Why Goldman Sachs is getting back into Chinese autos

Goldman Sachs announced its return to the Chinese automobile market after an absence of eight years on Thursday, leading a $300 million investment in Renrenche, an automobile portal for trading second-hand cars.

The bank is co-investing alongside Tencent and Didi Chuxing, both existing shareholders in the startup founded four years ago.

Tencent, the tech giant behind China’s biggest social messaging app WeChat, participated in Renrenche’s $85 million series C round of funding in August 2015. Car-hailing app Didi Chuxing invested $200 million in September last year.

Goldman Sachs's involvement in the deal was the most striking because it is the first time that the Wall Street investment bank has invested in China’s automobile industry since 2010, when it led a $70 million investment in auto rental site eHi Car Services. It ceased to be a shareholder shortly after eHi listed in New York in 2014.

That was a year after Goldman Sachs invested $334 million in Geely Automobile, the Chinese automobile manufacturer behind Swedish passenger car maker Volvo and British sports carmaker Lotus. It made an exit on the investment in 2012 through an after-market block trade of shares.

Goldman Sachs is returning to China’s automobile market shortly after Chinese President Xi Jinping unveiled measures to open up the auto industry to foreign companies at the Boao Forum earlier this month. By 2022, foreign carmakers will be able to manufacture cars in China on their own instead of through a joint venture with a local carmaker, as is the case under current guidelines.

Auto sector experts believe the influx of foreign carmakers will further improve China’s automobile technology and facilitate the introduction of more high-tech features in future cars. Understandably, this transformation will be a big opportunity for automobile after-sales services.

Goldman Sachs is betting on this opportunity. While apps like Renrenche are largely online peer-to-peer marketplaces for cars at the moment, their huge network of car buyers and sellers will be an invaluable source of information for automakers and service providers to conduct after-sales services in the future.

CASH BURNING

As with many other internet-orientated businesses, auto trading platforms are splashing millions of dollars to promote themselves in order to secure the biggest user network.

One example is Uxin. Backed by TPG and Warburg Pincus, the auto trading app spent a record-breaking Rmb30 million ($4.7 million) for a 60-second advertisement during the variety show The Voice of China in October 2015, more than triple the fee paid for the same slot a year earlier.

In another example, Renrenche chief executive Li Jian said last year that the company will spend Rmb1 billion ($157 million) on marketing and ads. He was speaking shortly after securing the $200 million investment from Didi Chuxing, suggesting he was using the bulk of the financing for promotional purposes.

Renrenche, which means “everybody’s cars” in Chinese, has used award-winning actor Huang Bo as its spokesperson across a series of advertisements on TV and billboards over the last three years.

Renrenche is not alone in competing for equity investments to sustain its cash-burning expansion. Cheduohao, the company behind China’s third-biggest auto trading portal Guazi, raised $818 million from the likes of Tencent, Singapore’s GIC Private, IDG Capital, and Yunfeng Capital last month.

In November last year Souche raised $335 million from Alibaba, Warburg Pincus, and Primavera, among others. Uxin plans to raise $800 million through an initial public offering in New York this year.

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Source: Gongpingjia (Chinese user-car valuation service)