April 23, 2012

China Auto Rental: An exit

Filed under: Automotive — Administrator @ 12:49 pm

We’re happy to announce, after the company pulled its US IPO, that we sold half of our remaining position in China Auto Rental, now China’s largest rental car network, but at the time of our initial investment is was little more than a call center selling insurance products under the name of UAA. Keep an eye on this company as it continues to develop and modify its services and product mix as it will surely command a growing position in its sector, especially now that Warburg Pincus invested US$200M in the company.

August 30, 2010

The battle of the rental cars wages on in China

Filed under: Automotive,Ymer News — Administrator @ 12:23 pm

China’s rent car war is heating up – in a big way. Ymer backed China Auto Rental which recently received US$150M from Legend Capital has a viable sparring partner in the billion dollar rental car ring on the back of Goldman Sachs reported US$70M investment into Shanghai based eHi Car Rental.

If you are interested, have a read of the article Wall Street Journal reporter, Jonathan Shieber, posted last week on WSJ blog Venture Capital Dispatch titled “With $70M, China’s eHi Car Rental Looks To Untangle Traffic Snarls”.

According to Shieber, eHi, in addition to operating a more traditional rental car model, is also looking to emulate Boston based Zip Car’s model (short-time inter-city rentals). I have serious doubts China is ready for this model, and that eHi is looking more at the PR value than the RMB value.

It took Zip Car almost a decade to build traction in the US, where there already was a rental car culture, a community around ride-sharing, and public parking lots conveniently located in multiple city locations; all three are still nascent concepts in China.

Let’s see how this plays out. It will be interesting, for sure. Most likely, though, you’ll see the traditional rental car model (with flavors of Chinese localization) proliferate long before Mainlanders are Zipping in and out of cars.

December 13, 2007

UAA launches China Auto Rental in 11 cities across China

Filed under: Automotive — Administrator @ 12:57 pm

Yesterday, we were in Beijing at the Great Hall of the People attending the kick-off party for UAA’s new rental car business called China Auto Rental (CAR) – it was a very impressive turnout and a fantastic event.

Attending the ceremony was a generous helping of government officials, VC types (e.g. Gobi, KPCB, Legend), strategic partners (e.g. Cross Country Group, PICC), and several CEO’s from NASDAQ listed Chinese companies (e.g. Baidu, Air Media, Focus Media, KongZhong). And in the end, when the last bottle of Dynasty wine was emptied, consensus was that the rental car business in China is the next investment tsunami and CAR looks poised to be at the forefront.

Mike and Howard (CCG); Charles (UAA); Adam (Ymer)

In less than 2 months, CAR has grown its rental car fleet from zero to 150 cars operating out of 11 cities/airports – Charles Lu, CEO of UAA, expects to increase the size of his fleet 6x to 1,000 and double the number of cities/airports to 22 by year-end 2008.

This may sound like a tall order given the fact UAA just sat down at the table however, in many ways, UAA has been working towards this day (whether Charles and his team knew it or not) since 2006 – for example, consider how close the following UAA services track to basic rental car offering:

(1) UAA is already the leader in emergency roadside assistance with over 95% nationwide coverage for it 2.2 million plus members;
(2) UAA operates a 1,400 person call center staffed by both customer service representatives and direct marketing professionals;
(3) UAA has a co-branded credit card/membership card with China Merchants Bank (i.e. allowing not only for credit card processing but also data collection/mining);
(4) UAA is a leading auto insurance brokerage (i.e. can offer customized insurance packages to renters); and
(5) UAA branding is one of the most widely recognized and trusted names in China’s automotive services industry.

By some estimates China’s domestic demand for rental cars will reach 300,000 units to 400,000 units by 2015 on the back of sales revenue of US$2.3 billion. Even if we slice market estimates by 30% you’re still talking about a US$1 billion plus rental car industry however the challenge (for an operator) is cost effectively scaling and sustaining a business long enough to reach critical mass – and this will require a war chest of capital.

Our read is – CAR is either going to be a massive success or an epic disaster as there really isn’t any middle ground with this one. Don’t get me wrong, I’m certainly not getting all aggro and negative on CAR but, yeah, this is an extremely capital intensive and asset heavy business which, unlike a Web 2.0 application feeding off Facebook’s community juices and API, CAR must build and operate a national service platform from scratch.

With that said, as noted above, CAR has the benefit of leveraging UAA’s existing network and platforms – and this certainly gives CAR the leg up over its competition, and thus dramatically improving the likelihood of success.

Still, investors can’t overlook the fact that we’re in uncharted waters with an unproven model (“…does anyone have a machete I can borrow, I need to blaze a trail…”) and it’s bound to get a little scary. So, a simple way to actually measure the degree of difficulty facing Chinese rental car operators is to consider the performance of incumbents.

Over the past 5 years, there have been, of course, several attempts to enter this market – most notably from the majors (e.g. Hertz and Avis). Crash and burn, anyone?! Indeed, Avis Europe’s joint venture with Shanghai Automotive Industrial Sales Co. (Anji Car Rental Corp) has had a bit more success than Hertz in keeping their management team out of trouble and on the path of truth as witnessed in Hertz’s February 2006 announcement that the company was terminating its partnership with China National Automobile Anhua International Trade Co. According to a Forbes article,

“…the decision to part company with the local firm was made because Anhua lacks capital to run the business and has failed to monitor the operations of its franchised branches...”

Obviously, part of the reason Western firms have found it difficult to profit from China’s rental car segment is poor execution but the bigger issue is that the operations are running off business models that are heavily influenced by their western linage in a not so western environment. (We’re getting flashbacks of the Groupe Danone and Wahaha spat.)

In spite of this rental carnage there is another domestic company that seems to be making some in-roads into the rental car universe – namely Shenzhen based Top One. Established in 2006, Top One received Series A funding from SIG and Hong Kong Maida Fund. According to sources, Top One’s rental fleet contains around 300 to 350 units operating out of about a dozen Chinese cities – mindful that the company has been at it for over two years – we’re scratching our heads wondering why they’re not bigger – indeed, is this an execution problem, a market acceptance issue, or a lack capital?

To wit, we’re guessing it starts with the fact that the barriers to entry are substantial – unlike in the US or Europe where there is already a deeply embedded car culture and credit card culture, pre-existing networks and services providing emergency roadside assistance, extensive credit histories on consumers are readily accessible, Lo-Jack, and a significant secondhand car market where rental agencies can hock their 9-month old fleet vehicles – in China, not much of this actually exists, and thus an operator must build from the ground up – all things being equal, in the end, it will simply come down to execution (which, given the local/homegrown nature of CAR and Top One, is slightly different from the hiccups Western operators have encountered).

In many ways, if Top One had made more progress (unquestionably validating the model) this opportunity would be flooded with “me-too” players – the fact that UAA and Top One seem to be the lone domestic gunmen makes this one of the most tastiest investment opportunities in China – indeed, we’ve got a drag race on our hands.

Better buckle up!

June 7, 2007

KPCB leads US$13 million Series B round in United Automobile Association

Filed under: Automotive — Administrator @ 12:39 pm

Earlier the week, venture capital fund KPCB led a consortium of existing shareholders in a US$13 million Series B round in Beijing based UAA – this comes three-months after Series A closed in February.

KPCB enhances an already impressive list of world class investors and industry leaders, such as Legend Capital, Cross Country Automotive Services, and, dear we say, Ymer Venture Capital.

We expect great things to come of this partnership – as should Chinese consumers!

April 3, 2007

Ctrip on wheels

Filed under: Automotive,Ymer News — Administrator @ 9:17 pm

In today’s South China Morning Post Business section Sherman So filed an article on United Automible Association titled Club hitches ride on fast growing car ownership.

“Basically, we are like Ctrip,” Mr Lu said, who sold his previous ventures for more than US$12 million. “Ctrip partners hotels and airlines and takes commission from them when customers make bookings. We partner car repair shops, insurance companies and others and take commission from them when our members require these services.”

February 24, 2007

United Automobile Association receives funding from Cross Country Automotive Services

Filed under: Automotive,Ymer News — Administrator @ 8:12 pm

Beijing, PRC and Medford, USA – February 2007 – United Automobile Association, China’s leading emergency roadside assistance provider, last week closed Series A2 financing.

Joining existing investors Legend Capital and Ymer Venture Capital in the oversubscribed up-round is Cross Country Automotive Services (CCAS), a leading provider of integrated vehicle and driver programs in North America serving the Automotive, Insurance, and Diversified markets for over 35 years.

This is a tremendous opportunity for UAA to leverage Cross Country’s longstanding industry-wide relationships, proprietary software platforms, and broad operational and business knowledge base. We are very excited about this strategic relationship and warmly welcome CCAS to the UAA family.

October 30, 2006

UAA named as one of the top 25 most valuable China based ventures in 2006

Filed under: Automotive,Ymer News — Administrator @ 9:50 am

In October 2006, Beijing based United Automobile Association was named one of “Zero2IPO – China Venture 50” – most valuable ventures in China in 2006 – UAA was ranked in the top 25.

This is a fantastic accomplishment for a company just over a year old. Congratulations to UAA’s founder and CEO, Charles Lu, and his UAA team. Well done!

August 28, 2006

Chinacars.com receives US$25 million cash infusion from Goldman Sachs

Filed under: Automotive,Ymer News — Administrator @ 11:02 am

Last week, Goldman Sachs invested US$25 million in Chinacars.com. Goldman’s investment comes just 10-months after Series A funding.

We’re very excited that Goldman is joining the Chinacars’ family and expect great things to come in the future.

Stay tuned!

August 15, 2006

United Automobile Association (UAA)

Filed under: Automotive,Ymer News — Administrator @ 10:55 am

Ymer Venture Capital and Legend Capital closed a syndicate investment in Beijing based United Automobile Association (UAA) last week.

We are thrilled to be an investor in this great company which has been leading the way in China’s automotive roadside assistance (e.g. American Automotive Association) category since UAA was founded a little over a year ago. (Before you pass judgment on the “…a little over a year ago” keep in mind roadside assistance is an emerging segment in China that only took hold a couple years ago.)

We have been big fans of the company for a long time, specifically because we believe the management team, led by seasoned entrepreneur Charles (Zhengyao) Lu, has demonstrated time and time again that they are capable of immaculate execution on the back of solid domain knowledge.

Furthermore, we believe there are heaps of synergies waiting to be tapped (and developed) between UAA and our other automotive investment, Chinacars.

We plan to write a longer post about this investment in the next couple weeks explaining what we like about UAA, where we see roadside assistance and China’s overall automotive business heading, and what we hope UAA will become.

In the meantime, there are a number of car related blogs that we’ve posted over the past year which should provide a short-term fix.

July 13, 2006

Used Cars in China: Part 3 – What do you get when you mix sake and baijiu?

Filed under: Automotive — Administrator @ 2:45 pm

The winning used car model in China is going to be a combination of an online/offline offering – this, I think, we all know. The question is who is going to be the first player to make this happen? The key to unlocking this secret is in fact not a key at all but rather an Apple.

No, not a Steve Jobs’ Apple but a Japanese Apple – namely Apple International Company Limited. Apple, one of Japan’s largest secondhand automotive dealers, not only operates over 290 nationwide franchised used car outlets but also exports secondhand automobiles to overseas markets, principally to Southeast Asian countries.

Back in September 2005, Apple Auto Network, a subsidiary of Apple International, teamed up with Beijing-based Yafei Cars and a leading Japanese conglomerate, Sojitz Company, to establish Beijing Taizhi Zixun Company. Aipu, as the joint venture has been come to be called, will purchase and sell used cars through a franchise network in China – Aipu looks to have 500 stores by year-end 2007 and 3,500 branches by 2010 (a bit ambitious, aren’t we?).

The last bit of public information I’ve been able to find on this relationship was from an April 2006 report in China Daily announcing the opening of Aipu’s flagship store in Beijing’s Changping district.

Right. So, how dominating is this venture going to be? I think the answer hovers somewhere between absolute domination to competitive (oh, yeah to complete bust, but let’s be glass is half-full people for just once).

And here is why – the core players (Apple and Yafei each own 40% of the JV) bring to the table three core attributes: (1) automotive related franchise experience in both domestic and international markets; (2) ability to readily source, control, replenish used car inventory; and (3) in-house technology expertise (e.g. infrastructure, auction, and sales management).

Apple International Company Limited

Apple International entered China in 2003 when it established A.I. Holdings in Hong Kong. Over the past three years, A.I. Holdings has established several subsidiaries and joint ventures in China and Hong Kong – and thus amassing the following four business line: (1) international car trading – buying/selling new and used cars; (2) car rental and leasing; (3) operates China-based automotive dealerships, selling both domestic (Jinbei, Dadi, Wuling, Hangtian, and Soyat) and foreign (Mercedes, Renault, Hyundai, Chrysler, Jeep and Mitsubishi) brands; and (4) global/regional exporter of Chinese made cars via its subsidiary China Automobile Exports.

The “amassing” kicked off in March 2004, when Apple International established a new joint venture in Hong Kong called Prime On Corporation which would focus on establishing a nationwide (China) chain of Mercedes dealerships. This was followed a couple months later, May 2004, with the creation of Yunnan Kubo Auto Trading Limited, an entity 90% owned by A.I. Automobile (China) used to purchase Xinglong Motor Group. Xinglong maintain franchise rights to sell Renault, Hyundai, Chuka, Chrysler and Jeep.

In April 2005, Apple entered the Shanghai market by establishing, China Automobile Exports (CAE). With showrooms in Shanghai, CAE has exclusive global distribution of Shenyang Jinbei (pick-up trucks and SUV), SAIC GM Wuling (mini-trucks and mini vans), and Wuxi Yuejin (sedans); CAE has exclusive regional (Africa, Australia, and part of Asia and Middle East) distribution rights of Baoding Dadi (pick-up trucks and SUV) and Shanghai Zhunti (min-bus).

Back in Japan, Apple was equally as active on the technology front. In February 2004, Apple International purchased 16% of Autobytel Japan. The Alliance was intended to build a web based auto marketing platform to serve customers in Japan, China and Southeast Asia to support Apple’s dealerships in China and Thailand – essentially, Apple wanted to develop Internet sales network to cover Asia Pacific region, leveraging Autobytel’s platform.

About a year later, January 2006, Apple liquidated its stake in Autobytel. I spoke with some individuals from Apple and from what I gather there are two key reasons for this liquidation: (1) public response – Apple had a shift in direction; and (2) internal response – there wasn’t enough demand for a web based platform outside of Japan (i.e. market immature).

Anyhow, back to 2004, specifically September 2004, Apple Auto Network (a subsidiary of Apple International) formed an alliance with i-Auc (a web based subsidiary of Aucnet, one of Japan’s largest used car auction networks) and established Apple Auction. The platform Apple Auction – based of i-Auc’s internet auction bidding service – is used nationwide by Apple Auto Networks’ 300 franchised used car outlets – Apple’s end game is to introduce the platform to China.

Yafei Qiche (Automotive) Chain Store

Founded in 1994, Yafei is one of China’s largest nationwide chain stores with 500 outlets in 240 cities across China – of which about 270 outlets have links with local banks and insurance companies to provide loans. Yafei also has ties to Century Automotive Club, an automotive rental/leasing company with a nationwide network consisting of about 50 branches.

Early in 2000, Yafei looked to leverage the Internet by signing a deal with Sina.com in June 2000, to develop an online car sales and rental platform. The deal would later include provisions for an online auto lease lead generation platform.

Actually, Yafei was one of the earliest players in the auto leasing segment – this largely came as result of Chinese banks looking to spread their risk among several institutions. For example, Yafei formed a joint venture with department store chain Parkson and Shanghai Automobile Industry Sales Corporation to guarantee car loans. Unfortunately, this and other such relationships lead to a 2003 investigation by People’s Bank of China (central bank) into Yafei’s automotive finance business.

Some concluding thoughts

Offline, Aipu looks fairly well positioned to be a major threat in the used car space – the key is to observe how they plan to leverage the Internet. On one front, Apple is coming off a one year partnership with Autobytel while continuing to maintain its relationship i-Auc’s Internet based auction network – so, yeah, there is knowledge that can be transferred. On the other front, Yafei has shown they too are “somewhat” web savvy having forged a partnership, albeit unsuccessful one, with Sina five years ago (my guess is it was less about the offering and more about timing). It seems reasonable to assume Aipu has Internet opposable thumbs and therefore won’t completely muck up an Internet offering.

Yet in spite of this neither Apple nor Yafei has an existing footprint in China’s Internet space – and to be honest, if you want to hit the market hard and fast, you’re gonna need this footprint from day one (queue Conan the Barbarian: Crush your enemies. See them driven before you…).

And so, this seems like an excellent opportunity for a China based auto related Internet portal with zero resources to address the offline opportunity and start chatting Aipu up with the idea of owning Aipu’s online presence (perhaps, drawing some lessons learnt from Ebay’s hook-up with Manheim and AutoTrader).

As Sox fans say…cowboy up!

July 6, 2006

Dairy Queen stoking China’s franchise boom one blizzard at a time

Filed under: Automotive,Retail — Administrator @ 5:01 pm

Dairy Queen outlet – XuJiaHui, Shanghai

Earlier this week, I was playing rugby next to Shanghai stadium, contemplating why New Zealanders are so much better at this game than Americans, when out of the corner of my eye I spotted heaven on earth – Dairy Queen. For those in the know, DQ makes up a quarter of what we in America call our cultural soul (the remaining three quarters include, American Idol, any credit card, and Oprah).

After downing two Monster Cookie Blizzards, braving the associated (and excruciatingly painful) “brain freeze”, and finally, marveling at my new found little piece of haven, I headed off to do a little research on DQ in China.

And what I found was very interesting – DQ is a US$3 billion ice cream retailer based out of Minnesota and owned by Warren Buffets’ Berkshire-Hathaway – 99% of DQ’s revenues are generated via franchising. DQ has a franchisee in Beijing responsible for 41 outlets, a second deal with Shanghai-based RCS Group Co Ltd, and a third agreement with Guangdong Foison to open 14 DQ locations in China – DQ expects China to become its largest market in five years.

I haven’t looked at franchising plays in a long time – I think it was back in 1993 while I was a student at Nankai University in Tianjin that I first decided I wanted to rollout Subway outlets in China (Beijing’s railroad administration bested me in a franchisee battle royale) – maybe it is time to start reconsidering this model again?!

According to the U.S.-China Consulting Group in Beijing, China now has about 1,500 franchise companies – local and foreign concepts – with 70,000 franchisees. In 2003, sales from franchised stores increased 44% from the previous year, but franchising still makes up only 2% of all retail sales.

Compare China’s 2% to that of the United States where over 33% of all retail sales are from franchised stores – this US figure could climb as high as 50% by 2010, according to Naisbitt Group’s The Future of Franchising – we could be just a the beginning of something beautiful – this of course assumes Chinese consumers are as much interested in consumption as their American friends across the pound – anyhow, with the right blend of product, brand, and customer service we could see some spectacular growth from of this sector in the coming years.

For example, franchised used car dealerships…

July 4, 2006

China’s “Capitlist Roaders” go global – “Bandit, this is Snowman, what’s your twenty?”

Filed under: Automotive — Administrator @ 3:43 pm

Over the weekend, the New York Times weekend magazine ran an article written by Ted Conover titled “Capitalist Roaders“. (You’ll need to register online with the New York Times but it is free and worth the extra two minutes it takes to fill in your digits.)

Capitalist Roaders is not only a “docu-article” detailing Ted’s seven day “self-driving tour” with Beijing Target Auto Club but is also a glimpse at how an American might view China’s expanding/growing domestic automotive culture.

Some insights are accurate, for example:

But of course the story is not only about construction and production; car culture is taking root in China, and in many ways it looks like ours. City drivers, stuck in ever-growing jams, listen to traffic radio. They buy auto magazines with titles like The King of Cars, AutoStyle, China Auto Pictorial, Friends of Cars, Whaam (“The Car — The Street — The Travel — The Racing”). Two dozen titles now compete for space in kiosks. The McDonald’s Corporation said last month that it expects half of its new outlets in China to be drive-throughs. Whole zones of major cities, like the Asian Games Village area in Beijing, have been given over to car lots and showrooms.

Some insights are totally (sorry) off the mark, such as:

The astronomic growth of China’s car-manufacturing industry will soon hit home for Americans and Europeans as dirt-cheap Chinese automobiles start showing up for sale here over the next two or three years.

Raise your hand if you think US consumers will settle for dirt-cheap, unattractive, old-skool combustion engine Chinese made cars when they can have low cost, fuel efficient, stylish Japanese products instead? The answer is right in front of your face – U.S. sales fell for all three big American automakers in June, led by a 26 percent drop at General Motors Corp. (GM), while Japan’s Toyota Motor Corp. surged – this is on the back of US manufacturers virtually giving cars away for free.

But our hero, Ted, ultimately concludes his opus on a glorious note, accurately stating:

And, in heavy traffic at the end of a tiring trip, it was easy to worry that the Chinese, rather than charting an innovative, alternate route into the automotive era, were on their way down a road that looks a little too familiar.

I wonder how long it’s gonna take until China’s government bans all pure combustion engines (i.e. non-hybrid) from the market (for domestic sale)? I’d bet my little red book we’ll start seeing hints of new regulations within the next five years.

So what does this all mean, if anything?

Initially, I faded Ted’s article as yet another “I went to China and learned this” story. But something funny happened – over the past three days, I started getting a boat load of email from all these Americans, all well traveled, college educated, and completely ignorant to investing in China (i.e. no exposure to China) – sparking a thought, what does it mean that these guys are asking me whether or not they should consider investing in China’s automotive sector when these same guys never thought of lifting a figure to buy Baidu or Sina?

And moreover, what does it say about the interests of the notoriously fickle, often overly demanding NYT readers that seduced the magazine’s editor(s) to run an article about China’s car culture? Maybe it’s a desire to see fuzzy dice and CB radios make a comeback (…but I hope not).

Maybe we’re seeing the early signs of the next big big investment play out of China…and then again, maybe I’m just projecting…

May 28, 2006

Used Cars in China: Part 2 – It’s going to take more than TurtleWax to make used car portals shine in China

Filed under: Automotive — Administrator @ 8:44 pm

Last week’s note titled “America’s experience with interest rates, leasing, and auctions” discussed the history of used cars in the United States, concluding that the main driver of used car proliferation in America was interest rates; and until China experiences a similar shift in rates/consumer demand the used car industry will remain uninspiring.

This week, we’re shifting gears from drivers to models, specifically Internet related models. Before I get too far ahead of myself, I wanted to warn you, I’m not all that jazzed up about the prospects of the online used car space in China. I used to be full throttle psyched (like 3 months ago) but now the deeper I dig the more I’m convinced that the numbers/demand can’t support a web-based used car offering in China.

Don’t get me wrong, I want to believe in this used car dream more than anyone (I have a storage room filled with bumper stickers in Chinese reading “honk if you’ve been used”); but sometimes reality bites, and in this case, well, I’m looking for Winona Ryder. What concerns me is that there seems to be a tsunami of euphoria flooding China, touting the riches to be gained in this business. And, I can understand why, or rather where it comes from (queue Meg Whitman’s entrance, spot light on eBay Motors). To the causal observer (yes, I am one of those) eBay Motors’ numbers are staggering – the preverbal “smoking gun” of comparable business models…or are they?!

So, let’s get on with it – show me revenues:

According to Solomon Smith Barney, eBay Motors accounted for about 30% of eBay’s total gross merchandise sales (GMS) in 2003 (up from 12% in 2001); incredible still is the fact that eBay Motors went live around 2000. And talk about potential, eBay Motors estimated penetration rate is about 1.8% of the total US$350bn addressable market (or a GMS run rate of about US$6.5bn). Casually flashing these figures around a boardroom would stimulate the bluest of the blue bloods to roll up their pants and River Dance around the room.

“Cool. We’re going into the used car business,” yelps the bean counter in the corner holding his tortoiseshell rimmed glasses (by the way, I wear tortoiseshell glasses) in one hand and a Texas Instruments BA II Plus calculator in the other, “let’s buy some more servers…”

Kansas City Sidestep (KCS) anyone? Yeah, well, for all the gloss, in some ways, eBay Motors is a KCS. No need to make this complicated with loads of details but there are some downers dulling eBay Motors fine turtle wax finish.

An obvious one is eBay’s so called “take Rate”, or rather the percentage of money eBay makes off merchandise (GMS) transactions – essentially, revenue. According to eBay’s 2003 annual report, the average non-motor GMS take rate is about 8.5%, or more than two times eBay’s estimated 3.5% take rate from motor related GMS. If we make some adjustment to eBay Motors’ GMS, taking into account its lower take rate, Motors contribution to eBay’s total transaction based revenue drops from about 30% to about 11%.

But let’s not be too harsh – an 11% revenue contribution from any one category (or product) is solid, yet this is only 11% of total transaction related revenue, eBay also has payment related revenue (and this is a point I’m hijacking from Solomon Smith Barney as I overlooked it, too). Payments in 2003 accounted for 22% to 23% of eBay’s total revenue whereas auction related transactions accounted for the balance, 78% to 77% – following this line of reasoning and adjusting for payments, it seems like eBay Motors contributed less than 10% to eBay’s consolidated revenues.

Oh, silly me, I forgot to mention, 20% of eBay Motors GMS comes from non-auto related auctions, such as motorcycles and recreational vehicles (RVs); yeah, you got it, further eroding Motors contribution. Ouch! Does anyone have a flashlight? It’s getting a little dark in here…

…perhaps, a little too dark, a little too hardcore on the rev erosion front for my liking. And, yeah, I know it is hard to argue with the numbers but I’m comfortable believing motor related revenues account for somewhere between 11% and 15% of eBay’s total consolidated revenue.

And margins? Well, even at 50% I think the river dancing in the boardroom has stopped, but if you insist we can use the cocktail napkin approach to come up with something – eBay doesn’t report margins on individual categories so we need to get a little creative by pulling some numbers from comparable companies: (1) eBay reported a 2003 Earning Before Tax (EBT) margin of 30.6% – very healthy (queue river dancing) – yet it would be unreasonable to assume eBay Motors generated anything close to these margins as eBay Motors’ pricing scheme is fixed; (2) on average franchised and independent car dealers earn margins of around 5.5% to 11.6% on new and used cars (source: NADA 2006); (3) China based job listing site 51jobs.com generated margins 13% to 21% between 2003 and 2005; and (4) auction houses, such as Manheim, report margin anywhere between 4.5% to 7.0% (by our best estimates from available data).

Back of the napkin estimate – I think it might be safe to assume EBT margins come in between 5% and 10% (though, Solomon guesstimates eBay Motors contributes to less than 5% of eBay’s net profit). Okay, not supermarket margins, but not eBay margins either; and certainly not enough to sustain a China-based start-up where the market is desperately underdeveloped. And what’s more, margins would be seemingly lower than eBay Motors as, most likely, the China venture would be a listing service (or classified service) rather than an auction platform where a business can demand a listing fee and a percentage of the money generated from the auction.

Show me infrastructure and inventory…

Putting margins and revenues aside, and turning our focus to infrastructure expenditure, the picture for our start-up friends (or even those a bit more entrenched) doesn’t improve much. Imagine, if you will, the amount of cash required to build-out a platform similar to that of eBay’s (circa 2000) – even in China, it would be massive. How so?

First, eBay Motors had the luxury of leveraging (arguably) the best web-based auction platform in the world – a tweak here, a tweak there, plug this into that thing over there and you are ready to go. Second, eBay has an installed registered user base of 10 million people. Third, mucho brand value and substantial marketing dollars. Fourth, tried and trusted features, such as proxy bidding, the Feedback Forum, “SafeHarbor” trust and safety services, to name a few. And finally, perhaps most importantly, strategic partnerships and acquisitions which not only provided inventory and traffic, but installed eBay Motors securely aloft the competition.

The first three are obvious and need little explanation, but the fourth (trusted features) and fifth (partnerships & acquisitions) are worth a bit more discussion:

Number Four: Trusted Features

eBay’s reputation as a “SafeHarbor” was widely accepted by its users, but vehicles (with their high sticker prices) were entirely different beasts all together – users needed sophisticated tools to protect themselves against fraud. Okay, so now you are scratching your head, thinking, isn’t this guy a bit hypocritical? Hasn’t he compared certification with a Kansas City Shuffle? Well, I’m not changing my tune – in fact, the following further supports my “certification is a hoax” campaign. (Where’s that damn soapbox? Ah, found it…)

In 2001, eBay formed a partnership with Saturn Motors (a subsidiary of General Motors targeted at women) whereby an eBay member selling a car could bring the vehicle to one of four hundred Saturn dealerships across America and get the damn thing “Certified” for a US$99 fee. It was a good attempt at resolving the trust problem (and a move I would have totally championed if I was heading up eBay Motors back in 2000) but very few people got their cars certified. In fact, the service really should have targeted those out-of-state buyers (people who could not physically inspect the car). I’ve spoken with several eBay Motors employees and asked for the number of cars “Certified” – each time I get same response, a hand-full (shuffle, shuffle, shuffle…).

And then, in 2002, eBay got smart and said “gosh, certification as a concept is a good idea, but members aren’t buying into it, we need to do more.” Enter eBay’s Assurance Program for Vehicles – the Program provided coverage to buyers and sellers alike and consisted of four main features: Limited Warranty (coverage for 1month or 1000 miles), Purchase Insurance (up to US$20,000), Payment Protection (Fast Deposit and Escrow.com) and Mobile Vehicle Inspection (in 2004, eBay canceled the Saturn partnership and hooked up with SGS Automotive Service, who could perform inspections a member’s home or office).

A solid four point protection program that covered pre and post-transaction services; and thus distinguishing eBay from the crowd. Furthermore, eBay Motors, as the market leader, had the leverage and wallet to cobbled together this Assurance Program. And while relatively easy for eBay to do this in America, a China base operator would have one hell of a time replicated these services for any number of reasons, but specifically because the necessary service providers don’t quite exist (or rather, those that do exist are either too expensive, not web-enabled, or restricted by regulations).

Number Five: Partnerships and Acquisitions

I’m seriously feeling this flavor (partnerships and acquisitions) big time – meaning that this was perhaps one of the most important steps eBay Motors took in establishing itself as a leader in online used car market. To recap, we know eBay Motors had access to premium IT and a unique/active membership base (eBay was a marketplace, true as the north star) but what eBay Motors didn’t have was vehicle inventory and established relationships with the largest group of used car buyers, franchised and independent car dealers (NADA reported that 76% of all used car sales involved dealers in 2005).

Here is a timeline detailing what eBay did to fill their inventory/partnership gap:

In 1999, Kruse International was acquired for about US$17m. Kruse companies conduct auctions, perform appraisal services and auctioneering training for classic car auctions in various locations in the United States and internationally.

In 2000, eBay entered into a marketing and services agreement with and purchased a less than 5% equity interest in AutoTrader (an automotive related web portal backed by Cox Enterprises, Manheim Auctions, and Trader Publishing Company). Under the terms of the marketing and services agreement, eBay developed the co-branded eBay Motors site and AutoTrader referred customers desiring an auction pricing format to the co-branded site in exchange for a referral fee. Also, eBay committed to incur $US32mn in marketing and promotion of the service and additional related services offered by AutoTrader over the 3.5-year term of the agreement (source: eBay annual report, 2001).

The significant of this relationship can not be overstated as it connected eBay’s trading community of 10mn buyers and sellers with AutoTrader’s 5mn unique monthly visitors and more than 40,000 participating auto dealers and 250,000 private sellers that provide the 1.5mn used vehicles offered for sale on AutoTrader.

In 2003, eBay acquired certain assets of Texas-based CARad, a leader in online auction management services for car dealers. CARad’s technology gave car dealers a simplified way to list and manage more vehicle auctions on eBay Motors. That same year, eBay Motors also forged a strategic relationship with Kelley Blue Book to become its exclusive auction-style partner.

Gosh, what does this all mean?

I guess it all depends on your risk appetite, right? Do you like investing in sure things, making intelligent high risk/reward bets, or simply blowing out your brains with a piss poor investment! Because at the end of the day, we all know the truth, eBay Motors (or some business model derivative) can not be independently replicated in China (given the existing environment) without the support of a sugar daddy. But if you disagree, well, here is a water gun (this is a family site)…

What eBay Motors demonstrates is that it is possible to make this model work if you bring to the table enough scale, traffic, technical support, comprehensive Assurance Program, and quality inventory. Though would we expect anything less from a US$50bn global Internet company? And yet, is eBay Motors a leader or rather a loss leader for eBay?

I don’t get the feeling eBay Motors would be a viable entity in its own right without the support (economies of scale) of eBay’s other categories. Or rather, I don’t expect eBay Motors, as a separate, independent entity, would be able to command anywhere near eBay’s un-adjusted FY06 PE of 45x (eBay is priced a little richer than the industry average PE of 41x – source Morningstar).

And, if you buy into this thought process (I’m intentionally excluding potential advertising revenue), then you’re sure to agree that there is no way on this green earth that a China-base used car web portal has the resources or traction to scale/survive independent of a cash-rich parent company with an existing inventory of quality used cars which are not only regularly replenished but also locally available.

To be continued…

May 20, 2006

Used Cars in China: Part 1 – America’s experience with interest rates, leases, and auctions

Filed under: Automotive — Administrator @ 4:55 pm

Today, it is raining in Shanghai. I sort of like these crappy days because it gives my mind a chance to drift away and think about stuff in ways I wouldn’t normally consider (perhaps, alcoholics might call this “a moment of clarity”); regardless, some of my best ideas/insights come to me when I’m most distracted or day dreaming (MTV generation, thank you very much).

Like, for example, I’m now at peace with how I see China’s used car industry playing out over the next decade; and in case you are wondering, this revelation happened somewhere in between a public bus’ side mirror nicking my umbrella out of my hands (classic case of standing too close to the curb) and almost getting hit by a taxi.

The revelation: “Kansas City Shuffle”.

A Kansas City Shuffle is when “…everyone looks right…and you go left.” I guess it isn’t something people hear a lot about as it falls on deaf ears mostly; essentially, the people (or businesses) involved are connected only by the slightest of events – only at a Shuffle’s Tipping Point is the plot truly revealed, but by then the damage has been done.

What the hell does a Kansas City Shuffle and used cars in China have in common? That is a good question – let me explain with another question – ask anyone what the core driver leading up to the proliferation of used cars in the United States and 9 out of 10 people will say “transparency” or “certification” (answers courtesy of the hypnotic multi-million dollar advertising campaigns by both online and office auto dealers and manufacturers); so, yeah, if you side with this camp I believe you’ve just walking into the middle of a Kansas City Shuffle.

Interest rates – that is the answer you should be mulling over in your head – not certification.

You might be asking yourself, why should I care about the catalyst of America’s used car industry and how it may or may not relate to China? The truth is, this blog is a bit specialized, for sure, but the forces that shaped America’s auto industry had a dramatic impact on the very fabric of American society – social, financial, and cultural; why would it be any different in China? From a socio-economic perspective – it’s very relevant to anyone involved in China. From a business perspective – specifically, I’m speaking to investors and entrepreneurs in the automotive space – it is critical to accurately identify the spark responsible for the explosion in America’s second hand car market – and from there determine whether or not China will follow a similar path – for if you don’t your business model will simply be wrong.

The best way to understand what I’m brewing about is to follow me on a trip down memory lane and then, back to the future – your mission, should you accept it is not to become a Scientologist, but rather to better understand how the used car industry in the United States’ developed and how China might track to this. This is going to take a couple days to play out so I’ve broken the blog down into a couple parts (I’m just not sure how many part just yet).

Part 1: A brief history of America’s used car industry – interest rates, leases, and auctions

1918 & Les Kelley: This guy, Les, is credited as one of the first people to truly institutionalize the used car industry. Until the 1950s/1960s, Les’ company, Kelley Kar Company (Los Angeles, CA), was one of the largest used car dealerships, worldwide; but Les is remembered more for his little blue book, Kelly’s Blue Book, a publication listing recommended wholesale values for basically every car manufactured/sold in the US/worldwide, than his dealerships.

Kelley’s efforts aside, the used car business in the US remained nascent until the late 1980s when the automotive tectonic plates dramatically shifted – the profile of used cars changed (younger cars) on the back of favorable financing terms (leasing) and thus a surge in consumer demand (buyer’s market – mucho inventory).

Early to mid 1970s: New car dealers still made solid margins on new cars – there was no need to go downstream and sell used cars – new car prices and interest rates were very reasonable, affordable, and the Japanese (automotive manufacturers) had yet to become a major pain the American automotive manufacturers’ license plate. In fact, the environment was so healthy that consumers were buying a new car every year (this was the norm, not the exception). And, unlike in the 1990s, manufacturers (or OEMs) went out of their way to discourage their dealers from selling used cars since OEMs only made money when dealers sold new cars.

Late 1970s to mid 1980s: The United States saw interest rates spiraling higher and higher (along side fuel) – inflationary pressures forced the price of American made vehicles through the roof, sometimes ratcheting higher 2, 3 or 4 times per year – essentially, the floor fell from under the feet of American automotive industry, or did it? The Japanese automotive OEMs were loving life (thanks to favorable exchange rates and their fuel efficient vehicles) – of course, at the expense of gas guzzling American vehicles.

For example, on Cape Cod, specifically during George Washington’s Birthday (Washington’s Birthday is somehow associated with car sales) the main shopping mall, Cape Cod Mall, opened its doors (literally) to local dealers and hosted a 3 day auto show – during these 3 days, my father, a Nissan/Fiat/Peugeot dealer, repeatedly outsold his American counterparts, selling no less than a month’s worth of cars (the record being 21 in one day) – or about four Japanese cars for every one American car sold.

In spite of inflation, higher rates, and fuel prices, Americans were still buying new cars, just not the same brand of new cars they did a decade or so earlier. The knock on effect, as far as the used car industry was concerned, was absolutely zero – largely because the majority of used cars were expensive and of poor quality (i.e. the market consisted of American made gas guzzling monsters – relative to the new Japanese products the Americans couldn’t compete).

The mid-1980s to the early/mid-1990s:American consumers dramatically changed they purchasing habits – essentially, they stopped buying new cars – full stop. Sure, higher prices were retarding sales, but this was already a factor years before; no the reason new car sales fell off a cliff had everything to do with high interest rates and the negative impact these rates had on significantly elevating car payments (the old practice of paying cash for cars had been sidelined by the popularity of financing). With an American economy less than inspired, rate moving higher, and consumer confidence dropping monthly, the last thing anyone wanted to do was pull the trigger on a new car. But, people still needed cars, and if they couldn’t see themselves in a new car, they could see themselves in a used car, especially at discounts of 30% to 50% below the average new car’s sticker price.

In no small measure, high interest rates forced America into second hand cars, gladly accepting lower monthly car payments along the way. Rather ironically, dealers soon (more so by the 1990s – as you’ll read shortly) realized they were sitting on a gold mine as margins on used cars were (potentially) heaps higher than on new cars. How could that be? Well, in plain English, consumers had no way of knowing how much the dealer paid for the used car as there was no factory invoice or Manufacture Suggested Retail Price (MSRP).

For example, a new car might net a dealer US$500 profit, whereas a used car might pull in four times that. In fact, it got to a point where dealers lost money when they sold a new car, and thus their only source of revenue came from sales of used cars (revenue excludes back-end revenue pools, such as parts and repair services which could account for up to 50% of a dealer’s revs).

As a result, new car dealers started consolidating used car dealerships (used car business is all about scale/inventory, much more so than new car business) and formed super stores specializing in used cars, such as Carmax and Lithia Motors.

Maybe we should take a step back, get our bearings – we’ve come a long way in a short period of time. It took nearly a century to get Americans into used cars; albeit they came grudgingly, they did come and for no other reason than to alleviate financial pain resulting from higher interest rates (car payments). So, now, consumers were happy (they could afford a car), dealers were happy (making money hand over fist), but automotive OEMs were unhappy (on the back of dramatic declines in new car sales) – it was obvious something was going to have to change as OEMs would not allow this environment to persist.

Welcome to the age of automotive lease (circa 1990): What promised to be the fix, or answer to sagging new car sales, actually, did as much for the proliferation of the American used car industry as high interest rates did in shifting consumer purchasing preferences. In no small measure, the “lease car revolution” made it possible for used cars to become a viable business. Essentially, previously leased cars made up the bulk of used cars sold in the United States during the 1990s and 2000s – available inventory (or a wide selection) is the life force of any used car business (on average a customer buying a used car will spend four to five times as long examining models/brands than a customer buying a new car) without inventory your customer would walk (whereas when buying a new car they would be willing to wait several weeks/months for the color/model they desired).

To understand why leasing was a smashing success in the US, we need to understand how the terms of a lease are calculated (this is just for review, so skip down to next paragraph if you want) – unlike taking out a bank loan to finance the entire value of a vehicle, a lease allows the consumer to finance only a portion of the car’s value, at a fixed rate, over a 36 month period. The manufacturer (not the dealer) calculates this portion by subtracted the specific car’s price by the residual (or, the expected value of the car at the end of the 36 month leasing period). For example, if you lease a $35,000 luxury car for 36 months and it has a residual value of 70%, it is worth $24,500 at the end of the lease. It has only lost $10,500 of its value, and you will have paid $291 a month (plus interest, tax and related fees). As a rule of thumb, monthly lease payments were about 30% to 40% lower than monthly payment resulting from an automotive loan from a bank – naturally, lower monthly payments was a major driver in accelerating the popularity of leasing.

Leasing, for a while, brought a relative clam to the auto industry (all was cool in skool) – OEMs were selling heaps of new cars, dealers were making money, and anyone who could afford a marginal down payment could own (lease) a car – yet, this was no more than a façade, structurally speaking the industry was a mess – and about to getting a whole lot messier.

Thanks to new fangled leasing regimes, more and more new cars were being sold than ever before – and, not surprisingly, competition amongst automotive OEMs mirrored this growth – resulting in lower and lower MSRP – in short, OEMs were sacrificing long-term profitability for short-term gains. Rather than touch the sticker price, manufacturers increased residuals, and thus reducing a consumer’s monthly auto payments. Yet, in order to increase residuals, manufacturers had to assume the car would hold a higher resale value at the end of the lease term. And there inlayed the problem – higher post-lease resale valuations all but ensured a glut in supply as consumers had zero incentive to purchase a three year old car that would cost them seemingly more that leasing a new car.

But what had become an awful situation for manufacturers was a dream for dealers, especially new car dealers. Before we move on it is important to note that during this period automotive auction houses, such as Manheim Auctions and Kruse International (which was eventually bought by Ebay in 1999), experienced dramatic growth (in profits and popularity) – thanks in large part to the surplus in previously owned leased cars. Manufacturers needed an outlet to sell their inventory of leased cars – and as they could not directly pawn the cars off on their established sales channels (new car dealerships) they hooked up with auction houses – the caveat being, that only authorized new car dealers could attend these auctions.

By engaging auctions, manufacturers set in motion events which ushered in the greatest vehicle yard sale of the twentieth century. And what is more, these previously leased cars usually sold for US$4,000 to US$5,000 below the manufacturer’s valuation estimates (to put some spin on this, American automotive OEMs’ profit margins on new cars were already in the red, even before the car hit the auction podium). And, to add insult to injury, a vast majority of these cars were still covered under manufacturer’s warranty, and thus buyers (dealers) effectively transferred any possible risk (defect, etc) to the manufacturers (dealers were given a free put option). Essentially, this lease-auction relationship gave dealers a reliable (semi-exclusive) source of quality (relatively inexpensive) inventory – and keep in mind, consumers had no way of knowing how much dealers paid for these cars – needless to say margins were, well, impressive.

I think it’s now crystal clear the role OEMs played in this saga, but what we haven’t touched upon is the role American rental car agencies, such as Avis and Budget, played. Put simply, these guys at the rental agencies were either leasing away like crazy or purchasing car directly from a manufacturer at just about cost – so, after a year or so, where do you think these agencies dumped their inventory – three guesses but you’ll only need one – auctions. Yup. More inventory. More competition. More price pressure. Just more of everything…supersize me, will yah?

Eventually, manufactures realized they had to put an end to this blood letting and introduced zero percent financing, but by then the damage had been done.

You’ll notice that certification (the Kansas City Shuffle) never once came up in this conversation – the reason is simple – dealers never fell for the certification trap (i.e. a manufacturer charged the dealer between US$300 to US$800 to certify a car) – as we’ve already mentioned above, a majority of the car purchased at auctions still fell under the manufacturer’s warranty – and yet, consumers did fall for the certification trap, refusing (or rather strongly preferring) to purchase a used car from anywhere other than a dealer selling “manufacturer certified” used cars. On average, dealers certified less than 10% of their used cars, and those that were certified were either getting delivered a customer across country or sat on the lot so the dealer could point to a couple cars and say, “yeah, we sell certified cars…”

Given what we know of China’s automotive industry and financial infrastructure – do you think the used car business is primed to explode or do we have a couple more years of pump priming before the market (and inventory) is deep enough to support single (multiple) player(s) offline? Let’s hold-off answering this question for now…however…I don’t think it is unreasonable to assume that, at this point, a viable online entity focused on the used car related market is anything more than a happy fantasy…

(Acknowledgment: I know this isn’t book but I need to send a shout-out to my dad for adding some color to this blog – valuable insights gained by being a leading figure in the US automotive industry since the late 1960s. )

April 30, 2006

Organized chaos & the certification myth in China’s used car industry

Filed under: Automotive — Administrator @ 4:14 pm

One of the greatest fallacies in the used car industry is that “certification” (i.e. certified used car) is the key to a successful business, specifically a web-based marketplace. Investors/entrepreneurs who look to certification as the holly grail are not only naïve but also setting themselves up for glorious failure.

In truth, certification is more of a marketing stunt than anything else whereas interest rates and inventory are two ingredients, when successfully harnessed/understood, will ensure a business has at least a fighting chance.

Over the course of the next several days, we’ll explore this subject in a bit more detail – this coming on the back of a month that saw China’s used car market go from an industry highly fragmented to somewhat more organized (at least, potentially).

This somewhat organized chaos is the result of two significant announcements from Manheim (US) and Quinland (Japan).

Companies such as Manheim (and the dozen or so other auto related online/offline platforms) who have either formed partnerships or have existing brand recognition have, perhaps, positioned themselves to completely monopolize the industry for the foreseeable future (at least, phase one). Given the depth (and diversity) of the competition — several of which have recently received funding — it is highly unlikely a start-up can claw its way into the forefront of this business (that is without specializing vertically) let alone look for a public exit…

Gentleman, start your engines…

March 22, 2006

Is China ready for a nationwide auto club (AAA)? Me thinks it is…

Filed under: Automotive — Administrator @ 8:02 pm

China Association of Automobile Manufacturers reported a jump of 59% in February’s vehicle sale year-over-year (yoy) to 528,100 units. Sales of “made-in-China” autos jumped 51% (yoy) to 480,000. Passenger vehicle sales popped 68% month-over-month (mom) to 763,600 units (total year to date 2006 sales). On the back of these results, we feel comfortable with our full year 2006 automotive sales estimate of 9 million units.

The auto industry in China, long an export play, is finally shaping up to be somewhat of a domestic play as well. When we first started researching this industry in 1992 it was very difficult to see where small foreign investors (ex-multinational auto manufacturers) would fit into the mix – in other words, how do we get rich from cars in China?

Of course, this was before the Internet, so what seems obvious today (“er, why don’t you just build a community site like Chinacars, or something, it’s like a proxy on the entire industry…”) wasn’t so clear back then – the only realistic opportunity that came to mind was rolling out a China version of American Automotive Association (AAA). The downside was, well, it was like, 1992/94, and regular mainlanders didn’t actually own a car (oh, and did we mention there were no street maps or tow trucks?) or that most drivers didn’t really have anywhere to go (or that motor insurance was like, well, non-existent).

What a difference a decade makes, eh? From1990 to 2004, China’s automotive market expanded by 35% per annum; there are an estimated 27 million private cars on the road in China – the ownership by location breakdown is as follows: Beijing 22%, Guangzhu 14%, and Shanghai 8% (source: AC Nielson, 4/05). Motor insurance premiums in 2005 topped US$6 billion while after-sale auto care/repair came in around US$5 billion.

On the back of this growth are gaps, massive service gaps to be precise; yet holes that a nationwide AAA sort of business would resolve very nicely, yeah?

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