Crain's New York Business
(Copyright (c) 2001, Crain Communications, Inc.)

After 25 years in the steel industry, Michael Levin took his molten experience and poured it into a very different mold: e-Steel Corp., an on-line marketplace for buying and selling steel.

Like other business-to-business on-line marketplaces, e-Steel found favor with venture capitalists who saw the profit potential in commissions from on-line transactions. e-Steel raised $100 million and launched in late 1999.

Unfortunately, other entrepreneurs had the same idea, and e-Steel found itself constantly developing new technology to set itself apart from the competition. Dozens of programming engineers hammered out sophisticated systems that allow steel companies to manage their supply chains on-line.

Last summer, bolstered by market research he had commissioned, Mr. Levin refocused e-Steel to better capitalize on the technology to transact steel, rather than the commodity itself.

``Just being a marketplace where any buyer and seller can meet has limited long-term value compared to a solution that addresses these complicated supply chains,'' Mr. Levin says. e-Steel won't reveal its revenues, but says it hopes to be profitable by 2002.

Determined to outpace its competitors, e-Steel is investing heavily in software development-60% of its 150 employees are programming engineers-and focusing on three revenue streams rather than one. Mr. Levin hopes all that effort will position e-Steel as the dominant player in the on-line steel business.

A change in competition

``Companies like e-Steel are reinventing themselves,'' says Emily Andren, senior analyst at consulting firm GartnerGroup Inc. in Stamford, Conn. ``They're looking at integration opportunities they can participate in, rather than just the e-marketplace.''

e-Steel's closest competitor in the on-line steel arena is Pittsburgh-based MetalSite, which is owned by several major steel producers and holds steel auctions for excess inventory and other spot sales. Others in the field include MetalSpectrum, Ferrous Exchange and MaterialNet.

But with e-Steel's new focus, the real competition will be other technology companies. Commerce One, for example, sets up Web back-office integration systems that are alternatives to e-Steel's.

``Are we selling software or transactions? Both. They work together,'' Mr. Levin says.

e-Steel commissioned a study by consultants Bain & Co. that concluded that steel transaction costs can by reduced by up to half by handling them on-line.

Instead of merely providing an on-line marketplace for all that metal, e-Steel will be selling supply-chain management systems and developing private on-line marketplaces for steel companies. It will continue to operate its open e-marketplace, where it gets a commission of less than 1% on the transactions conducted among 4,000 members.

e-Steel has snared some big customers for its new products. US Steel Group in Pittsburgh, the country's largest steel manufacturer and an investor in e-Steel, was the first to adopt an e-Steel system that integrates on-line transactions with pre-Web, back-office systems such as inventory management, accounts payable and shipping.

Ford Motor Co. in Detroit is spending a bundle on an e-Steel system that will bring its steel procurement on-line, from mill to assembly line. e-Steel will collect a fee each time the system is used.

Product investments

Last year, BHP Steel, an Australian company, was the first to invest in another e-Steel product: a private on-line marketplace. It's a system that allows the company to manage its sales on-line. e-Steel, which maintains a staff of six people in Australia to manage the project, received a lump sum for setting up the system and also charges BHP an annual subscription fee to use it.

``These are multimillion-dollar, multiyear contracts,'' Mr. Levin says of the BHP and Ford deals. Earning tiny commissions on e-marketplace transactions, he says, e-Steel's competitors will ``have to do phenomenal business to come up with the revenue base we have here.''

Says Phil Schefter, a vice president at Bain in Boston, ``They're going in three directions, but they are interrelated and are all built off of the concept of steel being bought and sold efficiently using this trading platform they've developed.''

e-Steel enjoys an expanding business-to-business market for its services: Accenture (formerly Andersen Consulting) predicts that within three years 40% of steel transactions will take place on-line. And e-Steel's evolving focus might give it an edge in the competitive business-to-business market.

But Mr. Levin says there's another, more challenging hurdle. ``The competition we're (most) worried about is this: Will the industrial companies embrace the internet and do it themselves?''