COE Premiums for 2005

By Nick Syn

FIRST OFF, WHAT exactly do we mean by low COE prices? Or more specifically, how low do these have to get before dealers break into cold sweats over perceived weaknesses in the willingness and ability of consumers to pay for new cars?

Well, judging by COE prices over the last few years, there appears to be a comfortable threshold level, roughly about the $20,000 to $30,000 mark that seems to make dealers sleep easier at night. These were the figures that COE prices tended to hover between for most of last year.

Lately, however, prices have fallen below the $20,000 level, as shown by the chart above which tracks COE premiums for 2005. And there they’ve consistently stayed.

This has led to plenty of talk about the local car market being generally weak and uninteresting, but, again, exactly what does this all mean? People tend to bandy terms like ‘poor sales’ about but, strictly speaking, it is the regulatory framework that determines the number of cars sold, not so much demand from the buying public.

If the COE quota is X, in other words, then car sales are necessarily X.

As these quotas are always fully subscribed, it becomes more difficult to determine what constitutes a ‘weak market’ and ‘poor sales’. Since the numbers always correspond to the LTA’s fixed quotas’, actual sales figures obviously don’t tell the whole story.

What does, then? You’d think the fact that bidding cycles are always oversubscribed should imply that healthy demand exists.

Using the degree of oversubscription as an indicator for demand can be problematic, though. A high degree of oversubscription suggests a great level of demand, which should push premiums up. However, this applies only when buyer sentiment is hale and hearty.

Demand is, after all, a function of willingness and ability to pay, and the oversubscription rate for a COE says a lot about the bidders’ appetite for a COE, but not so much about their spending power.

If buyers aren’t coming to the bidding table with fat wallets, you could have a heavily oversubscribed round of bidding, but with the majority putting in low bids.

And it’s this that’s characterising the COE market at the moment. Lately, we’ve seen bid ratios (the number of bids for a COE divided by the number of COEs available) remain static or even increase between rounds of bidding without the attendant positive effects on premiums.

A couple of examples include the first May tender exercise for this year; the bid ratio for Cat A went up, but prices still fell by over $700 compared to the previous round. This also happened to Cat B during April’s first tender exercise.

Looking at COEs as an indicator of what people are willing to pay clears things up a bit more, for the main problem, according to the trade, is that people are willing to pay considerably less than before.

As our poll of industry bigwigs shows, a host of factors appear to have contributed to this reticence to fork out more for the luxury of owning a car. Chief amongst these is economic uncertainty. The replacement market (when a buyer trades in an old car for a new one), traditionally the key driving force behind new car sales, has taken a hit in recent times, according to experts in the trade.

As restrictions to ownership were removed in line with the Government’s intentions to reduce the upfront costs of car ownership (lower import taxes and zero downpayment financing for example), many of the owners who rushed in to buy initially over the last three years or so have found themselves locked into expensive loan repayment cycles that they can’t easily get out of. Add to that concerns over the economic outlook and rising interest rates, which have made many other buyers think twice about changing their cars after the traditional two-to-three year period, and you get what essentially are longer ownership cycles.

This puts pressure on other segments of the market to take up the slack, and trade experts consider the focus now to be on Cat A customers, and first time buyers in particular. Careful with their money and always on the lookout for bargains, these first time buyers dwell at the lower end of the market, where clinching a good deal is the main goal.

The onus is therefore on dealers to offer the most attractive packages, and this has led to a climate of intense competition. A climate which has resulted in the low prices that we see today, for Cat A cars in particular. As dealers try to outdo each other, the amount of leeway they have to shave prices becomes from their margins become so thin that they’re eventually forced to skimp on their COE bids.

All this has knock-on effects in terms of lowering the psychological barriers that spur or halt buying. Dealers put up low prices to tempt buyers, and end up bidding low for COEs. Without strong bids from dealers, COEs, in turn, creep downwards. This leads dealers to cut prices, and the entire process repeats itself.

Whatever the case may be, the bottom line is that low prices mean lower margins, which goes a long way to putting the term ‘poor sales’ into the proper context, and to explaining the long faces on some dealers. If you’ve been sitting on the fence over buying a new car, then now’s probably the best time to get off it, after all, why let the first timers have all the fun?

THE LOW DOWN ON COES
CarBuyer polled four industry bosses to find out their views on the market situation and what’s in store for the near future

PHILLIP LU
Marketing Manager, Mazda Singapore
Brand/s: Mazda
Why are COEs currently so low?
Competition. It’s been especially intense this year. In terms of shifting buyer profiles, we have seen an increase in growth in the first time buyers segment but as our Cat B cars are priced differently we’ve still got a healthier replacement market than most. However, the main reason is everybody’s fighting hard over a pool of customers facing economic uncertainty and rising interest rates.

How long do you think this trend will continue?
We’ve seen interest rates go up twice already in these past few months. You have no choice but to offset higher interest rates with discounts just to close sales, so margins get thinner. This all puts downward stress on prices and correspondingly, on COE premiums. For the Cat B market, if people are replacing at all, they’re changing to Japanese Cat B cars. Continentals are too expensive.

What would it take, hypothetically speaking, to shake up the market?
The current economic conditions have to be improved, no question about that. It’s a buyer’s market now, essentially. If there’s one immediate thing to do to shake up the market, I’d say it’d be cash rebates. If you could give cash rebates to customers for their PARF papers, in full, instead of at discounted rates then I think that would help to greatly improve buyer sentiment.

SAY KWEE NENG
Managing Director, Regent Motors
Brand/s: Peugeot, Ford, Land Rover
Why are COEs currently so low?
The long and short of it is negative equity. People who bought cars when COEs were high can now only sell them for less than what they owe the bank. Changing to a new car therefore means a big upfront top up and this has dampened buyer sentiment considerably.We’ve also had a comparative deluge of COEs. For the first time I think we’re seeing supply exceeding demand. In the past, the ‘comfort point’ for COEs was in the $20,000 to $30,000 range, and that corresponded to what we would consider healthy demand.

How long do you think this trend will continue?
The government has made it clear that it wants to lower the upfront costs of car ownership and lower COE prices do help this goal. If you release more COEs, this has a downward impact on price. When they liberalised the purchase process, many people tied themselves to long-term loans that they can’t easily get out of. And the first-time buyers aren’t going to spend on luxury cars, they want the best deals and this means lower prices should be here for the foreseeable future.

What would it take, hypothetically speaking, to shake up the market?
For the first time buyers, basically, good deals. Another interesting prospect are mainland Chinese manufactured cars. These could be the next big thing, maybe not now but in two or three years time.

GLENN TAN
CEO, Motorimage Enterprises
Brand/s: Subaru
Why are COEs currently so low?
The car market has been rather soft. I think this can be attributed in part, to the fact that the number of new model launches at this time has decreased.

How long do you think this trend will continue?
The market has been designed transparently to let market forces work together. COE prices may probably fall a little more, but they will reach a point where car prices will fall low enough to attract first-time owners or those who paid high COEs to buy cars again.

What would it take, hypothetically speaking, to shake up the market?
Hypothetically, I would say a significant change in the vehicle tax structure would definitely boost the market.

EDWARD KOR
General Manager, Auto Eurokars
Brand/s: Opel
Why are COEs currently so low?
Market sentiment is generally very bad, many people are worried about the economic outlook and they’re not buying. And the people who do buy always ask for better bargains and discounts. Dealers can’t afford to let customers out of their showrooms, as they may never see them again. There’s no choice but to offer lower prices as there’s a desperation to close deals. And the lower the price, the lower the dealers’ threshold for COE bidding. Some even start bidding at the rebate level which can be as low as $10,000.

How long do you think this trend will continue?
Tough question! Unless there’s an upturn then I don’t see much change. There’s just no buying season now and what we’re having to do is to ride on promotions like the Great Singapore Sale in order to generate interest. Also, there are no mass-market friendly models, all the cars that need to have been launched have already been launched, I don’t see much change until the end of this year at least.

What would it take, hypothetically speaking, to shake up the market?
It’s all about pricing. If customers feel like they’re getting good deals then they’ll buy. Unfortunately, what they feel is a good deal is much lower than before. We’ve been giving cash back to customers, 20 percent of the COE rebate in fact, and this has helped showroom traffic.