OLX Group-backed CarFirst has shut down in Pakistan. Here’s why

After more than five years in operations, the OLX backed car trading platform CarFirst found itself out of business not with a bang but with a whimper. A simple announcement on LinkedIN marked CarFirst shuttering its operations on the heels of its competitor VavaCars announcing they were calling it quits in June this year. 

Both companies had a very similar business model. So when VavaCars shut down earlier in the year, questions about the fate of CarFirst had already started making the rounds. The story sounds similar to so many other startups in Pakistan in the past few months. Funding has dried up as the result of the global recession and the US Fed raising interest rates, and CarFirst is just the latest victim. As investors’ sentiment is fueled by fear because of the economic downturn, they are chasing sustainable business models – ones that do not require continuous cash burn. 

Remember, however, that this isn’t any old startup. Their failure is a little more complicated and points towards larger problems. CarFirst was funded by Dutch-domiciled global classifieds giant the OLX Group, and is part of the OLX Autos universe which deals in the business of buying and selling of used cars, beyond the classifieds only business and has no shortage of financial heft to back its portfolio companies. And when companies like OLX back out from funding their own portfolio companies, it could hint at very serious challenges in the market. And for tech companies, it means that funding woes can haunt you even if you are backed by the best in business. 

Earlier, OLX Mall, the eCommerce division of OLX in Pakistan, was shut down in March. OLX backing out from investing even after spending millions on building the brand and just before the launch is courageous. But OLX seems to have been cautious with where it invests and continues to invest because of a funding crunch as well its own woes: the Dutch-listed Prosus, which owns OLX Group, is in distress because of the Russian invasion of Ukraine which has impacted one of its prized portfolio companies Avito, the Russian equivalent of OLX, now up for sale.  

So how does all this add up for CarFirst? Briefly, rising food and fuel inflation have brought down purchasing power, the increase in dollar has resulted in an increase in car prices and the overall production of new cars has slowed down. Add to that equation the import ban which was lifted only a day ago, and you have a recipe for disaster for a sector such as autos. While there is no data on the size of the used cars market in Pakistan, versions from used cars dealers gives a desolatory picture of the used cars business as well and CarFirst operated as a trader of used cars. 

CarFirst and OLX 

CarFirst proudly identified itself as an OLX Group company while it was operational. Founded in 2016, the company operated a website and a network of inspection centres and warehouses for inspecting, buying and selling of cars. 

The company raised its Series-A investment from Germany-based Frontier Car Group (FCG) but never went public about it. According to Crunchbase data, CarFirst raised $89 million from FCG in 2018, which would safely make it the largest Series-A investment raised by a startup in Pakistan. CarFirst subsequently raised Series B investment directly from OLX Group as well, also in 2018 according to media reports.

Berlin-based Frontier Car Group which funded CarFirst also operated in the used cars space and developed, launched and operated used cars marketplaces in emerging markets such as Nigeria, Chile, Mexico, Pakistan and Indonesia. In November 2019, OLX Group invested $400 million in FCG and became its largest, though not a majority shareholder.

In 2020, the OLX Group acquired a controlling stake in Frontier Car Group  and the same year, OLX and FCG partnered to create OLX Autos, into which it has now folded Frontier Car Group operations. OLX Autos operates as a trader of used cars, giving evaluations and buying cars to sell them at a margin. 

OLX Autos operates in Argentina, Chile, Colombia, Ecuador, India, Indonesia, Mexico, and Peru under the same brand name, and operates three independent brands in other other geographies: CarFirst in Pakistan, Car45 in Nigeria and webuyanycar.com in the US. 

Since its partnership with Frontier Car Group which initially began with a relatively smaller investment in 2018, OLX now controls 99% effective interest in Frontier Car Group. OLX also shut down FCG’s Berlin office last year where it was based. 

While how much of CarFirst is owned by OLX is not known to us, a source at OLX in Pakistan told Profit that OLX Autos in Pakistan was CarFirst, which means that OLX effectively controlled CarFirst in Pakistan. OLX, which lists classifieds including autos on its website, has been an active partner of CarFirst, holding events such as CarBazaar and setting up auto inspection centres together.

The business of used cars in Pakistan

Even if OLX did not fully control CarFirst, a drying up of global VC funding means that CarFirst had no other funding options while OLX would also not be willing to give follow-on funds because of the cash burning model of the CarFirst business. 

You see, CarFirst operates a network of brick-and-mortar inspection centres which means it would have incurred high CAPEX, as well as high OPEX to keep those centres operational. The way it worked with CarFirst was that sellers could go to a nearby CarFirst centre, get an inspection and a price on the car and if the price sounded reasonable, CarFirst would buy that car from the seller at the agreed price. 

CarFirst would then apply any fixes to the car and sell it to a buyer at a higher price, earning revenue from the difference in the purchase and sale price of the car. All this while, CarFirst had competitors as well which included the traditional used cars dealers as well as classifieds platforms OLX itself and PakWheels. 

If one thinks about a Pakistani auto seller or a buyer, the behaviour usually is that the consumer would hop on to options that would offer the best price. If CarFirst offered a price on a car, the seller would most likely check out traditional used cars dealers and place ads on PakWheels and then negotiate with buyers just to get the right price, overlooking the convenience of selling on CarFirst that comes with certified inspection reports based on which they priced there cars. Then a similar competitor, VavaCars also appeared in the foray making the competition more intense for CarFirst.  

However, in conversation with automotive dealers across Lahore Defence’s Main Boulevard, Profit discovered that whether or not end users were getting the prices they wanted to sell their cars to CarFirst, dealers were. Many dealers cited the convenience of using CarFirst, and how they could readily sell to them at rates that made profits for them. 

Now this juxtaposition between end-customers possibly not using the platform enough to dealers being fans of it is interesting. It would indeed be correct if someone might cite that CarFirst was eliminating its competition by purchasing stock from dealers. However, by purchasing used vehicles from dealers at rates profitable to them and then selling the same vehicle to customers reduces your own profit margins. Increasing your profit margin would have come via higher prices for end-customers which kind of defeats the purpose of the customer being in the used automotive market to begin with. 

In short, growth in the Pakistani market for these newage used cars dealers is questionable. Think of it another way: companies like CarFirst and VavaCars were trying to become a national franchise when no other traditional used car dealer could achieve the same. Furthermore, in conversation with the dealers, Profit realised that none of them really wanted to go beyond their regional markets to begin with. At best they thought of city-wide hegemony, but that too as a pipe-line project. 

CarFirst and VavaCars tried to do something ambitious that frankly no-one else even wanted to, simply because of the heterogeneous nature of markets and customers across Pakistan. We term it valiant but the dealers whom we conversed with termed their fallen rivals’ ambitions as being disconnected from ground realities about the market.. 

But the final nail in the coffin for CarFirst was perhaps the economy. Pakistan is currently going through macroeconomic hell, with fuel prices sky-high and inflation clocking in at 24.9% last month. At a time when customer purchasing power is at an extreme low, the market for cars, used and old, is suffering from the government’s wonky balance of payments policies. 

In May the Government imposed an import ban on completely-built-up (CBU) vehicles and increased the State Bank of Pakistan’s (SBP) oversight on the import of completely-knocked-down (CKD) kits. The government set the automotive industry a whirlwind of price increases following these measures. 

Starting off the CBU units, the government rescinded the ban on CBU earlier this month on the eve of the 3-month anniversary of the ban itself. However, this blanket ban on CBUs led to prices for CBU units to skyrocket. There are two types of customers in the used CBU market, the ones that want a bargain and the ones that want reconditioned Landcruiser and/or Prado-esque vehicles. The ban nearly eliminated the former from the used car market and limited the number of those that fall in the latter. 

Now CKD units constitute the majority of the car market in Pakistan to begin with. The SBP’s measures also came at a time when the PKR nosedived. This led to automotive manufacturers to engage in price increases. Rounds of them. 

Profit looked at the prices of some of the more popular vehicles in the market space to see how much their price had increased over the summer. 

The prices of refurbished vehicles is also closely tied to that of brand new ones. The price increases by automotive manufacturers had ripple effects on the refurbished vehicle market as well. 

Profit talked to used cars dealers across Lahore’s Defence Main Boulevard with most of them reporting that they had seen a reduction in trading volume because customers preferred to wait and see where the prices would stabilise. 

“There are three kinds of cars sold at dealerships; brand new, used, and imported. Sales of all of them have reduced since the rupee depreciated so steeply,” Haji Muhammad Shahzad, chairman of All Pakistan Motor Dealers Association (APMDA), told Profit.  “They gave many of our members good competition but so did we.” 

You see for a company like CarFirst which operates brick-and-mortar centres, the costs are high but a decrease in the volume of trade of used cars overall in the economy means that CarFirst would not be able to grow customers as well as revenue, and would not be able to keep incurring expenses without funding from the investors which has gone scarce overnight especially for markets like Pakistan. 

Earlier, VavaCars, which was also backed by a multi-billion dollar energy group Vitol decided to wrap up operations despite having the financial heft to continue. A source at VavaCars told Profit that in the case of VavaCars, the company could not grow substantially. It could be a similar case for CarFirst. 

The official from CarFirst maintained that the Pakistani market was good for their business but did not take specific questions from Profit about CarFirst’s operations. The OLX Group, on the other hand, has not responded to our request for comments.