The Echo-nomist

Car prices have been going up during the pandemic because of a global chip shortage and other factors. But it’s actually giving a push to the second hand car industry. This has been an emerging market over the past few years, and a pandemic proved to be the last thing this industry needed to get a boost. It’s also highly competitive with a lot of contenders and emerging companies. Car Trade, Cars 24, CarDekho, Big Boy Toyz, Mahindra First Choice, True Value are just some of the companies.

Many people prefer using personal transport now as compared to shared mobility or public transport due to coronavirus concerns. The purchasing power declined during Covid due to many people losing their jobs and many others working at a reduced salary. This led to the prices of new cars being unaffordable.

Used car companies emerged as the unlikely heroes in this situation. They bought used cars for sale to the market which were, of course, cheaper than new cars. They even found a way around the social distancing issues by developing online platforms to look at cars and providing in-depth specs. Dealers are using online platforms for services like listing, sourcing vehicles, leads generation, pricing etc.

Even in the second hand car industry, there are two ways of doing business: B2C and C2C. C2C means customer to customer. So someone who owns a car is looking for someone to buy it. And the company involved in the C2C business, like OLX and Quikr, provide a virtual marketplace for the seller to connect with a potential buyer. Something like Amazon, but for used cars. B2C refers to business to customer. Here, the business directly connects with sellers and buys the used car from them at a specific price. Hence, they have ownership and inventory of the cars they’re offering for sale. When a customer is interested, they sell it to them at a price higher than what they procured it for.

The customers have a variety of cars to choose from due to such a competitive market. They range from entry-level cars like Swift, i10, Wagon R etc. to luxury cars like Porsche, Mercedes, Bentley and even Maserati, Ferrari and more. Sounds tempting, right?

Most companies cater to basic cars, which is why entry-level cars account for approximately 50% of the used car market in terms of volume in India. The buyers who go for used cars are mainly first time car owners and hence don’t usually go big. They prefer entry-level cars due to the low cost of ownership. The average age and price of used cars sold in the market is approximately four years and less than US$5,000 per unit, respectively (in India).

Demand plays a major role in shaping the industry. That’s the reason most of the dealers are involved with common cars. But the used car market is also highly fragmented in India. There exist dealers with no physical place of business, some operate in the unorganized sector and some even have branded showrooms. Around 90% of the dealers are in the unorganized sector.

The economics of dealership are mostly dependent on sales volume. To achieve a higher return on their marketing investments, they have to target in-market consumers. But a car is an asset. So car purchases are infrequent and only a certain number of consumers are looking for cars at a point in time. Converting leads into customers isn’t easy, and all the competition just makes it tougher.

This calls for targeted advertisement. These companies have been actively advertising through traditional channels- TV, newspaper etc. While that creates brand familiarity among viewers/readers, it can be inefficient in reaching the small percentage of people who actually want to buy a car. The brand familiarity does go a long way though because the consumer will remember that ad while buying a car.

CarTrade

CarTrade has filed a draft red herring prospectus with SEBI to raise around Rs 2,000 crore via an IPO. They’re the first company in the used car market to do so and almost hit the unicorn status after the last fundraising round in April. The firm is backed by investors such as JP Morgan, Temasek and Warburg Pincus.

They deal with second-had, as well as new cars. According to their DRHP, car shoppers can visit their CarWale and CarTrade platforms to research and connect with dealers, OEMs and other partners to buy and sell cars.

They have multiple sources of income, including- commission and fees from auction and remarketing services of used vehicles, online advertising solutions, lead generations, technology-based services and inspection and valuation services. This has generated enough income as they have been reporting profits since FY19.

It’s definitely an up and coming industry. While this market is smaller in India as compared to other developed countries, it is expected to grow at a compound annual growth rate of 11% in the next 5 years. Their current size, 4.4 million cars, is expected to grow to 8.3 million in FY26.