Used-car platforms: The consumer counts

First, India, where trading platform Mahindra First Choice Wheels (MFCWL) raised $15 million from Valiant Capital Management, a San Francisco-based hedge fund. The country sees 3.2 million used cars traded each year, which means the second-hand market is already bigger than the market for new vehicles. It is expected to be nearly twice the size of the new car market within five years.

China is, as it stands, the polar opposite. There were six million used car transactions last year, with passenger vehicles accounting for 3.5 million of them. New car sales were much higher, coming in at 23.5 million units. The implication is that the second-hand market in China could be poised for extraordinary growth. Indeed, it is worth noting that two-and-a-half times more used cars than new cars are traded each year in the US.

The question for investors seeking exposure to this anticipated growth is where to enter. Substantial amounts of capital have been deployed in the industry, most of it targeting the business-to-business (B2B) space, i.e. wholesalers and dealerships trading used vehicles amongst themselves. But is this the best course of action?

The underlying thesis is strong: Private capital wants to be a force for disintermediation, taking advantage of information asymmetries and inefficient distribution channels. Through a combination of scale and technology - online trading platforms completed by offline centers at which buyers can literally kick the tires - the objective is to make trading less opaque, removing the inherent distrust that exists between buyer and seller.

B2B platforms certainly achieve scale but it remains to be seen whether this can translate into profit. Acting as an online intermediary between wholesalers brings with it limited bargaining power, while the battle for market share has seen rebates liberally distributed among dealerships in return for business. As a result, margins are thin.

Consumer-facing segments, on the other hand, offer more scope for value added services and higher margins. This involves facilitating sales of vehicles by consumers to used car wholesalers (C2B) or, more commonly for VC-invested businesses, operating a platform through which these wholesalers sell on the vehicles to a new batch of consumers (B2C).

In this context, the other significant investment last week in a used car trading platform - which saw KKR team up with search giant Baidu and US-based hedge fund sponsor Coatue to invest $170 million in Uxin - makes sense. Uxin is the prime mover in the B2B space through Youxinpai, competing against Cheyipai, another VC-backed group. It will use the new injection of capital to drive expansion into B2C services, having recently launched a platform dedicated to connecting auto retailers with used car buyers.

This doesn't necessarily signal a lack of confidence in B2B. For example, one key difference between the Chinese and US markets is the former has yet to see a critical mass of supply coming from car rental companies (fleets are still relatively young). However, this is gradually changing and it should have a positive impact on the B2B players' margins.

Rather, first of all, Uxin is looking to broaden its coverage of the used car industry with a view to extending its dominance. (When Waburg Pincus invested in the company last year comparisons were drawn with the emergence of Manheim as a leading player, albeit in a pre-digital age.) Second, there is a recognition that many of the most valuable online and mobile services are predicated on consumer engagement.

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• Greater China
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