In emerging markets, owning a vehicle is more of a necessity than a luxury: a vehicle, is not only a key store of value, vital to navigate the complexities of daily life but also a corner stone of engaging in economic activity. Clearly there is a strong demand and tangible necessity for vehicle ownership; however, there remains a huge mobility gap, with many suitable individuals struggling to obtain car financing. In recent times, many startups have popped up in the vehicle financing space (particularly in emerging economies), and as of 2021, the market was valued at USD $240 billion, with an expected CAGR of 7.2% from 2022-2030 (1). Much of this market value is driven by emerging markets; for instance, China is the world's largest market by vehicle sales, and is still showing rapid growth. (2)
What are startups in this space trying to achieve?
Many founders within the vehicle financing space believe that the current mobility gap represents a huge systemic injustice. Generally, banks in emerging markets adopt a very conservative approach, fuelled by inaccurate and outdated credit assessments; this has been exacerbated by the pandemic, resulting in up to 90% of vehicle finance applications today being rejected. (3)
To get around the barrier of poor credit assessment preventing so many from receiving financing, startups are finding innovative ways to establish the eligibility of customers, using tech-driven approaches and alternative data sets to optimally assess loan eligibility and drive down exclusion rates. For example, Carro, one of Southeast Asia’s largest auto marketplaces, is optimising pricing and operations with AI/ML, leveraging a machine learning solution to identify and check the condition of cars. (4) Through this mechanism, Carro is able to provide customers with a much fairer, transparent and efficient experience.
Greater access is not the only advantage that many startups in this space have achieved: flexibility has been another key aspect of many business models and loan structures. Unlike traditional financing schemes that have longer and more stringent contract terms, these startups primarily provide subscription contracts, allowing customers to return cars at any time and also allowing for the option to buy the car at the end of a fixed term. Providing this level of flexibility has given many individuals in emerging markets the confidence to apply for vehicle financing, as they don’t have to take on any long term commitment.
How is Tomorrow Capital involved with Vehicle financing?
Tomorrow Cap has backed two vehicle financing startups to date:
- Migrante, a Chilean online marketplace providing consumer secured loans for gig workers, enabling them to purchase working capital products (e.g., cars & motorbikes) that improve their income.
- Autochek, a Nigerian online auto marketplace creating a comprehensive automobile experience, from sourcing vehicles and financing purchases to after-sales support and warranties.
We believe that supporting startups within the automotive financing space will create a disproportionate impact by fostering the growth of communities and economies. For instance, by helping gig-economy workers gain access to working capital in the form of a car/motorbike, Migrante allows them to support their families and communities to gain better education and food security, thus creating a positive impact that could benefit multiple generations.
What’s in store for the vehicle financing space going forward?
Vehicle financing is a huge and established market, but what lies next? The emergence of electric vehicles is likely to be a major driver of future market growth; furthermore, the shift of consumer mindsets towards sustainability means we may see a whole new sub-space, full of its own complexities which require careful navigation and regulation, as well as adaption of existing technologies and business models.
There are some headwinds on the horizon - as the loans are long term, a rising interest rate environment squeezes the margin for those with a floating borrowing rate as well as pushing consumer pressure.
However, we are strong believers in the deflationary impact of technology allowing for more affordable loans, stronger underwriting, and better loan mechanics. Additionally, with start-ups constantly looking to diversify business (e.g., by expanding offerings from used cars to new ones, commercial vehicles, motorbikes etc…), the sector diversity will drive strong returns and a positive consumer outcome.
Who do we think will win?
Companies who best understand the detailed loan mechanics, can access the lowest cost of capital for the long term loans (driving the best margin) and those with the best asset lite distribution in a contracting capital environment.
Sources
- https://www.grandviewresearch.com/industry-analysis/automotive-finance-market
- https://www.mckinsey.com/industries/automotive-and-assembly/how-we-help-clients/emerging-markets
- https://www.pymnts.com/emea/2022/alternative-auto-financing-puts-car-ownership-in-reach-in-emerging-markets/
- https://aws.amazon.com/solutions/case-studies/carro-ai-ml/
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