Bloomberg Línea — Less than a month after taking on $810 million in debt, Mexican used-car sales platform Kavak has announced it is launching operations in the United Arab Emirates, with a primary focus on Dubai, as well as in Oman and Saudi Arabia.
Seeking to capture a market with a potential for 1.9 million annual transactions and worth around $34 billion, equivalent to those of Argentina, Chile and Peru combined, the Mexican unicorn sees the move as less risky than its continued expansion in Latin America countries.
With this announcement, Kavak is now present in 10 countries, which also include Mexico, Argentina, Brazil, Chile, Peru, Colombia and Turkey.
“Our plan has always been emerging markets, and that is our vision for the next 20 years,” according to Juan Cruz de la Rua, CIO of Kavak and who is also the founder of Checkars, an Argentine startup that Kavak bought in 2020.
“We are accelerating the plans partly because of the results of the launches we have had in Chile, Colombia and Peru; and partly because every time we land in a country we are doing it more efficiently and faster than before,” he said.
The move comes after the company launched in Turkey in July, and which is among the top five countries in the world in terms of number of transactions, according to the company, where it sells seven million cars annually.
New markets
Saudi Arabia is a country of 30 million people and 1.1 million used-car car transactions, 70% of the size of the Argentine market in terms of sales. However, the average price tag is twice the size of those in Argentina, which alone makes it larger in terms of turnover. Moreover, the car sales market is growing at a rate of 15% a year, and will continue to do so, given that a major boost was the legalization of Saudi women being able to drive in 2021.
Oman, on the other hand, is a very small market, with around 100,000 cars sold per year, and where Kavak is making a strategic landing since the country is a very important purchasing point for residents of Dubai.
Dubai, meanwhile, is a market of 400,000 car sales per year with an average price tag three times higher than in Latin America.
“Cars in Dubai are super luxury, but have the same sale price as in Turkey. However, there, a BMW or an Audi is a lower mid-range car. So the focus will be on the 95% of the population that is made up of expatriates who have a residence for one or two years and are looking for an easy solution to purchase a car,” according to the company’s CIO.
“The Middle East was an opportunity,” De la Rua said. “The acquisition of used-car sales company Carzaty, of Omani origin, accelerated our regional expansion. We are attentive to the opportunities and synergies that we do not want to miss.”
For the new venture, Kavak will invest some $130 million over the next two years to build up an inventory of 3,000 cars and the necessary infrastructure in the three countries.
Indebtedness
Kavak, a unicorn valued at $8.7 billion and Latin America’s most valuable, took on $810 million in debt in September, and which caught market analysts’s attention due to the size of the liability.
Kavak acquired the debt financing from HSBC, Banco Santander and Goldman Sachs, and the figure is higher than the $700 million it raised in its last venture capital round from funds such as General Catalyst, SoftBank, Tiger Global and Founders Fund, making it the Latin American company with the largest amount of financing granted by financial institutions to companies of less than 10 years of age.
The credit line is also larger than the total amount of debt acquired by some Latin American startups in the last year ($733 million), and which include Chilean fintech Xepelin, to which Goldman Sachs has lent $140 million, and Mexican loan management firm Clara ($150 million, also from Goldman Sachs), and the $233 million for Mercado Libre (MELI) and the $160 million loaned to Mexican fintech Konfio.
Eastern promise
Kavak will establish its business model in the Middle East and strengthen its operation with 500 employees and an inventory of 500 vehicles, distributed in three logistics centers located in the cities of Dubai and Muscat. In Muscat, capital of the Sultanate of Oman, the company is building a reconditioning center with the capacity to process more than 1,500 vehicles per month.
in Saudi Arabia, meanwhile, Kavak will develop an organic scheme in which it will hire more than 500 employees and establish two operational centers in Riyadh, the capital of Saudi Arabia and the largest city in the Arabian Peninsula, including the company’s automotive workshop.
The target for the Middle East is to achieve sales of 1,000 vehicles per month in the region.
“Today we have no need for new investors, we are focused on achieving profitability in the countries where we are operating, where in Mexico, Argentina and Brazil we are very close to achieving it. However, in the Middle East, what we do have is a wider supply of capital than in Latin America, and we are in talks with banks to raise debt if necessary,” said De La Rúa.
When asked about the weight of the new operation in the total business, he said the Middle East operation will have a higher added value in terms of turnover per sale, even though the operating costs will be higher.
