Startup to IPO: How Tuhu Car Became China’s 1st Automotive Aftermarket Company to Debut on the HKEX

In 2021, while researching the automotive aftermarket in southern China, the Cathay team got into a ride-hailing car with standard branded tires. Upon inquiry, we found that the young driver was a devoted fan of Tuhu Car (9690.HK) — now known as China’s leading automotive aftermarket brand, and the first in the sector to go public, listing on the Hong Kong Stock Exchange (HKEX) at HK $28 a share and valuing the company around HK $23B.

What drove this driver to Tuhu?

The younger, digitally native generations in China are accustomed to online orders and wary of being taken advantage of by offline stores. This driver became disenchanted with the exorbitant maintenance fees from 4S dealerships after the car warranty period. He was looking for a high-value alternative, and Tuhu fit the bill.

At the time, the driver wanted to switch to another brand of tires, quoted at RMB 900 at a mom-and-pop auto repair shop. However, upon checking the Tuhu app, he found the same tires listed for only RMB 700 and immediately placed an order. The same applied to engine oil and car batteries. Tuhu provided online product selection and ordering with transparent pricing, and then assigned the nearest Tuhu offline store to assist with installation for a service fee — providing excellent service without additional sales pressure. Moreover, they offered car wash vouchers and Tuhu stickers, turning this driver into a Tuhu enthusiast. And with many of his friends also using the platform, he planned to open his own Tuhu store.

With such a great reputation (spread by word of mouth) we became convinced Tuhu was a highly valuable franchise brand in the Chinese automotive aftermarket — ultimately leading to our 2021 investment. Here’s why.

The Tuhu Value — It’s Three-Fold

For Users:

• After the warranty period, vehicle owners need a cost-effective chain replacement solution that delivers on core values: 1) a diverse product offering, 2) speed, 3) quality, and 4) savings. Tuhu provides excellent service similar to supermarkets, offering carefully selected branded products with transparent prices, standardized processes nationwide, and a no-pushy-sales experience.

For Auto Parts Retailers:

• Tuhu’s unified online and offline marketing brings stable customer traffic.
• Centralized procurement eliminates concerns around stocked products, while pricing and digital inventory turnover are entrusted to the unified management of the Tuhu platform — allowing stores to focus on management, customer retention and service.
• Standard Operating Procedures (SOP) make stores more professional compared to independent establishments.
• The extensive product line can range from car washes to maintenance, battery repair, and more — allowing store owners to earn reasonable profits, with industry high ROI.
• Store owners’ willingness to pay franchise fees and become Tuhu Workshops forms a positive cycle.

For the Market:

• Tuhu is quickly integrating the entire procurement process and redistributing profits from the prior “middlemen” (national and regional distributors) to consumers.
• It challenges high fees from 4S dealerships and provides a variety of low-cost, high-quality services and products.
• The company has run a verified, efficient, scalable, relatively low asset-intensive, and strong control business model in the path of automotive aftermarket consolidation.

China’s Automotive (After)Market

China has become the world’s largest car ownership country over the last decade — bringing new challenges in maintenance, upkeep and supply. In 2011 (Tuhu’s founding year), the number of automobiles owned in China was ~107M. At the time, the Internet had yet to become a major infrastructure for the sector and the potential market was characterized by fragmented supply and difficult-to-quantify service levels.

For car owners, there was a lack of high-quality services, limited scope, low trust, and a lack of seamless, integrated online and offline options. On the supply chain level, the myriad of SKUs and the spread of auto service shops across the country made the distribution network multi-tiered but inefficient, compounded by imperfect infrastructure.

By 2016, China’s car ownership exceeded 280M, and the Internet began to rapidly penetrate the industry. In 2021, car ownership reached 308M. According to Zhuo Shi Consulting data, in 2022, the scale of China’s auto service industry reached 1.24 trillion yuan, with compound growth rate expected tol reach 9% in the next 5 years. As the average age of cars in China is only 6.2 years, compared to 12 in Europe and America, it’s clear there’s further room for growth with increasing demand for auto services — especially maintenance.

The Tuhu Journey — from Start to IPO & Beyond

Tuhu got its start with tires, which had the highest single-category sales amount, but also the most complicated SKUs with cash flow challenges. It was this choice that gave them a clear market position and value proposition. With a few jointly owned demo stores, they standardized services and quickly replicated the single-store model. While the business strategy formed the operating flywheel, batches of venture capital injection and facilitation propelled the company forward.

Supply chain integration is at the core of automotive aftermarket platforms. By consolidating downstream stores, bargaining with upstream suppliers, Tuhu gained the ability to increase revenue and profitability each year — with gross margins increasing over the time from 9% to 24%, leaping across the chasm of net profit and cash flow.

At Cathay Innovation, we witnessed Tuhu overcome challenges in the supply chain and continuously innovate its model to provide Chinese consumers with exceptional service, establishing a strong brand reputation with an unfaltering dedication to a ‘customer-first’ approach. In 2021, annual sales for Tuhu’s Auto Service broke 10B with users exceeding 20M. And as of the first half of 2023, Tuhu has opened 5,129 Workshops in 300+ cities with 100M+ registered users.

Today, we’re celebrating Tuhu’s public debut on the Hong Kong stock exchange — the first of its kind to reach the public market and a magnificent achievement for the company, attracting high-quality investors during the IPO process.

However, we believe there’s more potential for topline growth. First, there’s the ICE (internal combustion engine) vehicle sector — conventional fuel vehicles will still dominate the maintenance and repair market in the next 10 years. Next, is the rapidly growing EV (electric vehicle) sector with Tuhu already starting strategic collaborations with several automakers, battery manufacturers, and charging station operators in battery, motor and EV control unit repairs. Further, supply chain integration can bring more bargaining power and improve cash flow. Lastly, Tuhu’s brand influence is gradually strengthening, and the “celebrity effect” is emerging alongside the continuous increase in offline traffic.

Parting Thoughts — an Emerging Global Automotive Aftermarket Player

Cathay Innovation is a multi-stage venture firm that provides capital and industry access to help founders across Europe, North America and Asia build transformational businesses in commerce, fintech, digital health, mobility and energy.

We believe that Tuhu has accomplished a rare feat in becoming the leading brand in the Chinese automotive aftermarket and despite the turbulent environment over the past two years, has demonstrated the strength of an innovative franchise model in auto parts retail.