The Asian Steel Industry Can Benefit Significantly from the Internet Madanmohan Rao interviews Andrew Yao, CEO of iSteelAsia.com madanr@microland.net Andrew Yao is the founder and CEO of Hong Kong–based iSteelAsia.com, an online market exchange for the Asian steel industry. He is chairman of construction materials distributor Van Shung Chong Holdings and was formerly a strategic consultant at Matsushita Electric in Tokyo. What was the original vision behind the founding of iSteelAsia? We set out to reform the steel trade in Asia through e-commerce, reducing or eliminating the structural inefficiencies and complex value chains that had built up within it and enhancing the speed, efficiency, and cheapness of steel trading. This has been operationalized through three components: a secure online B2B [business-to-business] exchange environment for steel trades, timely and comprehensive news and industry information for the steel trading community, and service providers in financing, insurance, surveying, shipping, and logistics. Steel is the second-largest industry in the world, after petrochemicals, and its operational inefficiencies make it perfect for the Web. Asia currently captures about 45 percent of global steel consumption. We see clear signs of an increasing demand for steel supply from this region. How has your organization grown since founding? Some 15 industry players were our founding members, based in Germany, Hong Kong, Malaysia, Saudi Arabia, South Africa, South Korea, and the U.K. While primarily targeting the Asian steel trade, we have set up offices in Beijing, Shanghai, Guangzhou, and Manila as well as international offices in Europe and the Americas. From a founding team of less than a dozen, we are now aiming to staff up to around 65 employees by the middle of the year. iSteelAsia.com should be able to secure about 10 percent of the Asian steel market by 2002, targeting $5 billion worth of online steel trading. We already have close to 2,000 registered users of our site. Whom do you view as your competition, and how do you stack up against them? We see the so-called traditional way of doing business as our competitor. We do not see a competitor with a real trading portal in Asia yet. We respect our U.S. competitors, such as eSteel and MetalSite.com, as pioneers in the business, but we feel they lack the understanding of local conditions to succeed in the Asian steel trade, in a region where we already have first-mover advantage. What are the top three misconceptions you notice in the way companies approach B2B e-commerce in areas like steel? First, the belief that e-commerce can be brought in to an existing business like a new software package. B2B e-commerce involves, instead, a complete reexamination of the business and perhaps a totally new organizational structure or even a new business plan. Second, failure to appreciate the need for speed. E-commerce grows so fast that competitors can overtake you overnight! And third, misunderstanding of the value propositions involved. The cost and efficiency savings provided by e-commerce—at least 25 percent process cost savings in many circumstances—make it compelling, but too few businesses understand this. What are the top lessons you have learned about B2B market spaces since the launch of iSteelAsia? First, that commodities industries everywhere are ripe for e-commerce. Entry barriers have to be raised every week: competitors move in so fast that longer time scales invite trouble. Second, that networks of business relationships are enhanced, not supplanted, by e-commerce. Next, that narrow money yardsticks are dangerous and misleading: relationships can be worth far more than their paper value; cost savings or added revenues can come from all kinds of unexpected places. And last, that a good business model beats a high stock market valuation any day! How do your strategies differ for the different Asian markets? Our strategies in different markets vary with the local conditions. For instance, in China we had to allocate considerable resources toward educating the steel community about e-commerce and the Internet in general. In Korea, on the other hand, with its sophisticated economic base and relatively high Internet take-up, we could concentrate rather on forming certain business and technical alliances. We launched a Chinese-language version of the site this past February and have held seminars. We recently signed [a memorandum of understanding] with Korean Internet, steel, and financial corporations. What are the revenue streams in your business model? We have multiple revenue streams: deal commissions as well as revenue-sharing partnerships with shipping, banking, surveying, and insurance companies. Major sources of revenue are commissions on transactions—with sellers only—and value-added services. The precise commission rate ranges from 0.2 percent to 0.875 percent depending on the product, and online auction commissions range from 0.15 percent to 1.5 percent. Such rates are competitive compared with present market rates for offline traders, which are generally around 3 percent. How do you view the Indian steel market? According to steel industry research reports, the Indian steel market ranks number four in Asia—after China, Japan, and South Korea—in terms of steel consumption and steel production. The Internet and e-commerce concepts have been more widely utilized in India as compared with some other Asian countries, and the B2B e-commerce industry is much more mature than others such as China. We are investigating business opportunities in India right now. We believe the Indian steel industry can benefit significantly by shifting some businesses from offline to online channels. About the Author: Madanmohan Rao