<B>Online Trading Sites Struggling in Europe</B>

Online exchanges are having a tough time getting a cut of Europe's paper industry.

One of three independent electronic marketplaces launched last year has folded. The others, PaperExchange.com Europe and PaperX.com, are fighting for acceptance in an industry that now has its own Internet plan and views them as unwelcome middlemen.

The start-ups are accepting that they may have to cede control of their businesses to major companies in the 50 billion euro European paper market. But even that may not be enough to ensure their survival. Europe's leading paper companies have balked at trading on the independent exchanges, and have begun work on their own online trading consortium.

The first business-to-business paper-exchange project in Europe, Sweden's accesspaper.com, ran out of funds and was abandoned in June. It never launched a Web site. "Paper companies basically said `we cannot accept that someone else becomes rich on our cash flow; we are going to set up an exchange on our own cash flow,'" says its founder, Michael Palm, now a consultant to venture capitalists.

Finnish papermaking giant UPM-Kymmene Corp. doesn't disagree. "There is no room for an outside supply chain to come in and take something which belongs to suppliers and customers," says Jorma Saarikorpi, a UPM vice president who is leading a project to start an industry exchange. Saarikorpi says the industry got the idea from the start-ups. "They put this new idea forward and this made us as an industry look at the whole value chain and believe we can do something, too," he says. He is meeting with competitors, including Finnish companies Stora Enso Oyj and Metsa-Serla Oyj, to plan their own online exchange.

Saarikorpi says UPM has never traded on the independent exchanges. But the industry approach is basically the same. The exchange will act as a meeting place for paper suppliers and their customers. The paper companies also are working on a project called Papinet, and are developing a set of extensible-markup-language, or XML, standards for the online paper trade. But an industry-led exchange using the Papinet standards isn't expected to be launched for at least a year.

Stora Enso hasn't transacted business on an independent exchange and doesn't plan to, a company spokesman says, but "would consider" taking part in an industry consortium -- even as it moves ahead with its own portal. "We think e-commerce will have growing importance in selling paper," the spokesman says.

Such attitudes are forcing the independent exchanges to try to reposition themselves as consultants and software providers rather than just marketplaces. PaperExchange and PaperX both promised improved trading efficiency and lower transaction and supply-chain costs. Both put former paper executives in high-ranking management jobs. The chief executive of PaperX, Lars-Ake Helgesson, is former chief executive of Stora. PaperExchange, a unit of PaperExchange.com Inc. of the U.S., hired former Jefferson-Smurfit PLC and Georgia-Pacific Corp. executives as general managers.

Launched last June, PaperX scrapped transaction fees in late August and is recasting itself as an electronic-commerce partner rather than as a middleman.

Both are upgrading their technology offerings. PaperX is selling software to enable paper companies to trade on the Internet. PaperExchange, meanwhile, also is selling software that lets suppliers take orders over the Internet, and hopes to generate more and more of its revenue from such e-commerce applications.

To gain industry acceptance, both PaperX and PaperExchange are now open to selling a majority stake to large paper suppliers.

"We would like to attract regional partners," says Colin Carroll, managing director of PaperExchange.com Europe, which launched its European site in April. "We will take our European operations separate, and operate as a distinct entity from the U.S. parent," he says. "It's a lot easier when you have industry partners in collaboration." Bjarne Lie, co-founder of PaperX, says his company also wants industry participation, and that "even a majority stake would be fine."

But the industry heavyweights have their own plans, and that's bad news for the independent exchanges. "There's a great deal of skepticism about whether these exchanges will ever get off the ground, especially for narrow verticals (sector-specific portals such as PaperExchange and PaperX) that don't have industry sponsorship," says Chris Vroom, a managing director at Credit Suisse First Boston.

PaperX, which raised 15.5 million euros in February from venture capitalists led by Apax Partners and Insight Capital Partners, had to delay plans for second-round financing during the third quarter.  – Dow Jones