Deal focus: Carro prioritizes car financing as ecosystem enabler

Carro recently became Southeast Asia’s first automotive marketplace unicorn, but the company continues to look for ways to carve out a strategic competitive advantage. Implementing artificial intelligence (AI) technology is the current priority.

The core business is facilitating sales of used vehicles across the C2B, B2B, and B2C verticals, with algorithms that calculate how quickly different models will sell at different price points in different markets offering speed and an element of transparency. Carro also looks to finance the transactions that take place on its platform, sell insurance to buyers, and provide after-sale services like car maintenance.

Revenue increased 2.5x during the 12 months ended March – COVID-19 has encouraged take-up of digital solutions – and the company expects to hit the S$1 billion ($744 million) mark in 2022. SoftBank’s conviction in the business was sufficient for the group to lead a S$477 million round via its second Vision Fund. EV Growth also participated, while existing investors include SoftBank Ventures Asia, Insignia Venture Partners, and B Capital Group.

Most of this uptick in revenue will come from car sales, with Carro booking a commission on every deal. By contrast, the financial services business is a slow burner: on extending a $10,000 car loan with a 5% coupon, the company receives $500 per year over the life of the debt. Though its revenue share is small, financing generates plenty of profit, so Carro wants to do more. AI can be its differentiator.

“Say someone buys a car at 2 a.m. Normally, the dealers are closed but you can do it online. You are taken to a page where you fill in your basic information, and with consent, we pull information from [the credit bureaus], and run it through our automated credit check, which immediately decides if an applicant is okay, borderline, or reject. It creates a frictionless purchasing journey, with the customer finding out quickly whether they can afford the financing,” explains Ernest Chew, Carro’s CFO.

Depending on the market – Carro is active in Singapore, Thailand, Indonesia, and Malaysia – the financing might be for an individual buyer, a dealer acquiring vehicles wholesale, or a consumer top-up where the bank lends at 60-70% loan-to-value (LTV) and Carro takes it up to 80-90%. The company also provides financing for sales transacted through its classifieds platform rather than the marketplace.

Ultimately, Carro is sitting on a mountain of information that the likes of banks don’t have and wants to leverage it with greater speed and efficiency. For example, bank loan approvals are slow because the lenders don’t know about the quality of the vehicle, the transaction price, or how easily a vehicle could be monetized in the event of a seizure. They also find it hard to finance dealers because cash flow is often limited, profit margins are slim, and assets are predominantly inventory.

“To us, inventory is like gold bars. We trade in and out every day, so we know the value,” Chew adds. “If dealers have transacted through our platform, we have inspected their vehicles, we know what prices they’ve transacted at, and we can monitor their purchasing behavior – how often they buy cars, how quickly they settle with us, and how quickly they take the cars away. We might finance a dealer at 100% LTV because even if things go wrong, we know we can take the cars, sell them, and not lose much.”

He estimates that 6,000-10,000 cars pass through the Carro ecosystem every month. The total includes marketplace sales as well as situations where the company facilitates transactions with a view to financing them, not taking a commission. It does not include the classifieds platform.

The point of critical mass where there is enough information for pricing algorithms to work effectively might be as low as 1,000 cars a month. Intra-market homogeneity can be helpful. In Indonesia, for example, Toyota and Daihatsu are the dominant brands and their models are very similar.

At the same time, operating across multiple markets can be challenging. In Singapore, customers are reluctant to bring in vehicles for inspection until they know the price. In lower-trust economies, customers arrive before the price is set but they won’t leave their vehicles at the lot unless payment is guaranteed within 24 hours (Carro might be buying inventory that it holds and sells through the B2C channel). Some literally sit in their vehicles until cash appears in their account.

Willingness to transact virtually also varies between markets, so Carro maintains physical showrooms. However, the onus is to sell online. To this end, there are no-questions-asked return policies of 3-7 days and repair warranty periods of 1-2 years, depending on the location.

The company is in no hurry to enter new geographies, though Chew claims that opportunities in Vietnam and the Philippines are considered with an open mind. The biggest obstacle is not addressing local nuances, but a recognition that expansion would only work if there were partners on the ground. After all, having reliable sources of supply is the lifeblood of the industry.

Meanwhile, there is more white space in the company’s core markets. “We will grow financing because it’s an enabler and if you run it well it can be profitable,” says Chew. “But we want to participate in the marketplace and capture the entire ownership cycle of the car. When someone buys a vehicle, they will probably have financing, buy insurance, and then in six months, they need workshop services. A couple of years later, they will sell the car. It’s easy to see why we offer the ecosystem of products we offer.”

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• Topics
• Southeast Asia
• Consumer
• Expansion
• Singapore
• Softbank
• SoftBank Ventures Asia
• Insignia Venture Partners
• B Capital
• automobiles
• Growth capital
• Financial Services
• TMT