Charting the Dutch Digital Economy Part VII: Why B2B e-Commerce Is So Big

A few weeks ago The METISfiles reported on the relatively small size of Dutch B2C e-commerce. In this next digital economy series episode we will estimate the size of the B2B e-commerce sector. This is a much more complicated exercise than estimating B2C ecommerce size as there is no Dutch research available . Also, in other counties B2B e-commerce statistics are just as hard to come by which makes it hard to compare. The good news is that survey results on B2B e-commerce have been made available by the Dutch Central Bureau of Statistics (CBS). To come up with a B2B e-commerce sizing estimate we combined the composition of the Dutch GDP, the financial statistics of Dutch companies and the results of the Dutch ICT CBS survey.

But first we need to define what we include in B2B e-commerce. For the purpose of this blog we will define B2B e-commerce as the trading in products or services between businesses using computer networks, such as the Internet or EDI. The size of the B2B e-commerce market is therefore the value of all B2B e-commerce transactions between businesses. A transaction has a sell and a buy side. In order to avoid double counting we define the size of the Dutch B2B e-commerce as equal to the total value of electronic purchases by businesses based in the Netherlands. Within these purchases we also include the purchase of goods or services from abroad.

The number we are looking for is the value of all buying transactions of businesses based in the Netherlands which we will refer to from now on as Dutch business. For this we use CBS’s company financial statistics. According to these stats the total net purchases of Dutch businesses in 2013 equals € 858 billion. For 2014 the total value for intermediate goods and services was -0,3% so we can savely assume that the B2B purchases in 2014 were the same as in 2014.

Now that we have total B2B spending we can start calculating B2B e-commerce. Dutch CBS has been tracking the use and value of Dutch B2B e-commerce since 1999. However, CBS have changed the survey questions regarding e-commerce. Before 2010 companies were asked to provide the exact percentage of goods and services that were purchased electronically. The survey results showed that 17% of all purchased goods and services in 2010 could be classified as B2B e-commerce. Applying this number to the total number and goods purchased – € 772 billion in 2010 – results in a B2B e-commerce market size of € 131 billion. A conservative extrapolation of this 2010 B2B e-commerce share would result in a B2B e-commerce size in 2013 of €151 billion or 10 times as much as Dutch B2C e-commerce. Does this makes sense? Let’s first take a look at some international research and apply the outcomes to the Dutch market.

The German B2B e-commerce market was estimated to be worth € 870 billion in 2012 representing 95% of all German e-commerce spending. B2B e-commerce here appears to be 19 times the size of B2C e-commerce. With all other things being equal and The Netherlands being 22.7% of the German economy (GDP) in 2014, Dutch B2B e-commerce would be € 198 billion which would mean that Dutch B2B e-commerce would represent 30% of total B2B spend.

Other research into B2B e-commerce mostly refers to B2B sales rather than B2B purchase value. As the size of import and export varies by country, outcomes of this type of research can only be used as a very rough indication of the size of B2B e-commerce based on purchase transactions. The UK B2B e-commerce market size in 2013 was estimated at GBP 92 billion which was actually smaller than the B2C e-commerce market estimated at GBP 101 billion. However this number represents B2B sales which makes it difficult to compare. AT Kearney stated in 2010 that the UK B2B e-commerce market size was 2.3 times the B2C e-commerce market size. Their number was also based on sales value and is a bit vague on what is included in B2B or how the number was actually calculated. However, applying this ratio to the Dutch situation would size the Dutch B2B e-commerce market at € 35 billion.

The US B2B e-commerce percentage of total B2B commerce was estimated by Forrester to have reached 8,5% in 2014 resulting in a B2B e-commerce market value of $ 692 billion in 2014. Again this number is based on B2B sales rather than purchases. Nevertheless, if the same percentage would be applied to the Netherlands, Dutch B2B e-commerce would be €56 billion in 2014.

According to Frost & Sullivan the worldwide B2B e-commerce market, based on the transaction volume of online sales, is projected to reach € 6.7 trillion in 2020. With all things being equal and the Dutch economy being 1.1% of WW GDP in 2014, total B2B e-commerce in the Netherlands would be € 74 billion in 2020. With a 8% CAGR until 2020 the Dutch 2014 B2B e-commerce market size would have been € 47 billion or 7% of all B2B purchases. Using the GDP share, however, is questionable. Also, this research covers B2B e-commerce related to manufacturing only so underscores the total B2B e-commerce market.

Using other countries as a proxy leads to a Dutch B2B e-commerce size that varies from € 35 billion to € 198 billion. At best these numbers can be used as a lower and upper limit of the Dutch B2B e-commerce market size. Using sales value instead of purchase value also flaws B2B e-commerce approximation methods. Moreover, using a sales transaction approach tends to underestimate e-commerce in export oriented countries such as The Netherlands.

A better method is to stick to the CBS data. Our total B2B purchase number for 2014 of € 858 billion excludes agriculture excludes agriculture, finance, real estate, government, education and healthcare. Government and most of the education sector are not counted as businesses. To correct for finance we use their sector production number of € 97 billion in 2012 as a proxy to their net revenue and subtract the sector value add of € 48 billion. The result is an estimated 49 billion B2B purchase number. To correct for agriculture we assume the sectors purchase value to equal to 60% of the sectors revenue, adding an additional € 17 billion purchase value. For healthcare and real estate, we assumed a purchase value of 25% of the sector’s turnover resulting in an additional € 26 billion. The corrected purchase value of the Dutch economy in 2014 therefore equals € 949 billion.

As of 2010 Dutch CBS decided to change the questions related to B2B purchases and asked companies if they purchased < 1%, <2%, < 5% , < 10%, < 25%, < 50%, or >= 50 % of their total purchases electronically. As a result B2B e-commerce came dramatically down after the 2009 high of € 131 billion. Apparently CBS felt they were overestimating B2B e-commerce and tried to get a more realistic view on the size of the market by offering respondents pre-defined classes. With these redefined survey questions it is difficult to come up with a good estimate because the chosen percentage classes leave too much room for correctly assessing the class average. Nevertheless:

  • averaging the upper and lower class boundaries would result in a B2B e-commerce market size of € 87 billion in 2014
  • using the lower class boundary would result in a B2B e-commerce size of € 58 billion in 2014
  • using the upper class boundary would result in a B2B e-commerce size of € 116 billion in 2014

For our B2B e-commerce estimate we have chosen to use a class means that equals the lower class boundary plus a quarter of the differences between the lower and upper class boundary. Using these artificial class means combined with the total of B2B purchases of € 858 billion leads to a B2B e-commerce market size of € 73 billion, almost 5 times the B2C e-commerce market.

B2B size

The reason the B2B e-commerce market is so large when compared to B2C is caused by the value chain effect of production and trade processes: the metal to produce a bolt for the engine of a car involves at least four (but probably more) transactions before it reaches its final destination. All purchase transactions and associated value are part of the total B2B e-commerce market size, including purchases made abroad.

B2B share

The graph above shows the share of Dutch B2B e-commerce in total B2B commerce for 2014. While only 8% of the current B2B commerce can be regarded as B2B e-commerce due to the sheer size of B2B commerce it is still 5 times as big as B2C e-commerce.

As a result there is a second conclusion that can be drawn: the total addressable B2B e-commerce market depends very much on the economic structure of a country. Economies that tend to stand at the top of the food chain, i.e. producing final goods and services, can be expected to have relatively higher B2B market sizes than economies with economies based on intermediate goods and natural resources. Economies generating more complex final goods (i.e. the German car industry) tend to require more input or intermediate products and services and therefore can be expected to show an even higher B2B e-commerce market size.

The final conclusion that can be drawn regards the future of B2B e-commerce. While the future of B2C e-commerce depends on the growth of consumer spending and its ability to convert analogue commerce into digital commerce, B2B has an additional growth driver. B2B e-commerce is not only driven by economic growth and its ability to digitize current B2B commerce but can also expect to grow its future potential. As companies continue to outsource non-core activities, B2B e-commerce benefits in two ways. First there is the effect of converting internal to external value chain spending causing the size of B2B commerce to increase. Secondly there is the effect of managing the increased complexity of the value chains which will drive the use of B2B e-commerce technologies giving an extra boost to B2B e-commerce. So while B2C e-commerce is capturing most attention it is the B2B e-commerce where the real action is.