)
% Of Total Goods & Services Procured Through E-Business Technologies In 2005 50% 60% 75% 80% 90% Missing Cases TOTAL Frequency Percent Valid Percent Cumulative Percent

1 4 1 2 3 4 15

6.7 26.7 6.7 13.3 20.0 26.7 100.0

9.1 36.4 9.1 18.2 27.3

9.1 45.5 54.5 72.7 100.0

Mean Standard deviation Range Percentiles 25 50 75

72.27 14.72 40.00 60.00 75.00 90.00

Club members appeared to be much more amenable to the idea of procuring goods and services through the use of e-business technologies in 2005. Eleven club members foresee their company procuring between 50 and 90% of their goods and services via e-business technologies. The average projection was 72.3%.

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www.ft.com

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TABLE 11.31: Projections Of E-Business Growth In 2005 (% Reduction In Paper Invoices)


% Reduction In Paper Invoices In 2005 40% 50% 65% 70% 80% 90% 100% Missing Cases TOTAL Frequency Percent Valid Percent 16.7 8.3 16.7 16.7 8.3 16.7 16.7 Cumulative Percent 16.7 25.0 41.7 58.3 66.7 83.3 100.0

2 1 2 2 1 2 2 3 15

13.3 6.7 13.3 13.3 6.7 13.3 13.3 20.0 100.0

Mean Standard deviation Range Percentiles 25 50 75

71.67 21.14 60.00 53.75 70.00 90.00

B2B commerce has traditionally been a routinised, paper-intensive process, which created inefficiencies for both buyer and seller. By moving the procurement process online, and removing paper from the information interchange pipeline, reliability and speed is likely to improve. The IT for paperless transactions is at hand for most business processes, thus removing most of the costs of generating and circulating paper, at least in theory. Unsurprisingly, twelve club members forecasted a substantial reduction in paper invoices of between 40 and 100% in 2005 as a result of the adoption of ebusiness tools. The average projection was 71.7%. Digital technology can potentially free workers from slow, inflexible and costly paper-based business processes. Thus creating time for more productive work, and reducing administrative costs.

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TABLE 11.32: Projections Of E-Business Growth in 2005 (% Of customers And Suppliers That Will Have Access To My Companys Real-Time Sales And Inventory Data)
% Of Customers And Suppliers That Will Have Access To My Companys Real-Time Sales & Inventory Data In 2005 10% 20% 25% 28% 40% 50% 60% 75% 80% 90% Missing Cases TOTAL Frequency Percent Valid Percent Cumulative Percent

2 2 1 1 1 2 1 1 2 1 1 15

13.3 13.3 6.7 6.7 6.7 13.3 6.7 6.7 13.3 6.7 6.7 100.0

14.3 14.3 7.1 7.1 7.1 14.3 7.1 7.1 14.3 7.1

14.3 28.6 35.7 42.9 50.0 64.3 71.4 78.6 92.9 100.0

Mean Standard deviation Range Percentiles 25 50 75

45.57 27.82 80.00 20.00 45.00 76.25

Only seven club members foresee 50% or more of their customers and suppliers having access to their companys real-time sales and inventory data in 2005. The average projection was 45.6%. It seems that club members are reluctant to integrate their suppliers and customers into their online operations. As a result, they will not be able to capture, analyse and exchange real-time information with the different stakeholders. Moreover, from a supply chain management perspective, e-business entails a move from independence to interdependence , and the concomitant building of an extended virtual enterprise. It is assumed that by establishing such deep process interdependencies, sellers and buyers each benefit by becoming locked into progressive long-term relationships. It appears as if this vision has not yet filtered through to the majority of club members.

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Websites: www.cartoday.com www.dana.com www.fordvehicles.com www.ft.com www.ids.ac.uk/ids/global/bella.html www.just-auto.com www.nissandriver.com www.theautochannel.com

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APPENDIX 1: E-BUSINESS QUESTIONNAIRE


Section I: General 1. Does your company have an e-business strategy? Yes No Section II: Key E-Business Drivers 1. What are the key drivers for e-business in your sector? [Options: 1=Not important, 2=Marginally important, 3=Important, and 4=Very important.] Key E-Business Drivers Rating Globalisation Customer Requirements Standards & Protocols Spread of the Internet Trade Liberalisation Acquisitions & Mergers (Consolidation) Closer Integration with Suppliers Agility Business Flexibility Increased Competitiveness Connectivity Other (please specify):

2. Has the traditional ways of conducting business changed in your sector during the last 3 years? Yes No 3. If yes to Q2, please explain how? ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

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4. What are your immediate objectives and goals?

________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Section III: E-Business Perceptions


Please state whether you agree or disagree with the following statements. 1. In 3 years my company will be more reliant on e-business. Strongly Agree Agree Neutral Disagree

Strongly Disagree

2. Exploiting the full potential of the Internet is a high priority for my company. Strongly Agree Agree Neutral Disagree

Strongly Disagree

3. Companies in my sector without e-business will be at risk of going out of business. Strongly Agree Agree Neutral Disagree Strongly Disagree

4. E-business is a serious competitive threat to my company. Strongly Agree Agree Neutral Disagree

Strongly Disagree

5. As online intermediaries emerge in business-to-business (B2B) trade and more large companies shift their procurement online, suppliers are at risk of being de-listed (shut out) by or disintermediated from their customers. Strongly Agree Agree Neutral Disagree Strongly Disagree

6. E-business and e-commerce are essentially the same. Strongly Agree Agree Neutral

Disagree

Strongly Disagree

7. E-business is more about technology than about strategy. Strongly Agree Agree Neutral

Disagree

Strongly Disagree

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8. E-business companies must be willing to bring suppliers and customers deep into their processes and to develop a similar understanding of their business partners processes. Strongly Agree Agree Neutral Disagree Strongly Disagree

Section IV: Supply Chain Management 1. Does your company use e-business technologies for supply chain management/integration? Yes No 2. Do your suppliers have access to real-time information of your companys sales and stock levels? Yes No 3. Are your firms internal operations electronically integrated with that of your: Yes No Customers Business Partners Suppliers 4. Does your company have the e-business capacity to access your suppliers: Variable Yes No Production Capacity Available Inventory Lead Times Delivery Flexibility 5. Does your company require its suppliers to make use of e-business technologies (such as EDI)? Yes No 6. Does your company outsource non-core functions to: Yes No Small/Micro Firms Emerging Black Contractors 7. If yes to Q6, what type of non-core functions? ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

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8. If yes to Q6, when awarding contracts to small/micro firms does your company consider the e-business capacity of such firms in the selection process? Yes No 9. Does your company seek external advice from IT research and advisory firms? Yes No 10. Does your company have an in-house IT department or do you outsource your e-business operations? Yes No In-House IT Department IT Vendors 11. Are you aware of any online auto-supplier networks (e.g., DaimlerChrysler, GM, and Ford are awaiting regulatory approval in the US and Europe to set up Covisint, their joint Internet purchasing exchange)? Yes No 12. Is your company linked to any internet initiative for supplier interactions? Yes No 13. Please rate the likely benefits of the recent moves by Daimler-Chrysler, Ford & GM to put their purchasing operations on the Internet: [1=Not beneficial, 2=Marginally beneficial, 3=Beneficial, and 4=Very beneficial.] Benefits Rating Cut Costs Value Chain Integration Increase Operating Efficiencies Speed up the Purchasing Process between Manufacturer & Supplier Improve Quality Set Standards Other (Please specify):

14. What are the disadvantages of DaimlerChrysler, Ford & GMs proposed online integrated procurement system? Yes No Monopoly Privacy Concerns Reduced Profits Reduced Supplier Base Threat to Long-Term Strategic Alliances Other (Please specify on blank page)

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15. For electronic supply chains to succeed, how important is openness and trust: [1=Not important, 2=Marginally important, 3=Important, and 4=Very Important.] Variable Rating Openness & Transparency Trust Section V: IT Audit (Use & Non-Use of E-Business Technologies) 1. Does your company make use of e-business technologies? Yes No 2. Your company uses e-business technologies for: (Please tick the appropriate box) E-Commerce Yes No Business-to-Business (B2B) Procurement B2B Selling Business-to-consumer (B2C) Selling Other (Please specify):

3. What IT/e-business technology investments has your company made so far? (Please tick the appropriate box). Also indicate the year in which the particular IT was introduced in your company. IT Yes No Year Enterprise Resource Planning (ERP) Material Requirements Planning (MRP) Manufacturing Resource Planning (MRP II) Electronic Data Interchange (EDI) Manufacturing Execution Systems (MES) Computer Aided Design (CAD) Customer Relationship Management (CRM) Supply Chain Management (SCM) Enterprise Application Integration (EAI) Internet Intranet Extranet Other (Please specify):

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4. For what purposes do you use e-business tools: Purpose Design Inventory Management Management of Distribution Channels Order Processing Production Logistics Engineering/Technical Services & Support Marketing Sales Procurement Application Integration Other (Please specify):

Yes

No

5. Is the information provided within your companys internal operations electronically linked (i.e., do they talk to each other)? Yes No 6. Please rate the extent to which the internal operating systems (such as production, design, logistics, etc.) in your company are integrated with external electronic networks (such as the Internet)? [Options: 1=Not Integrated, 2=Marginally integrated, 3=Integrated, and 4=Very integrated .] Internal Systems Rating Production Design Marketing Purchasing Logistics Other (Please specify):

7. Does your company make use of enterprise application integration tools to connect ERP, EDI, etc. systems to the Internet? Yes No

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Section VI: Benefits & Obstacles 1. Please rate the following benefits of e-business technologies in terms of your own companys experience: [1=Not beneficial, 2=Marginally beneficial, 3=Beneficial, and 4=Very beneficial.] Benefits Rating Improve Competitive Position Access International Markets Increase Revenue Increase Productivity Increase Market Access Reduce Cost of Information Supplier Information Exchange Attract New Investment Reduce Procurement Costs The Shortening of Order-Ship-Bill Cycles Improvement of Inventory Operations Other (Please specify):

2. Please rate the following obstacles/barriers to the adoption/use of e-business technologies in terms of your own companys experience: [1=Not a constraint, 2=Marginal constraint, 3= Moderate constraint, and 4= Strong constraint.] Obstacles/Barriers Rating Concerns About Security Legal & Liability Concerns Low Supplier E-Business Use High Cost of Computing & Networking Technologies Limited Knowledge of E-Business Models Limited Knowledge of the New IT Unconvinced of the Benefits of E-Business Firm Computerisation Too Low Limited Network Bandwidth (Internet) Unreliable/Inconsistent Network (Internet) Other (Please specify):

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Section VII: Impact of E-Business Technologies on the Firm 1. Please indicate whether e-business technologies have had a positive or negative impact on the following variables, and rate the strength of the impact: [1=Marginal impact, 2=Moderate impact, and 3= Strong impact.] Variables Positive Impact Negative Impact Rating Production Systems Design Operations/Logistics Interaction with Suppliers Marketing Competitiveness Profits Value Chain Integration Attitudes Towards Outsourcing Attitudes Towards Partnership & Collaboration Organisation Structure & Management Relationships With Your Customers Other (Please specify):

2. Has the new IT changed the way in which your firm does business? Yes No 3. If yes to Q2, please explain how? ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 4. Has e-business affected the way in which you interact with your suppliers? Yes No 5. If yes to Q4, please explain how? ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

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6. Please indicate whether the implementation of e-business technologies in your company was successful or not. Very Successful Partially A Failure A Total Successful Successful Failure

7. If the implementation was a failure, please could you explain why this was the case? ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Section VIII: Delphi Projections of E-Business Growth 1. By 2005 _____% of my companys purchasing operations will be put on the Internet. 2. By 2005 _____% of my companys business will be web-based. 3. By 2005 my company will purchase _____% of its supplies through global web-based auctions. 4. By 2005 we expect to procure _____% of total goods and services through e-business technologies. 5. In 2005 we will reduce the number of paper invoices from _____% to _____% by implementing e-business technologies. 6. In 2005 _____% of suppliers will have access to my companys real-time sales and inventory data.