Summary

(1) The growth of the used car business, at least in the US, has been riding on shifting incentives for buyers, with the increasing preference for flexibility and affordability strengthened by the pandemic.

(2) Similar conditions have emerged in Southeast Asia, but market players, especially more traditional companies, have largely been struggling to get out of the trenches over the past year.

(3) There’s greater opportunity in the structural growth of Southeast Asia’s car markets than more mature markets, and with the help of digitalization, used car adoption can last well beyond the pandemic that accelerated its growth. 

(4) This COVID19 digitalization opportunity for Southeast Asia’s used car market does not automatically equal growth. It needs to be coupled with the healthy fundamentals that can hold the business together as it innovates and adapts to market adjustments. 

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Over the past century, car ownership has become a hallmark of economic stability, both on the individual and societal level. Automobile purchases are often looked to as an indicator of consumer spending and thus the health of an economy. And as the pandemic disrupted economic activity globally, the automobile sector was among the first and hardest hit, especially during the first half of the year. 

Amidst lockdowns and public health restrictions, manufacturers had to close down factories, sending a downstream impact to supply. On the other end of the market, consumers found themselves stuck between the effect of weakened supply (higher prices), and the desire to switch from ridehailing, private hire vehicles, and public transportation to owning their own mobility options. 

US used car businesses register growth with COVID impact

That said, a class of automotive companies based in the US managed to see growth in the middle of all these market shifts: user car marketplaces. There’s Carvana (NSYE: CVNA) and Carmax (NYSE: KMX) registering 3x and 1.5x growth in their user car businesses respectively. Vroom’s (NASDAQ: VRM) stock price doubled post-IPO earlier this June, and Shift is expected to follow this year. 

The growth of the used car business, at least in the US, is riding on shifting incentives for buyers. Given supply constraints and consumer preference for vehicle ownership, the market has begun to favor platforms that are able to provide more affordable and more flexible access to supply in a world of economic uncertainty and contactless transactions.

The growth of the used car business, at least in the US, is riding on shifting incentives for buyers.

The increasing preference for flexibility and affordability aligns with other notable trends in the US automotive industry. With more auto dealers and carmakers looking to get rid of inventory, discounts have run abound impacting even luxury cars. Car rentals, one of the key offerings of these online car marketplaces, have also become more popular as a flexible alternative to purchasing brand new cars. And most of these transactions in the industry have shifted online, not just in response to public health measures but also to cut overhead costs with fewer people visiting showrooms. 

Southeast Asia slow to pick up a similar pace, but opportunities lie around the corner 

While car marketplaces in the US seem to have turned a corner, at least for the time being, Southeast Asia’s car market has been still struggling to get out of the trenches, although the severity has varied with the market.

Automotive conglomerates in the region were hit hard over this past year. Indonesia’s largest, Astra International (IDX: ASII) saw its stock price halved over the past year while in Malaysia, Sime Darby Bhd has also had it rough. 

In Indonesia in particular, as the COVID situation worsened, private vehicles became preferred over ridehailing and car leasing, which impacted Grab and Gojek sales. And even the purchase of new cars has been deferred by many consumers with local banks tightening their lending standards. 

At the same time, these changes in consumer preferences and institutional standards have opened up demand for used cars as the first choice of car to own and subscription-based offerings as a flexible alternative to purchasing. 

This actually opens up an even greater opportunity to tap into the used car industry’s structural growth Southeast Asia than more mature markets. According to an interview with Carro CFO Ernest Chew, in more mature markets, the used car to new car ratio is about 2-3x, while in Southeast Asia it remains one or less in most countries. 

But as we’ve learned over the past few months, this COVID-induced digitalization opportunity does not automatically equal growth. It needs to be coupled with the healthy fundamentals (finances, operations, and leadership) that can hold the business together as it innovates and adapts to market adjustments.  

This COVID19 digitalization opportunity does not automatically equal growth. It needs to be coupled with the healthy fundamentals that can hold the business together as it innovates and adapts to market adjustments. 

Gearing up for post-pandemic growth with the healthy fundamentals and tech DNA: Carro case study

For Carro, COVID presented them with the opportunity to revisit and strengthen their fundamentals. Like many businesses, they switched to survival mode, using the lockdown to look at OPEX, cutting down on fatty expenses and improving their financial and operational efficiency. 

Thanks to the quick and decisive response of leadership, as well as a healthy pre-pandemic cashflow, they managed to come out this year in a strong position financially, registering profitability for most of 2020. But ultimately this healthy foundation will only be as beneficial to the business as the kind of growth that is built on top of it. 

For Carro leadership, the next question after getting into survival mode was to rethink used car purchases — the core business — as a function of consumer preference? How could it be done safer, faster, and more economically? 

And this is where Carro’s DNA as a technology company, which is unique in the region and the industry, comes into play. This tech DNA, fostered by the leadership of engineers and a culture promoting rapid experimentation and risk-taking, created an ecosystem that enables, as Aaron put it in a recent interview, “various forms of [selling] the same thing: cars.” 

This tech DNA, fostered by the leadership of engineers and a culture promoting rapid experimentation and risk-taking, created an ecosystem that enables, as Aaron put it in a recent interview, “various forms of [selling] the same thing: cars.”

Read more about our take on the ecosystem growth trajectory for tech companies >>>

Consumers in the post-COVID world desire contactless, hassle-free, and online services, and Carro has been poised to deliver these services. From car subscription services to financing to Singapore’s first contactless car purchase service, they have been able to develop multiple options for consumers to own cars. This optionality plays into the shifting preferences of consumers induced by the pandemic. From the seller standpoint as well, with the sale prices increasing, Carro’s marketplace model has enabled consumers to fill in the supply gap for used cars affected by the supply constraints on factories.

Read more about how Carro built this optionality to build the “Alibaba for cars in Southeast Asia” >>>

And Carro has seen the fruits of creating this optionality. They began to see similar growth trends as their US counterparts as they settled into the second half of 2020. In September their revenue grew 500% year-on-year, with bulk coming from their subscription service launched in Singapore last year. 

And with the still relatively low used car penetration in Southeast Asia, combined with changing consumer needs, Carro is well-positioned to take advantage of the growing acceptance of used cars and trading of used cars as it lasts well beyond the pandemic that accelerated its adoption.