Huang Le of Chezhibao : Secondhand Car E-commerce Industry Will Be a Matter of “Survival of the Fittest” Next Year
3 December, 2018
When I first started doing business, there were not as many e-commerce platforms for used cars as there are today, and all the companies were located in different regions. Youxinpai and Cheyipai in Beijing, Carsing in Shanghai, and us, Chezhibao, in Nanjing.
I studied for both my Bachelor’s Degree and Masters’ Degree in Canada, and I was a scalper for two years in graduate school. I have had the privilege of seeing websites like eBay Motors, Autotrader, and Blacklist in action.
We were living in Windsor, Ontario at the time, which borders the US. Detroit was located just opposite of us. A lot of foreign students from China wanted to buy cars while they were studying in Canada. With CA$20 – 30 K, you could already own a Porsche, so the students would constantly wait for the prices of cars to drop. The price difference of a car between the US and Canada is US$10 K. Foreign students are also exempted from consumption tax, plus the insurance in the States was cheaper than in Canada. If you were also willing to use an American license plate on your car, you would have a great business opportunity. The logistics services in the US are also very mature: for example, if I choose a car from eBay Motors and ask to have it sent to the Detroit port, I would be able to pick up the car immediately, as long as I own a US visa.
In foreign countries, the rules are clear: as long as you’ve done your homework, there won’t be any barriers to you conducting your business. During my postgraduate studies, I sold dozens of cars, and I used the money I made to buy a suite in Toronto.
When I returned from overseas, I believed that the used cars market in China represented a lot of opportunity, and one day, when I was browsing online, I found Carsing. I then went to Shanghai to discuss the business with Carsing’s store manager, and he told me that I would not need to make any investments if I ventured into this field. So, I did just that.
My family was in the construction industry, so our financial status was not bad at all. After I graduated from university, my family invested in a company and put me in charge of it for two years. If I continued to work in the construction industry, I would have a yearly net profit of US$200 M. The reason why I stopped doing construction is that I didn’t like it, and I wasn’t happy working in that industry. I was only about 20 years old at that time, and mostly everyone else, who were also managing projects that costed up to hundreds of millions, were all aged 45 years old and above. As a result, I was spending my time having lunch with people 20 years older than me everyday, and there was no common language between us.
My family did not support my idea of venturing into the second-hand car industry. Finally, I decided to withdraw all my shares, including the bonuses, from my family’s company and focus on only one thing. After I did this, I couldn’t even go home, so I slept at my office everyday for about two to three years.
At the time, I was really impressed with Jack Ma, and I was similarly inspired by websites like Tencent and Sina. There were so many local companies in the construction industry that it seemed impossible for me to become “Number One” in China, but for me it seemed actually possible for someone to be “Number One” in the Internet industry in China.
When we first started out, Youxinpai invested a total of US$30 M in Chezhibao. Originally, Mr. Chris Ken Dai was the Vice President of Yiche, and his known for his capabilities in this field. In fact, this industry actually has a certain hierarchy. If a big company invests in a smaller company, it gives some sort of credibility to the investee, and subsequently more investors will follow and decide to invest in it.
I am not an Internet person, and I never understood fundraising. We needed a huge amount of money to run the company for a month, and I had no money at all. Concurrently, the Nanjing Electron Business Association was having a promotional roadshow, so I went to them to get the word out about our company. One of our competitors, Pa Hao Che, already existed. I was really gutsy; I didn’t bother with being intimidated by the so-called “World’s Best 500”, and I said to them, “We will definitely become “Number One” among C2B companies,” and I completely ignored the existence of Pa Hao Che.
I believe that what I’m saying is the truth: this industry needs to be really cultivated, and the big companies can’t, or won’t, do it. If my family’s business, for example, took it up, you can bet that it will fail. They will find that one car can only fetch them RMB2 K, and they will find such a small profit useless. Just one project in the construction industry is worth billions already, but it doesn’t work that way in the e-commerce industry.
We received our Series A round of funding from Gobi Partners. They invested RMB20 M in our company.
After the money came in, I wanted to open up branches in seven cities, but Mr. Don Jiang, a Partner at the firm, suggested that I should only open four. He believed that the amount we had received would not be enough to cover seven cities. However, I was very unafraid, and believed that it was, in fact, doable. To put it bluntly, there was absolutely nothing to worry about. It was only RMB20 M, if there was a loss, I would be able to compensate for it.
The hardest part was opening a branch in Shenzhen and fighting against Pa Hao Che. I found a space on the top floor of a building on Beihan Boulevard. I cleared away the mah-jong and hot dry noodles stalls downstairs, and within a month we were open and staffed by college and university students. I recruited them because I worked with them best, since I’m not very old myself.
Shenzhen was a city that did not produce cars before this, and the retail market looked good. When the first-tier cities began restricting the issuance of new car licenses, Shenzhen became the source for vehicles and a manufacturer of them. Right after we entered the market, Shenzhen restricted the issuance of car licenses as well. We were the ones leading the development of the Nanning markets; Nanning subsequently became the most important car trading center in Shenzhen.
During that time, China’s used car market was still in relatively good shape, but 2015 proved to be a dark year for the industry. The mainstream car brands and their models were facing restrictions, which equals to less cars being traded, and the market was split. We could not trade with outsiders. As a cross-regional platform, this was a challenge for us, because it meant a fresh start in every city. The Chinese market itself is like a big game of chess, artificially creating financial crises.
But we did not realize the seriousness of the problem at the time. We did a massive expansion from four cities to 13, and then we noticed that the volume of trading wasn’t as high as we expected. Secondly, our regional coverage became too wide, and we had problems managing the team. We had to conduct a wave of layoffs. It was the darkest moment of my life.
Let’s talk about the second half of 2015. The market underwent a cold period, and stock prices plummeted drastically. I held a meeting with our Board of Directors and we readjusted our strategy, because we had to be very cautious. Every company was readjusting their strategy at that point. Right after that in 2016 during the March 15 “party”, there was an exposé on used cars; Cheyipai immediately closed down, Pa Hao Che shut down in April, and Carsing stopped business in early 2017. A lot of smaller C2B companies could not operate any longer. Ultimately, it became a situation of “winner takes all”. If we weren’t careful in the beginning, we would not have survived either.
In actuality, Cheyipai was a scapegoat for the industry. In business, there is no such thing as not making a profit out of margins. If you don’t make a profit, there would be no value at all. Guazi created a service fee model, which is essentially also a type of margin. In the secondhand car industry, I feel that your choice of business model is very limited: it’s either B2C, C2B, or B2B, there aren’t really any other models in this industry. Using the Internet and a new organization structure, not only will customers have a better experience; efficiency will be improved, service costs will be lower than other companies, and the radius of the flow will be wider, thus making it easier to earn gross profits. These are margins.
Originally, the innovative model for secondhand car trading was C2C. Guazi and Renrenche used this model, but then everyone realized that it wasn’t sustainable and switched back to being a dealer. If this really solved the problem and the company’s asset rate is higher, then it is valuable. You cannot say that Carmax doesn’t have value; it is more of a matter of whether they can do that. Car dealers disperse the financial risks of the industry – the cost of asset depreciation will always be the seller’s burden. Furthermore, there will always be a dominant competitor in the region, and it will always be fighting with another dominant competitor in the same location.
Youxinpai is an example of a B2B model. I feel that Mr. Chris Kun Dai really wants to contribute to this industry in China, but he is really restricted by a lack of sources for cars. Youxinpai sells more than 300 K cars a year, and the gross profit of one car is RMB1 K, which is very low. China does not have sources with big volumes for cars, and upstream car dealers are scattered: there are only 10 or 20 cars in their inventories, and the brakes are for retail, not wholesale. They will also not let of a car if it doesn’t give them a profit of RMB4 – 5 K. They typically earn this amount and if you want to gain a profit of RMB1 – 2 K from them, it’s virtually impossible.
Our strategy is to make C2B an absolute monopoly. I have the feeling that after another five years, this industry will be fully matured, and it will be a very competitive market. There will be an obvious difference between car dealers, from price range to category, to year and the condition of the car. Chezhibao, as an enterprise platform, can empower car dealers, provide financial services, and a source of vehicles for said dealers.
Our company made a profit in Q4 2016, but we faced a loss in 2017 because we expanded once more, from 15 cities to 46 cities. This year we expanded to 102 cities. We have been testing the boundaries of several costs, including marketing, services, and profits that we have invested in while still maintaining the largest market share. By next year, we won’t need to expand any further, and by the end of 2019, we will gain a profit.
The general direction for next year should be good, but it will also definitely be a rocky period. Our strategy will work, as long as we keep stable and steadfast. To be honest, everyone is uncertain about what’s coming next, and so am I.
Many companies do not have money this year, and may be very cautious at the beginning of next year. Youxinpai has a valuation of US$2 B, and Guazi has a valuation of US$6 B. But what happens when the next financial crisis hits? What will players like Renrenche do? In case a financial crisis does happen, competition among the players will not be about fundraising anymore, it will be about making more money, making more gross profit. Once the gross profit per car is prioritized, the volume of cars sold will subsequently lessen.
Nevertheless, this industry has a stimulating future. The next two or three years will be a battle of “survival of the fittest”. This market is growing, and the companies that play well will grow even bigger. There are 200 M car owners selling their cars in China; inevitably, they will enter the secondhand car market at least once. This trend may be delayed by the negative outlook of the economy at this point, but it will definitely come.