The C2B segue: China used-car trading platforms

AVCJ has reported on eight PE and VC investments in Chinese used-car trading platforms in the past 18 months, but this could be just the tip of the iceberg. Private capital has flooded into the space as a force for disintermediation, taking advantage of information asymmetries and inefficient distribution channels.

Most of the investment has targeted the B2B and B2C segments: wholesalers and dealerships trading used vehicles amongst themselves, and dealerships selling cars on to the next owners. Chief among them are B2B specialists Youxinpai and Cheyipai, which have raised $260 million and $150 million, respectively, during the period.

The C2B segment - whereby consumers sell vehicles to wholesalers - is less penetrated, but Yongshan Zhang, a principal at Baird Capital's China growth equity team, thinks it has the most potential.

"Wholesalers exist is because there are still information asymmetries, but as the penetration of online platforms deepens, 1-2 big C2B platforms plus localized B2C retailers is likely where the industry would go," he says. "From a profitability perspective, the C2B model is likely to get there first due to its asset light business model and favorable working capital profile."

Baird has backed this up by leading a Series A round of funding for Carsing, a Shanghai-based C2B platform that last year branched out into Shenzhen. FLAG Squadron Capital and Delta Capital also participated. The size of the investment was not disclosed but it is said to be around $10 million.

Choose your segment

Carsing was founded in 2009 by Lin Zhe, who previously worked at Chinese car information portal 51Auto.com. His colleagues included the founder of CarKing, a B2C platform that is also backed by Baird. Set up as a C2B and B2B model, serving as a mobile platform through which consumers could buy and sell cars, Carsing soon switched to C2B only. The online operation was complemented by an offline presence.

The Delta team, which is based in Shanghai, first heard about the company through friends who had used the service and made an approach in late 2013. This did not result in a transaction due to concerns about valuation. When Delta reviewed the situation six months later, Carsing was already in discussions with Baird and so the two firms agreed to team up, with FLAG Squadron coming on board as well.

The company is said to be China's third-largest online trading platform after Youxinpai and Cheyipai. It runs six auctions per day - taking commissions from buyers only - and has 15 locations. The plan is to open 30 outlets and enter nine new cities this year, and also develop a financing business. The new capital will support these expansion plans and, due to the asset-light business model, it is expected to go a long way: over the six years prior to this investment, Carsing's capital expenditure was just $10 million.

"We heard about this company from our friends, not through conventional advertising channels, and we think word-of-mouth is the most effective way of marketing Carsing's services. We are not going to raise those huge amounts because we don't think that is healthy or sustainable," says Greg Ye, founder and managing partner at Delta. "The entry barriers are also high because it takes time to build up a reputation among consumers."

He notes that it is important to spend time understanding a target market before moving in. Carsing likes cities with large car-owning populations but the sweet spot is mid-range car ownership. It is harder for a second-hand business to get traction in areas where there are many luxury vehicles. In terms of regulation, the ease with which a license plate can be transferred between owners is a key consideration.

An interesting quirk of Carsing's business is the number of transactions that see cars sold in Shanghai and then shipped to buyers in second- and third-tier cities. There are no licensing transfer headaches - the cars are sold without plates - but it presents a transportation challenge. A medium-term goal for Carsing is to set up a logistics network to support these transactions, which would raise the entry barrier still further.

New rivals?

Competition in the space is slim, with Ping An Group the other major player. However, there remains the possibility that the likes of Youxinpai and Cheyipai might try to expand into C2B. According to industry sources, margins are thin in the B2B space due to limited bargaining power and the rebates offered to dealerships in return for their business. A movement towards the consumer-facing segments, where there is more scope for value added services and higher margins, seems logical.

But Zhang notes that the B2B model relies on relationships with dealerships but C2B essentially means competing against them and he doesn't see how this conflict can be resolved

"Before C2B came along the biggest channel for consumers selling cars was trading-in to dealerships, which would work with scalpers to price and buy vehicles," he says. "Consumers knew they couldn't get a good price but due to safety and convenience they went with it. C2B solves this problem because you are inviting hundreds of buyers to bid on your car rather than haggling with one person."

Ye adds that vertical expansion may not even be on the B2B players' agenda due to the expectations for growth in the industry as a whole. There are huge expansion opportunities in lower-tier cities, where consumers are more pragmatic about buying second-hand, while car rental companies are a rich source of reasonably-priced cars that has yet to be fully tapped. Last year, Youxinpai investor Warburg Pincus told AVCJ that it envisaged China following a similar, but internet-enabled, path to the US market, with large-scale players bestriding auctions, financing, recovery, repair and information.

There were just over six million used car transactions in China last year, up 16.3% year-on-year, with passenger vehicles accounting for 3.5 million of them, according to the China Automobile Dealers Association. "The big players are doing fewer than 200,000 cars a year between them," says Ye. "We should see triple-digit growth over the next five years."

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• Topics
• Technology
• Consumer
• Greater China
• Venture
• Venture
• Baird Capital Partners Asia
• TMT
• Consumer
• FLAG Capital
• China