“I think I don’t have much of a story, I’m too ordinary.” Zeng Wan Gui said.

But as the founder and CEO of Baturu, Zeng Wan Gui admits he did something “a bit bold.” He founded the full vehicle parts auto parts e-commerce platform Baturu in 2013 (Mongolian for “hero”), and even in mature markets like Europe and the US, comparable companies are rare. In the US, similar companies focus on maintenance parts and wear parts, and a few startup companies in China also focus on maintenance parts.

In Zeng Wan Gui’s view, Warburg Pincus Investment Group (hereinafter referred to as “Warburg Pincus”) is also “a bit bold.”

On July 6, 2017, Baturu announced it had secured $100 million in Series C funding, led by Warburg Pincus, with existing investor Zhongding Venture Capital following on. This financing was called the largest single investment in China’s automotive aftermarket supply chain sector.

Hu Zhengwei, Executive Director of Warburg Pincus, believes that what Warburg Pincus sees is an extremely high ceiling. The market values of the top several auto parts supply chain companies in the US all exceed $10 billion, while in China, the number of similar companies is zero. After focusing on the automotive aftermarket for four or five years, Baturu became the target of Warburg Pincus’s bet.

In the view of Xu Bo, CFO of Warburg Pincus’s China division, Baturu, located in Guangzhou, also has the advantage of geography.

Public data shows that Guangzhou is one of the three major passenger car production bases in the country, and the automotive industry is Guangzhou’s largest pillar industry. To accelerate the development of its largest pillar industry, Guangzhou intends to invest heavily in building the auto parts industry, constructing five new industrial parks, with the goal of adding 200 billion yuan in output value to the auto parts industrial base by 2020.

“Baturu backs onto Guangzhou, China’s largest auto parts distribution center, making it easy to source high-quality goods and laying a solid foundation for national expansion.” Xu Bo said. In his view, Baturu will become the “Amazon” of the auto parts sector.

Baturu’s Series C financing involved multiple exchanges with Huaxing Capital. Xu Kun, Vice President of Huaxing Capital, told China Entrepreneur that in 2016, VC/PE investments in the full vehicle parts sector had not yet truly gained attention, but Warburg Pincus’s entry would change that.

“Too traditional”

When Huang Hui chatted with local government officials about Baturu, the other party told her, “Baturu is the hegemon in South China (auto parts industry).”

Currently, auto parts industry entrepreneurs can generally be divided into two categories: the first is people from traditional industries grafting onto the internet, and the second is people with internet backgrounds trying to disrupt traditional industries. Hu Zhengwei’s judgment is that this industry is not suitable for internet people, “it’s quite difficult, with so many SKUs, goods all coming from upstream, without any upstream connections, you’ll be crushed.”

Zeng Wan Gui belongs to the first category. He is from Jiangshan, Quzhou, Zhejiang, went south to Guangzhou in 1997, did full vehicle parts trade in Guangzhou for 7 years, started his own factory in 2003, and in 2009 selected ten brands of full vehicle parts to start a chain.

After doing chains for over two years, he opened four stores in Guangdong Province and found he had hit a bottleneck; the complexity of full vehicle parts far exceeds that of maintenance and repair parts, and he felt the chain model developed too slowly.

Turning to e-commerce became his breakthrough. At the end of 2012 and beginning of 2013, he began contacting the internet and building a full vehicle parts database. In September 2013, Baturu was established.

However, for Zeng Wan Gui with a traditional industry background, finding a technical person to realize his ideas was not easy. Headhunters recommended several people to him, but he was not satisfied. Later, he found the principal of the best high school in Jiangshan, got the list of students who graduated from which years, studied computer science at which schools, then found these people, explained his intentions, communicated repeatedly until they agreed and joined. Baturu’s CTO joined this way in May 2014.

“There were a few months that were very painful; Mr. Zeng seemed a bit obsessed. From models to parts, what is the logic, he had to explain to technical staff, and once they understood, implement it through technical means.” Baturu co-founder Wang Guangshi said. He has known Zeng Wan Gui for over a decade, and in 2012, they talked about how the internet could reduce industry dependence on people. After that, he moved from Beijing to Guangzhou and co-founded Baturu with Zeng Wan Gui.

In November 2014, Baturu’s full vehicle parts trading platform “Auto Parts Shop” went live. This is a B2B e-commerce trading platform, and compared to various O2O in the internet entrepreneurship scene at the time, Baturu still seemed synonymous with traditional.

In March 2015, Lenovo Star’s 7th Spring Class began, a TMT professional class, with big names like Pan Shiyi and Yan Yan attending the opening speeches, “all embracing this (internet entrepreneurship) group.” In May 2015, Premier Li Keqiang visited Zhongguancun Entrepreneurship Street, accompanied by Liu Chuanzhi, and specifically went to Lenovo Star to meet with the class students. The climax of “mass entrepreneurship and innovation” arrived.

“So this class also had a certain timeliness; many young people just starting out, got a financing, young and saw the Premier. That batch of projects had a lot of bubbles, still a bit impetuous.” Huang Hui recalled, “The Premier walked around the class, everyone was hyped, posting all over Moments.”

This training class was also Zeng Wan Gui’s first circle in the internet. “I was purely from traditional industry, completely unfamiliar with the internet and this circle, didn’t understand. Lenovo Star gave me basic knowledge of the internet, and from there I met many young internet entrepreneurs.” Zeng Wan Gui said.

In Huang Hui’s impression, Zeng Wan Gui didn’t talk much in class, the typical low-key South China entrepreneur, but quite recognizable, everyone called him “Old Dad.” When electing class monitor, out of over 50 people in the class, he got the most votes, but he politely declined the class monitor position and recommended another post-85s. “Old Dad showed a relatively humble state, probably these traditional background entrepreneurs lack confidence.” Huang Hui said.

But Huang Hui noticed that among the projects participating in that training session, many hot O2O projects later underwent difficult adjustments, while Baturu has made it to today, “still very resilient,” “which gave Zeng Wan Gui some confidence in a way.”

By the end of the 2015 training, Lenovo Star’s summary was that to see the making of Baturu, three examples suffice:

1. In the 7th Spring Class, claimed to be the peak of male CEO looks, the group slogan was surprisingly everyone loves Zeng Wan Gui.

2. In Lenovo Star’s Entrepreneurship Gobi Trek, one group’s name was surprisingly Baturu.

3. Old Dad’s driver is actually a professional racer, willingly following him as driver.

“Poor presentation”

In January 2015, Baturu secured 50 million yuan Series A funding from Qifu Capital and others. “Series A mainly looks at people, not so many intricacies. Series B is in-between, we did a lot, but maybe not many results to show, or the results didn’t look good.” Zeng Wan Gui said. Throughout the rest of 2015, his state was “very anxious”—after “Auto Parts Shop” launched, transaction data didn’t explode.

In Zeng Wan Gui’s view, the auto parts industry is too traditional, with poor infrastructure; to do auto supply chain, it must be a process from slow to fast. “To C logic is completely different from To B.” Zeng Wan Gui said, “To C benefits show quickly. But To B isn’t; B takes real effort, each point’s logic isn’t hard, but all need time to grind. Because our upstream and downstream are all small business people, very shrewd, calculating every penny; to dominate this field, it’s not that simple. Need to build infrastructure very well.”

In the view of Zhu Yingchun, partner at Zhongding Venture Capital, B2B mode has many pitfalls, one of which is growth confusion, pursuing transaction volume while neglecting foundation-building. Zhongding Venture Capital was one of Baturu’s Series B investors.

But in the eyes of investors at the time, Baturu was an investment target with too much uncertainty. Concerns around Zeng Wan Gui himself were many among investors. “Some investors said the company is good, what they do is good, but the founder seems to lack internet thinking, poor financing ability, no vision, no explosiveness… because what we talk about is too grounded, investors find it unsexy.” Zeng Wan Gui recalled. Some investors asked if he wanted to move the company from Guangzhou to Beijing; others asked if Zhuge Auto Repair, rising fast, would punch the old master to death with random fists?

Zhuge Auto Repair Network was the former B2B auto parts superstar; after launching in February 2014, its scale skyrocketed like a rocket. Public data shows that in 2014 and January to March 2015, Zhuge Auto Repair’s transaction scale reached 1.4 billion yuan and 1 billion yuan respectively. In December 2015, Zhuge Auto Repair listed on the New Third Board, becoming the first stock in the auto services market. At the listing ceremony, then-chairman Qi Qing introduced that less than 2 years after launch, transaction volume was nearly 10 billion, valuation 6 billion.

While in 2015, Baturu’s transaction volume just crossed the 100 million yuan threshold.

During Series B financing, Baturu hired a local Guangzhou FA, contacted over 40-50 investors, but few were willing. “They as FA were quite diligent, did a lot of capital translation work. But they couldn’t replace me; I’m the typical poor presentation type.” Zeng Wan Gui said.

As one of Baturu’s Series B lead investors, Huachuang Capital’s investment decision was also not easy at the time. Huachuang Capital managing partner Wu Haiyan told this magazine that Baturu was Huachuang Capital’s last deal before the 2016 Spring Festival, “the decision was quite difficult then.”

Baturu was also under huge pressure; Huachuang Capital partner Wang Daoping recalled that Baturu’s monthly losses were millions at the time. “You need multiple communications with him (Zeng Wan Gui) to get more value; the first time, he might not have strong appeal.” Wang Daoping said.

What finally made Huachuang decide to invest was Baturu’s fund usage. Wu Haiyan found that under such difficult conditions, Baturu still had a not-small technical team, maintaining decent technical investment. “VCs look not at profitability, but growth trend.” Wu Haiyan said, “We saw where his raised money went, to technical platform and data, building core competitiveness. That’s right. Spending on inventory or marketing is useless.”

When Huachuang Capital’s investment talks were nearly done, Zhu Yingchun went directly to Baturu’s office location.

In Zhu Yingchun’s view, B2B e-commerce is first “business,” and business means trade. Not all “business” with “internet” plugged in can soar; only good business plus internet has true innovation value. Therefore, Zhongding Venture Capital, in B2B e-commerce investment decisions, follows the category-first principle, prioritizing categories with big market value potential, like auto parts, ingredients, MRO (industrial products), fast-moving consumer goods, etc.

And Baturu’s essence is auto parts supply chain. “This is an industry domain that can benchmark international big market value tracks; the US has 4 listed companies over $10 billion market cap. High ceiling, stable high gross margins, good cash flow, typical good business.” Zhu Yingchun told this magazine.

However, what Zhu Yingchun didn’t expect was that in November 2015, his first visit to Baturu, upon entering, Zeng Wan Gui gave him a slap in the face. Zeng told him that Baturu’s Series B was almost done; if no understanding of auto parts supply chain, no need to talk further.

“We in traditional business have a bad habit: unwilling to explain to those who don’t understand. People unfamiliar with me might think I’m arrogant. I’m not aloof; it’s my style.” Zeng Wan Gui said.

“This was like on-site essay question!” Zhu Yingchun recalled, “Luckily we were prepared.” Before investing in Baturu, Zhongding Venture Capital reviewed no less than 50 BPs in auto parts supply chain, and deeply surveyed 5-6 companies. After Zhongding Venture Capital fed back their research and understanding of auto parts supply chain, Zeng Wan Gui was shocked, “There are investors this professional?”

Another impressive example for Zeng Wan Gui was that besides investing in Deppon Logistics and Truck Help, Zhongding Venture Capital also invested in a forklift parts company. In Zeng Wan Gui’s view, only very professional investors would notice such niche opportunities.

In July 2016, Baturu announced 100 million RMB Series B, invested by Huachuang Capital, Zhongding Venture Capital, etc., with original investor Qifu Capital continuing to follow on.

Inflection point coming?

Before encountering Baturu, Warburg Pincus had been looking at the automotive aftermarket for four or five years but hadn’t made a move.

Hu Zhengwei introduced that initially Warburg wanted to invest in wear parts projects, but later found wear parts have low value, fast turnover, not high entry barrier, so gave up.

“If just doing wear parts, SKUs not much different from distributors, efficiency might improve a bit, comparative advantage over traditional not so obvious. To achieve profit growth, only scale effects. But the dilemma is that wear parts upstream is also concentrated; using scale as chip to get profits from upstream isn’t easy.” Hu Zhengwei said.

In comparison, full vehicle parts e-commerce has higher ceiling, longer runway, and wider moat. First, auto parts industry market scale is large enough (high ceiling); second, Baturu now only has some penetration in parts of South China, huge deep cultivation space in both South China and national market (long runway); finally, Baturu has put real effort into database, systems, and upstream docking (wide moat).

Xu Kun believes that before Baturu, capital markets were very pessimistic about full vehicle parts e-commerce. From late 2016, Huaxing Capital was communicating with Zeng Wan Gui on how to explain the business model to make capital markets quickly accept full vehicle parts e-commerce. By early 2017 when starting Series C, Baturu contacted over a dozen investment institutions, almost all gave positive feedback, received many investment intents.

Among them, Warburg Pincus decided fastest; Hu Zhengwei revealed that they connected end of February to early March, issued TS in two-three weeks, due diligence done in one month.

Zeng Wan Gui introduced that compared to Series B, the biggest change in Series C was efficiency. Peak time, Baturu had 660-670 people, system efficiency not up yet, many links relied on manual; now compressed to over 200. Compared to January 2016, January 2017 per capita output increased over sixfold, transaction volume doubled.

For main uses of Series C funds, Baturu said it will further improve database, informatization, and build higher-quality supply chain.

What excites Zeng Wan Gui and investors more is that in August this year, Baturu’s South China Central Warehouse in Guangzhou will be put into use. “Theoretically, you can buy all parts here to assemble a car.” Zeng Wan Gui said.

Early July, various parts with QR codes were being scanned into the South China Central Warehouse. Baturu’s plan is to expand the central warehouse to 200,000 square meters this year.

Zeng Wan Gui said the construction and operation of the South China Central Warehouse will be Baturu’s next focus, “because this warehouse gathers the nation’s best resources; doing this well makes replication very fast.” In the next three years from this year, Baturu’s ambition is to cover the whole country.

Baturu’s upstream partners are first-level wholesalers, not parts manufacturers; downstream are large and small repair shops. “Those big wholesalers are all in South China. Once supply matures, like opening Wanda plazas, Wanda opens in Xi’an, they follow to Xi’an, to Beijing, they go to Beijing.” Zeng Wan Gui said.

“Once one central warehouse is debugged, for expansion elsewhere, just move the same setup; nationwide will have 6-8 central warehouses.” Hu Zhengwei said.

And Xu Kun’s judgment is that although Baturu’s current valuation in auto parts e-commerce isn’t the highest, its subsequent explosiveness will be very strong.

But there are also concerns that when big e-commerce platforms turn attention to the auto parts category, will the imagination space of independent auto parts e-commerce platforms be squeezed?

This is not unfounded worry.

Also in July, JD.com signed a strategic cooperation agreement with Bosch, cooperating deeply in new product launches, crowdfunding, O2O, etc. This is seen as JD.com’s major move into automotive aftermarket. There were also rumors that JD.com wanted to acquire a certain B2B auto parts procurement platform.

Abroad, Amazon seems increasingly interested in the auto parts market. Public reports say that in recent months, Amazon also signed distribution contracts with Bosch and other major auto parts vendors. Some comments believe this might take business from major US parts retailers.

In response, Zeng Wan Gui said, “We use 100% of our time on one thing, but Amazon uses 1% of its time on one thing; I might not lose to it.” (China Entrepreneur · Ma Jiying)

(Original link: Market share less than 1%, staff cut by 400, once seen as poor presentation by investors, but this company raised $100 million in Series C, reason unexpected)