On July 6, auto parts e-commerce platform Baturu announced that it had secured a $100 million Series C funding round led by Warburg Pincus. Hu Zhengwei, Executive Director of Warburg Pincus and the person in charge of the project, accepted an exclusive interview with 21st Century Business Herald, introducing Warburg Pincus's investment logic in the auto parts supply chain sector in the Chinese market and sharing his thoughts on the industry's development prospects.

"Although the market is huge, the entire auto parts supply chain industry is extremely fragmented. In China, the highly fragmented and decentralized market lacks unified standards, and the multi-level and unregulated distribution and sales system has led to severe resource waste and inefficiency in the industry," said Hu Zhengwei.

He believes that compared to overseas markets, the Chinese market still has significant room for consolidation, which also provides huge development opportunities for leading companies in the automotive aftermarket supply chain sector.

The following article is compiled based on Hu Zhengwei's narration, with some edits:

We have been observing the automotive aftermarket supply chain for a long time. Narrowly speaking, it basically consists of three major segments: B2B supply chain, auto repair and parts chain stores, and C2C platform companies.

What we are most optimistic about is the supply chain. In the US, this market is actually very mature. The top 5 auto parts supply chain companies account for 30% of the market share, and each of their market values exceeds $10 billion. Together, these five companies are currently worth $76 billion, which is a huge market.

From a macro trend perspective, supply chains will definitely move from fragmentation to concentration, as concentration brings higher efficiency. China's market is still very fragmented, mainly because the auto parts industry in China has not yet been digitized. Without systematization, brand expansion and regional expansion are very slow, and auto parts dealers hit a ceiling and cannot scale up. To break through in this industry, the key is whether you can digitize it, database it, and reduce human factors through these means.

Bullish on full vehicle parts

The entire auto parts chain from top to bottom basically divides auto parts into maintenance parts, wear parts, failure parts, and accident parts. Simply put, from top to bottom, the value of each small part increases, the number of SKUs increases, and the turnover rate decreases. For example, maintenance parts like oil and tires don't have that many SKUs, and oil and tires turn over very quickly; some wear parts like brake pads and wipers are very cheap. But accident parts are different; there are millions of SKUs at the bottom, and the turnover rate is correspondingly lower. So many people in the auto parts circle say that after doing this for a lifetime, they're left with some parts, a warehouse full of inventory, because these parts have high value, and sometimes you can't sell them for half a year. These are their characteristics.

Relatively speaking, we are not as fond of directly doing wear parts. Although the wear parts market in the US is large, there are several differences between China and the US. For those doing wear parts, it's hard to change the traditional business model or add something on top of the traditional model. Because the traditional model is already quite efficient.  

Full vehicle parts are very different. Full vehicle parts have very low turnover rates, and upstream, midstream, and downstream are all fragmented, with midstream distribution also fragmented. Upstream, midstream, and downstream are all fragmented, which is a great opportunity for us. Downstream is fragmented—today repairing this brand, tomorrow that brand, no platform can solve all their problems. There are thousands of upstream factory manufacturers, with fierce competition, and their margins are actually not that low, so you can squeeze profits from upstream.

Baturu started from 1.0, where they would source goods themselves from suppliers—for example, if someone placed an offline order, they would go directly to the supplier and say I'll pay to buy the goods; to 2.0, where after placing an order, suppliers deliver the goods Baturu needs to the transit warehouse twice a day; now to 3.0, building central warehouses where suppliers directly place the goods here, and once you order, we ship immediately.

Closing the transaction loop

The core of this industry is to build good systems and databases. Systems and databases are two different things—a system is a framework where you pile things in, and a database is the information that fills that framework. The system tells me there are these models, these parts; the database tells me which parts are in each model and where to find them. To solve the problem when a car comes in—from the car to the model, to the parts, to finding that part from the supplier—that's a complete transaction closed loop. If I can't find it, there's no transaction.

Now many people in this industry claim they have achieved so-called databases, but in reality, they often stop at one of these steps—some lack systems, some lack databases, some can't achieve transactions, some have nothing. Those that can do transactions can only do a small part of them—a portion of models or parts, only OEM parts, only part of it.

Winner-takes-all market

This industry is different from when it was done in the US. Like other offline industries, once the internet enters, it will definitely be winner-takes-all. When a repair shop faces two platforms, it will definitely go to the one with better cost-performance.

What (Baturu) can achieve now is that basically 95% or more of the parts you can think of can be directly traded. Only by achieving direct transactions is this a true closed loop. Additionally, digitization and datafication can provide added value to insurance companies—only closed loops can achieve this, and it can help insurers reduce claims payouts. According to our understanding, some insurers using the Baturu platform for premium assessment and direct purchase one-stop service have not only improved efficiency but also reduced claims payouts by an average of over 30%.

In the end, what we need to answer is what model to use for this market. We must grasp the essential and fundamental contradictions, always answering the question: "What product, at what cost, solves what problem, and why wasn't this problem well solved in the previous traditional supply chain?"—this is a question that must always be answered.

In B2B, inflating volume (brushing orders) is too easy. We've seen some companies before, and you can tell from their accounts that they have brushing situations—this approach is meaningless.

What is meaningful? It must be strengthening your infrastructure to solve problems others haven't solved. Any business model that doesn't address fundamental issues is rogue, I think.

Value of data

After completing IT and internet transformation, as transaction volume increases, a large amount of data will emerge. Data has several significant meanings. First, it can provide suggestions to suppliers. Second, it helps select high-quality suppliers. Third, the pricing system will be more market-aligned.

The bigger these data get, the more useful they are, because you're no longer a point or a line of value, but data across the entire surface. In the future, Baturu will not only have these large central warehouses; below the central warehouses, we might set up regional warehouses. When setting up regional warehouses, this data becomes very important again. Data can tell us which goods to put in regional warehouses, which in central warehouses, how to transfer from central to regional warehouses, how much stock to place—these are all things data can tell us.

Taking it a step further, if we can truly achieve production on demand from factories, data can tell the factory how much stock to place here. The direct demand might go straight to the factory saying you need to produce, put these goods in my warehouse—this can only be done after scaling up even more.

This is why we go from sorting out the big industry logic, to the segments in the aftermarket supply chain, choosing full vehicle parts in this segment, and choosing Baturu within full vehicle parts—it's this big logic chain. (21st Century Business Herald · Zhao Na)

(Original link: Warburg Pincus Hu Zhengwei on auto parts supply chain: Huge consolidation space remains in Chinese market)