Obits: Cold Feet Squash Minority-Supplier Site
BY Mike Hofman
Despite high-profile supporters and millions in seed capital, an online exchange for minority suppliers to the auto industry couldn't figure out how to make its business model work.
The business: Online marketplace for minority-owned suppliers Founded: February 2000 Closed: July 2000 Cause of death: Loss of confidence in revenue source
M-Xchange.com Inc. seemed blessed from the start. No less a personage than the Reverend Jesse Jackson appeared at a Detroit news conference in March of this year to help introduce the Internet start-up to the public. On the dais with Jackson were the company's cofounders, both pillars of the city's business establishment. One was Roy Roberts, a legendary figure in the auto industry who had been the highest-ranking African American executive at General Motors before he retired, in February, at age 60. The other was Gary Wasserman, the owner and president of Allied Metal Corp., a specialty-steel maker based in Troy, Mich.
Basking in the limelight with Jackson, the two men unveiled a plan for a profit-making Web site. M-Xchange.com would market the products and services of businesses owned by members of minority groups, such as African Americans, Asians, and Native Americans. Roberts and Wasserman would levy a 1% to 3% charge on every deal they brokered. If they could attract even a small fraction of the nationwide commerce involving minority-owned suppliers, they would generate huge revenues. All three major U.S. automakers, for example, earmarked roughly 5% of their $300 billion in combined outlays each year for purchases from minority-owned suppliers. And M-Xchange.com set its sights on a much broader market that spanned industries ranging from aerospace to hotels.
Even though the transaction-fee model looked golden to Roberts and Wasserman in March, just four months later they regarded it as toast. Despite the upbeat launch, which included raising $3.5 million in seed capital from friends and family, the veteran executives scrapped their start-up when they developed cold feet about transaction fees as a source of revenues. Given that view, Roberts says, folding M-Xchange.com became the "prudent" thing to do.
The idea for M-Xchange.com had originated with Wasserman, who saw an opportunity to tap a growing market niche through the Internet. He enlisted Roberts, a revered figure in Detroit who had risen from humble origins in Arkansas to become group vice-president of GM's North American vehicle sales, service, and marketing.
In May, M-Xchange.com received an important boost when it signed a deal with Delphi Automotive Systems Corp., a $29-billion auto-parts supplier also based in Troy. Delphi, which received a small equity stake, lent the start-up 10 technicians to help build a Web site. Meanwhile, M-Xchange.com also hired 10 marketers and other employees to drum up interest among minority suppliers. "Roy Roberts's team did a good job of selling to the minority community," says Andre Arbelaez, president of the local Hispanic Business Alliance and the director of corporate development at Marisa Industries, a minority-owned auto supplier based in Auburn Hills, Mich.
But by late spring M-Xchange.com's luck was running out. The word around Detroit, according to Arbelaez, was that Covisint, an online business-to-business marketplace supported by the Big Three automakers, might create its own exchange to reach minority suppliers. That might have siphoned business away from M-Xchange.com, although Roberts denies that he regarded Covisint as a potential rival.
Covisint was not the only looming threat. Online exchanges selling everything from office supplies to aluminum were cropping up in a host of industries targeted by Roberts. The burst of competition was driving transaction fees down industrywide. "Today the consensus is that people may be able to charge a quarter of 1%, and even that's falling," Wasserman says.
With the transaction-fee model in question, Wasserman and Roberts disbanded M-Xchange.com in July. Although the Web site was never open for business, they spent about $900,000. By leaving no creditors unpaid and returning all unspent money to investors, the founders buttressed their reputations. Indeed, Roberts is in line to become president of the Boy Scouts of America in 2001.