Highlights

1. Hypervertical platforms maximize user LTV through the introduction of adjacent products and services informed by data. “If hyper-vertical is the vehicle, data is the fuel, enabling Carro to deepen their integration into the automobile industry.”
2. Business models, products, and distribution needed to adapt to changing customer needs and behavior, in order for the company to be future-proof. It’s also important to build up efficient visibility across the region and keep an eye on certain aspects of the business that are at risk. “So it is very important to measure each of your [markets] accordingly and each of [your] business lines according to what matters and how it will matter.” – Aaron Tan, Carro Group CEO
3. Financial efficiency does not exist in a vacuum. It has its roots in conscious decisions made since day zero, all the way back to deciding in which industries or markets to build. “To our CEO, co-founders and senior management’s credit, we had always planned our businesses to be profitable or have a path to becoming profitable.” – Ernest Chew, Carro Group CFO
4. Leveraging technology needs to be tied to the business model and customer journey the company is building. “Besides automating processes, I make sure to spend a few minutes each day on divergent thinking, basically inventing ways to further enhance the car ownership experience with data and AI.” – Bryan Tan, Carro Group Chief Data Scientist
5. While data can unlock adjacencies for a verticalized platform, it’s clear that the adjacencies themselves are increasing the depth and richness of the data pools the company is able to tie into the customer’s experience. “When the platform becomes self-evolving like Carro because it’s collected the majority of data in Southeast Asia for car sales and car driver data, they can capture whole adjacent services to the core business… there are four revenue streams, and a very robust feedback loop on top of a strong distribution. I think that is a great model for sustainability and profitability.” – Yinglan Tan
6. Accumulation of market advantage is ultimately built on a mindset of flexibility and focus reflected in decisions piled up together over time.

In Carro’s recent media update, “All systems go for Carro”, the auto retail technology group marked several key milestones, from achieving its first profitable year in FY2022 after first reaching positive EBITDA financials in 2019 to its current annualized revenue run-rate already at 2x versus FY2022 and its group-wide gross product margin on track to be approximately 10% by end of the calendar year, among many other notable highlights. 

According to the press release, Carro’s gross profits owes to the company’s focus on online retailing and machine learning. As CEO Aaron Tan notes in the release, “We were laser focused over the pandemic around operational excellence and cost improvements; we chose to utilise programmers to solve problems and are starting to see the fruits of our labour.” 

Carro’s Chief Data Scientist Bryan Tan adds, “By leveraging machine learning to improve and automate our processes, we’ve achieved best-in-class GPM in this region compared with our peers.” 

These achievements are not overnight successes, however. The roots of Carro’s focus on online retailing and machine learning at this point in its growth are rooted both in internal decision made along their growth journey and external market factors. 

In this article we reference our past Insignia Business Review pieces on Carro and On Call with Insignia podcast conversations with Carro leaders from 2019 until today to trace the roots of Carro’s momentum today and what will ultimately be the foundations of their continued growth moving forward: 

1. 2019: Riding on the wheels of a hypervertical platform with data as fuel
2. 2020: Optimizing for Operational and Financial Flexibility
3. 2021: Technology as the Key to Balance Speed in Scale and Long-Term Profitability
4. 2022: Expanding advantage “accumulation” through quality data sources

2019: Riding on the wheels of a hypervertical platform with data as fuel

In 2019, we wrote an article covering Carro’s expansion into Malaysia (its fourth market) through the acquisition of local player MyTukar.

“When it comes to Southeast Asia’s automobile industry, Carro has further cemented its lead across four markets as it invests into MyTukar.  With MyTukar’s strong founders, extensive dealership network, and vision for the digital experience of Malaysian car dealerships, Carro saw the opportunity to accelerate the digitization the country’s automobile industry, projected to contribute 10% to GDP by 2020.”

But more than the acquisition itself, the focus of this essay was on the hypervertical platform Carro had built catering to multiple markets and business lines — the first time on Insignia Business Review we had discussed such a business model (in years since we’ve covered this concept many times). 

The central idea has remained the same: maximizing user LTV through the introduction of adjacent products and services informed by data. Early on Carro had already been bringing this concept into reality to great effect with their financial services business Genie Finance. 

“Beyond evolving proven models for the region, Carro has geared its platform to be hyper-vertical, where the focus is on maximizing the LTV of every car owner and partner dealer using the platform. From purchase to maintenance, selling, and repeating the cycle, Carro’s users never have to leave the platform. With vertical and horizontal integrations covering multiple use cases and catering to both car owners and dealerships, Carro is able to establish its ubiquity in the markets it is in. 

If hyper-vertical is the vehicle, data is the fuel, enabling Carro to deepen their integration into the automobile industry. In particular, data amassed over transactions across four markets in the region, from car inspection to bidding, coupled with the performance of their financing platform Genie, has made Carro best positioned to underwrite risk. This enables more efficient transactions across their services and lines of business, from insurance to pricing for subscriptions. 

“With data as fuel, financial services is the high-performance engine that accelerates the growth of consumer platforms. With Genie powering our hire purchases and underwriting capabilities, Carro is able to create more stickiness not just with customers but also merchants on the platform — the foundation of a financial services ecosystem for the automobile industry.””

2020: Optimizing for Operational and Financial Flexibility

Then in 2020, with the initial impact pandemic, the hypervertical platform approach was put to the test as car supply chains were impacted and demand weakening as a result.

Following Customers Through the Storm

The advantage of catering to multiple use cases (e.g., not just wholesale marketplace but also leasing) became clearer through this period. As the wholesale business took a hit, demand for Carro’s subscription product went through the roof, as Aaron shares in our very first podcast episode back in April 2020.

“Generally, I think the line of our own business that is purely to do with trading of cars has been hurt. And it’s not even because consumers are buying less used cars, but actually because of the fact that customers are buying less new cars. Because when people are buying less new cars, it results in less trade-ins. And as a wholesale marketplace, it becomes tougher for us to get trade-ins of cars.

That said, what we have seen is the increase in demand for our leasing or our subscription product, where we talk about six months subscription or one year subscription of vehicles and stuff like that. The demand for that particular product or what we call Carro Leap recently has gone through the roof. We don’t even have enough cars to fulfill the demand that we actually asked the other companies that were struggling, “Hey do you want to [offer] your cars on our on our platform instead, so that we can work together with you to lease your cars out and you just subscribe to the platform.”

What we have learned is that while demand for trade has decreased, the demand for subscription has risen a lot and that has more than enough effect to negate that drop in business for us.”

The lesson here was that ultimately business models, products, and distribution needed to adapt to changing customer needs and behavior, in order for the company to be future-proof.

Aaron adds in the same podcast, “Generally it’s a matter of how we think about business models. How do we think about what the customers are fearful of is safety or this because they just want to get the car from the comfort of their home, etc, and move on to innovate on different business models that can survive through these tough times.

So we’re always constantly thinking about how we future proof the business. How do COVID-proof the business so to speak, so that at the end of the day, this particular situation that we are all in right now becomes more an opportunity, versus an issue or a trap for a company.”

Keeping Both Eyes on What Matters

Apart from being closer to their customers and evolving their business models as their customers evolved with respect to the pandemic, it was also important for Carro as an organization to build up efficient visibility across the region and keep an eye on certain aspects of the business that were at risk. Aaron splits this idea into three parts in the 2020 podcast: constant communication with country teams, paying attention to NPLs and Carro’s loan book amidst pandemic-induced policies, and having visibility over employee wellbeing. 

“What we do is that number one, assess the situation, number two, implement and share measures across the group. For myself as CEO what I tend to do is that I have daily calls, if not at least two days or so, I have an understanding of whatever that’s happening in various countries.

We are very much impacted from a sales standpoint as far as credit standpoint because we actually have a fairly large loan book which basically means that in times of uncertainty like this and especially Singapore government recently just issuing a new law basically means that you can now get away scot-free for not paying your rent or paying your car loans and stuff for six months without too much impact to [the consumer].

So for us, we are watching all those kinds of things. So for me it is about understanding which metrics are important. For instance, I’m watching my NPLs like a hawk nowadays. So it means even the [loans that are] 10 days late or one day late I need to know. So it’s very important to measure each of your countries accordingly and each of the business lines according to what matters and how it will matter.

And I guess the number three thing is that a lot of us have a lot of employees that we have. Are you working from home nowadays? The question is, then how are they doing? Are they coping well? Well, do they have very good instructions from their bosses. So the next thing I do, we are going to do next across more and more countries is that we have done this survey and follow up for you guys. So we are implementing it across various countries as well, which is to understand what is happening, do you have enough directions from the various CEOs, etc.”

Flexibility also applies to Financials

Highlights from our 2020 conversation with Carro CFO Ernest Chew

What’s clear is that both with Carro’s business model and operations, they were able to build up a level of flexibility or take advantage of the company’s existing flexibility, to navigate the pressures of the pandemic. This applied very much to the company’s finances, as CFO Ernest Chew describes in a 2020 podcast.

“I leaned back on what I’ve learned from the GFC, from businesses that failed because they ran out of cash and from the used car auction business which we advised our PE client to purchase in the midst of an economic crisis. 

We looked at our toolkit. A few things that we did immediately: we went to conserve cash, slash all expenditures and cash up. We very meticulously went through expenses line by line. We cut down marketing immediately. We looked at payrolls. We monitored our cash position very closely. And we looked at monetising inventory as well. We went to banks to borrow even though we didn’t need to yet. 

In terms of finances, we were okay. We were barely profitable, but we had to pull the handbrake and jam the brakes immediately, or risk even more potential losses. Now on hindsight, we were too conservative coming out of the lockdown. We lost a bit of momentum, but we were okay. More importantly, we were “not swimming naked” – we had okay fundamentals. Most importantly we had cash and we were not over-levered. 

The bad times can bring out the best in people – we switched to “survival mode” in those crucial months. We have a great team who worked very collaboratively. Together, we looked at our opportunities, our processes, we looked at switching gears and repositioned coming out of this. 

For example, we talked about opportunities. In periods of economic uncertainties, now you throw in the pandemic, how do we make used car purchases safer, faster and the natural economical choice? The other opportunity was our subscription business, which really appeals as there’s no long term commitment, no residual value risk but addresses a population segment who needs a car for basic needs and do not want to take public transportation given the pandemic.”

What’s important to note here is that (1) financial efficiency does not exist in a vacuum, (2) there was a lot of proactive (both defensive and offensive) measures taken as well. Ernest’s sharing, especially the last paragraph, also echoes Aaron’s insights shared half a year prior. This proactivity owes to Carro’s mindset towards profitability from day one, which Ernest shares about as well on the same podcast. 

“To our CEO, co-founders and senior management’s credit, we had always planned our businesses to be profitable or have a path to becoming profitable. We used the lockdown to seriously look at our OPEX, our fats and ways to improve our efficiencies. We came out of the lockdown leaner and meaner. In fact, our cash position did not deplete during the lockdown and we were free cashflow positive.”

It helps to be in a market with massive long-term potential, regardless of the season

With all these near-term measures, what is important to note is that Carro is operating in a space where the long-term prospects of the market post-pandemic still present massive untapped opportunity, because the pain points and market inefficiencies are tied to long-standing circumstances in the region. Again, this has its roots in conscious decisions made since day zero, on where to build the business in the large automotive space.   

We write about these fundamentals in an article comparing how the car industry in Southeast Asia has shaped up in the second half of 2020, compared to the US.  

“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.” 

2021: Technology as the Key to Balance Speed in Scale and Long-Term Profitability

Carro came out of the challenges of 2020 in a stronger financial position as a company, and the company welcomed 2021 with greater investments into artificial intelligence applications across its businesses. They literally came out on top, as in the case of their number one ranking on the Financial Times list of High Growth Companies in Asia Pacific. Later in June, the company raised its unicorn round, the first in the industry to do so. 

2021 also saw the fruits of Carro’s greater focus on B2C sales and optimizing their business operations for the “Amazon.com experience” for vehicles. This has also meant leveraging their AI and machine learning DNA (i.e., talent and data) towards creating this experience covering both sides of the marketplace, from pricing algorithms and computer vision inspection for sellers to credit algorithms, automated behavior and usage-based insurance, and customer service talkbots for buyers. 

As Aaron shares in a 2021 podcast, “…a lot of the growth really has to do with the fact that we are focusing a lot more on B2C sales, basically selling [and] providing customers with the Amazon.com kind of experience for vehicles…We really use AI [and] machine learning in every facade of the customer experience when you’re trying to buy or sell the vehicle.”

The fruits of optimizing for this auto retail experience with AI and machine learning extended beyond topline growth and towards EBITDA positive financials over the past two years. 

Aaron adds in the podcast, “I’m always glad to say that, we’ve been able to achieve it because…we don’t need to spend as much as our competitors do. And it all has to do with the fact that it’s machine-learning driven…[Being EBITDA positive] is a testament to the fact that we are really running a business here…We actually have a path to making money and that has been super critical and actually very positive for us as we’re trying to fundraise in this particular environment.”

The key lesson here is not simply to sprinkle AI or machine learning and the next day expect to have one’s cake and eat it too, but that leveraging technology needs to be tied to the business model and customer journey the company is building — hence why this strategy will not work for just any type of business in any type of industry.

2022: Expanding advantage “accumulation” through quality data sources 

In 2022, as Carro continues to make headway with its consumer-focused and AI-driven strategy across Southeast Asia, just as we wrote in 2019, data continues to be the key driver in unlocking, not just growth on their existing ecosystem of services, but potentially new areas to continue building out the digital-first auto retail experience for their customers. 

Earlier in the year we had the pleasure of having on our podcast the company’s chief data scientist, Bryan Tan, who shares among other things, the impact his role has had on the business.

“I oversee all the Machine Learning and AI programs at Carro. The core mandate for my team is innovation. We run initiatives to improve people’s car ownership and usage experience with a focus on South East Asia. Here at Carro, we are involved in almost every vertical relating to cars, from buying, selling, leasing, insurance and finance. You name it, we do it. And we do it differently, empowered by AI/ML.

Some examples include price automation in car transactions. Distance-based and behavioural-based insurance premiums and maintenance costs. AI monitoring of engine health to automated inspections and listing of cars… These and much more form the foundations of AI/ ML in Carro.

Besides automating processes, I make sure to spend a few minutes each day on divergent thinking, basically inventing ways to further enhance the car ownership experience with data and AI.”

Yinglan also shares on the podcast about the impact of data from a consumer (driver’s) perspective on our podcast, to illustrate the data advantage Carro has accumulated over time. 

“So just buying a car itself doesn’t give a lot of data. I mean it does give how frequently they buy the car, and obviously you can upsell insurance and loan products post that, but if you were to provide aftersales to a car, like car wash, high frequency buying car parts, car repairs, and unfortunately I’m guilty of that because I’m not a very good driver.

So I tend to go to the workshop quite often for small scratches here and there. As a result, companies like Carro collect a lot of data about me. Based on my engine sound, they can infer whether I’m a good driver or not, and decide to upsell me the right policy, the right insurance policy at the right price given my driving skills. 

When the platform becomes self-evolving like Carro, because it’s collected the majority of data in Southeast Asia for car sales and car driver data, they can capture whole adjacent services to the core business, because when you think about when I sell my old car the platform makes commission. I buy a new car; the platform makes a commission. I buy a piece of insurance; that’s another piece of revenue. And then I borrow money to finance the car; there are four revenue streams, and a very robust feedback loop on top of strong distribution. I think that is a great model for sustainability and profitability.”

The key lesson here is that while we pointed out previously how data can unlock adjacencies, it’s clear that the adjacencies themselves are increasing the depth and richness of the data pools the company is able to tie into the customer’s experience. In short, what quality of data can expand monetization? 

The Carro Certified ad released on Carro’s Youtube Channel captures this idea of leveraging interactions with the car in Carro’s ecosystem to create the “Carro” picture for their customers to know exactly what they’re getting on the platform, and vice-versa.

The “Over Time” Mindset

A throughline in Carro’s journey as covered on Insignia Business Review and the On Call with Insignia podcast is the idea that many of these advantages the company had built to achieve the results it shared this month were accumulated over time. This accumulation of advantage is ultimately built on a mindset of flexibility (i.e., how can we provide more to customers with less?) and focus (i.e., what really matters to build a sustainable business — in terms of data, in terms of spending, in terms of metrics, in terms of the customer journey?). 

And so for companies looking to navigate this difficult period, while problems won’t be completely solved by individual decisions — these decisions do pile up “over time”, from dollars spent by frontline employees to taking funding from a particular investor.