The author of the column is Alexander Savinkin, our investment expert and co-founder of Howtotoken. It’s #icobusted, where we scan the market for the newest and most remarkable upcoming ICOs and analyze them in-depth, with a focus on the viability of the business concepts behind these projects. This won’t concern pre-ICO/ICO price gaps, no gasps and groans about the team, and no code checking. Here, we will try to break everything down to see if there are any market prospects for the product if, and only if, that product can be delivered.
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TrustedCar is the new generation of car leasing. The team claims to beat traditional car sharing and car rental companies, and to dramatically change traditional dealerships. So, what are their chances?
TrustedCar Flex can basically be described as a project similar to car sharing, with car dealers as vehicle providers and people who want to rent a car for a few days, weeks, or months as clients. But they don’t want to just to create a low-price global car-sharing company. The project team’s belief is that the “business model of dealerships will change dramatically in the long-term as a result of our technological innovation.”
TrustedCars already has an established business and a functioning platform for buying used cars. With more than 30,000 listed vehicles in 2017 and currently more than 8,000 vehicles available for purchase, it is considered one of the biggest online shops for used vehicles in Europe. Its partnership network consists of more than 100 dealerships in Germany.
But now let’s go back to the TrustedCar Flex platform. The experience from using it is mostly like renting a vehicle online: you sign up with a mobile app, choose a car, and pick it up at the dealership. Unlike traditional rentals, you are only asked to pay for the time you actually used the car, there is no contract with a fixed return date and time. Some of the use cases may be when you only need a vehicle from time to time, for example in the winter when you can’t ride your bike to work or if you need a vehicle on a daily basis, but you don’t want to own a car or worry about maintenance, repairs, etc. The solution also promises advantages for companies as they won’t need to buy a car or sign a long-term lease, but will instead be able to get a vehicle within TrustedCar, turning fixed costs into variable and flexible expenses.
What I liked about this project is that the team has been working closely with car dealership partners for the last three years and they have identified their problems and needs. Dealers face several issues: vehicles sitting on the lot generate maintenance and storage space costs every single day, as much as $15 per day per vehicle. Selling a vehicle is also quite a long process as it takes an average 100 days (according to the project team’s observations) to sell one, and some cars cannot be sold for six months or even longer. Cars also become damaged from not being moved (dead batteries, flat tires, and rusted brakes are some of the ways in which vehicles suffer from long parking). TrustedCar is going to provide a technological solution for dealerships to resolve both sides of the income statement issue: an increase in revenue and a reduction in holding costs. Instead of vehicles taking space, they are on the road making money to offset inventory-financing and other expenses – and there are no upfront costs for dealers to list their vehicle inventory with TrustedCar Flex. Since they already have a solution to connect all of the different dealer management systems to their platform, it will be just a few modifications for car dealers to offer their vehicles on the TrustedCar App. Additionally, TrustedCar plans to implement an IoT+blockchain smart insurance solution in the future. As for now, a framework agreement has been made with “one of the largest vehicle insurance companies” that will provide insurance for the period that the vehicle is being used.
TrustedCar plans to compete in the car rental and car selling markets, however I personally think that car sharing (especially stationary car sharing) might be considered as a target market, too. The project is going to bring car-sharing flexibility into car rental. A more far-reaching goal is to make the process of car renting via the TrustedCars platform so convenient and provide such a reasonable price that people will consider it as a replacement option for buying a car.
The car sharing market accounts for $24 billion and $23 billion in China and the USA, respectively, and a much smaller amount of $8 billion in Europe as stated in McKinsey research on shared mobility. Even the least aggressive scenario projects 15 percent annual expansion.
The global car rental market is valued at approximately $60 billion and is expected to reach nearly $124 billion by 2024. The biggest car rental brand in the US is Enterprise Holdings, with $20 billion revenue and more than 7,600 car locations worldwide. It is the parent company of Enterprise Rent-A-Car, National Car Rental, and Alamo Rent A Car brands. One of biggest and most popular car rental companies in Europe are Europcar and Sixt, whose sales volume accounted for approximately $2.5 billion in 2017 and have nearly 4,000 car locations worldwide each.
The main advantage for clients is what TrustedCar offers in comparison with the traditional car rental services: carsharing. The user doesn’t have to sign a contract for fixed time, but can instead enjoy riding a car for as long as he or she wants. According to the team’s plans, the price is going to be about the same as with long-term car leasing. However, it is not clear how are they going to use blockchain technology in order to offer such a relatively inexpensive solution without affecting the overall cost structure.
On the other hand, car dealerships will benefit from this service too. Listing their vehicles on the platform frees income inflow that is buried with cars being parked in their lots. What’s more is that there is going to be a cost reduction due to freeing up parking space.
The team’s plans are to change people’s attitude towards car ownership. However, here may be the weak point – it’s nothing but an assumption. And a 2017 McKinsey survey reveals that 67 percent of all US respondents prefer driving their own cars over using ride-hailing apps, and 63 percent aren’t interested in trading their vehicles for shared-mobility rides—even if they’re free. Additionally, there doesn’t seem to be any strong obstacles for rental market players to implement a similar solution as they already have a large network of rental spots.
One of the possible ways to assume the potential revenue of TrustedCar is by comparing their numbers with that of the dealers numbers regarding existing car rental players. If we consider a dealer as a car location, then, as TrustedCar currently has about 100 dealer partners; the number of car locations is 76 and 40 times less than Enterprise Holding and Europcar have, respectively. It results in a possible gross revenue of $65M to $260M (Europcar’s revenue divided by 40 and Enterprise’s revenue is divided by 76). Keeping in mind the low marginality of the rental business, these are interesting but not crazy numbers.
Let’s make a few more slightly boring calculations, but there will be some remarkable results. Let’s concede that a new attractive business model will boost TrustedCar’s gross revenue x10 in an optimistic scenario. That gives us a range from about $500 million to $2,000 million of gross merchandise volume due to our previous assumptions. How do we know whether this is a good result in comparison with TrustedCar hard cap of $41 million?
(Just so you don’t mix these up: gross revenue or gross merchandise volume (GMV) is a value for merchandise sold through a particular marketplace. Site revenue comes from commission fees. In other words GMV = partner sales via your marketplace + your commission fees.)
If TrustedCar sells all of the volume just for its own Flex token then $500 – $2,000 million GMV could create a pretty strong demand for Flex. But we have to remember that not all of that money is needed simultaneously or every day. There is a “reutilization” of money during the year – like working capital turnover ratio. In other words, imagine that your annual revenue is 100 Flex and that you sold your service five times by 20 Flex per each deal sequentially each 2-3 months. It means that on average, during the year, demand for Flex is equal 20 Flex (100 divided by 5, which is our turnover ratio here) but not 100 Flex. The result is that the higher our turnover ratio is the smaller the demand for Flex is.
On average, TrustedCar rental periods may vary from a week to a quarter. To simplify our calculation, let’s assume the average rental period of 1/10 of a year. It means that the TrustedCar turnover ratio is 10, or that all Flexes turn over 10 times per year on average.
And finally, let’s get back to our assumption regarding the optimistic scenario. We should divide those $500 – $2,000 million GMV (provided that everything is nominated in Flex) by 10 (TrustedCar turnover ratio). This calculation gives us the number of possible “active money” or “currency in circulation” for Flex. So if TrustedCar does well and makes 10x the revenue, it allegedly means that demand for Flex can be in the range of $50 – $200 million.
Pros and cons:
(+) Global, large market
(+) Existing local service
(+) The team is close to market and realizes its needs
(-) Great amount of substitute services
To sum up, TrustedCar will most likely fill in the middle-term rent market rather than disrupt the whole car sales industry. Dealerships may see it as a way to generate some additional profits. The high market potential and size, as well as the already functioning business, strengthens positive expectations about this project. We would recommend taking a closer look at this project, however, it is still in question whether or not the team will manage to fulfill the project’s potential.
- Car sharing in Europe by Deloitte
- “How shared mobility will change the automotive industry” by McKinsey
- Enterprise Holdings financials by Forbes
- 2017 used car market report by Manheim
- Car rental market research by Zion Market Research
- “Five trends transforming the Automotive Industry” by PwC
- 2017 Automotive Trends by PwC