Published February 13, 2009

Weak brands may stall following COE quota cut

24% reduction may see premiums rise; this could hurt cheaper cars while popular ones cruise

By SAMUEL EE

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(SINGAPORE) The new sharply reduced COE quota could lead to a shakeout in the motor industry and drive some brands off the road, say distributors. But they add that it could also make some marques stronger.

'Distributors have to think hard whether their brand can carry on in this market.' - Koh Ching Hong, managing director of Borneo Motors Singapore

The annual quota of Certificates of Entitlement for Quota Year 2009, will be 24.1 per cent smaller than last year's, Transport Minister Raymond Lim told Parliament yesterday. QY09, which runs from May 2009 to April 2010, will offer 83,789 COEs compared with QY08's 110,354.

This means that the maximum number of passenger cars that can be registered in calendar year 2009 will be 73,830 - down 24.2 per cent from 2008's total of 97,348.

Of the five COE categories, yesterday's announcement dealt the harshest blow to Cat B - for cars above 1,600 cc. For QY09, there will only be 18,233 Cat B COEs available, or a 30.9 per cent cut.

Cat A - for cars below 1,600 cc - will also be hit hard with just 33,486 COEs, down 28 per cent. Cat E - the open category - will be 12 per cent lower at 17,186.

Mr Lim said that part of this quota is to allow the vehicle population to grow by 1.5 per cent (based on the vehicle population of 872,027 as at Dec 31, 2008). The bulk is to replace vehicles which the Land Transport Authority anticipates will be deregistered in 2009.

But Mr Lim added that there is scope to review how COEs are projected to replace vehicles that are deregistered - to see if the methodology can be improved and more closely match the COE quota to the actual number of vehicles deregistered.

'It will improve responsiveness of the system,' he said. 'But there will be trade-offs, such as more uncertainty over the quota released. Hence, LTA will consult the motor vehicle industry as part of this review.'

The president of the Motor Traders Association of Singapore described the new COE quota as 'within expectations'.

'The forecast for deregistrations is reasonable and, as expected, the allowable growth rate has been pegged at 1.5 per cent as previously announced by the minister,' said Tan Kheng Hwee.

She added that the timing of this 'substantial reduction' is good.

'It is happening during a period of relatively low demand so we expect the increase in COE prices to be gradual rather than to skyrocket,' said Ms Tan. 'As such, we expect premiums should still fluctuate between $1,000 to $10,000 for the next 12 months.'

Last week's COE tender saw Cat A settle at $1,020, while Cat B was $689. Some distributors believe any increase in premiums will hurt the weaker brands first.

'Distributors have to think hard whether their brand can carry on in this market,' said Koh Ching Hong, managing director of Borneo Motors Singapore, the authorised distributor for Toyota and Lexus. Toyota is Singapore's top brand.

He explained: 'The popular and more established brands will be able to stay on but some others may not.'

The senior executive of a popular Japanese dealership agreed.

'This downsized quota will cut across all brands. But those multi-franchise dealerships with economies of scale should be able to ride it out longer than those small, one-brand players,' he said.

One observer said that when the market shrinks, COE premiums rise, leading to more expensive cars. 'So only those more affluent customers will continue to buy cars. Marginal car owners will drop out of the market. That means cheaper makes will lose out because there are no more marginal owners to buy their models.'As a result, only those brands with a relatively wealthy customer profile will survive.

'They could even increase their market share,' he added.

In parliament yesterday, the Transport Minister also unveiled measures to encourage more existing car owners to convert to the OPC or Off Peak Car scheme. He said that the scheme has been gaining popularity, with the 42,000 OPCs accounting for 7.7 per cent of the car population.

'The OPC scheme is something we should encourage,' he explained, adding that as its name suggests, 'it helps alleviate peak hour congestion on our roads.'

'This fits into our overall objectives to better manage traffic congestion, particularly during peak periods,' said Mr Lim.

To make OPCs more attractive and encourage more car owners to opt into the scheme, he said that one possibility was to implement an electronic day licence, as opposed to the current paper licences.

Another is giving immediate cash rebates to those who convert their existing cars to OPCs - an improvement over the current system where the cash is only paid out when the car is deregistered.

The third area would be to re-look the restricted hours, especially the Saturday restrictions, with a corresponding adjustment to the OPC tax concession.

Mr Lim also revealed that $800 million would be spent on improving MRT infrastructure to allow trains to run more frequently. When completed in 2011, one year earlier than originally scheduled, the Jurong East Modification Project will increase capacity by 15 per cent.

The minister also announced the date for the opening of the Circle Line Stage 3 - May 30, 2009.