By Leow Ju-Len and Colin Yong

“THE $2 REALLY saved the day for us,” says a senior manager from a leading distributor for a Japanese brand.

He was referring to Category A’s price collapse in late November, which stirred car buyers from their slumber and brought them into showrooms in their thousands, eager to trade money for metal.

Category A COEs are used to register cars up to 1.6 litres in engine capacity, or taxis.

The $2 crash filled up order books around the island but since then, says the senior manager, fresh sales have actually been scarce.

That must be the reason why COEs are down across the board this week. Category A dropped $1,521 to $6,200, while the COE for cars above 1.6 litres (Category B) tumbled almost 60 percent, shedding $3,845 to end this week’s auction at a paltry $2,656.

The Open Category COE saw a similar tumble as it can be used to register anything on wheels but could not conceivably be deployed for anything other than a Category A vehicle at the moment. It fell $1,080 to $6,509.

The motor trade has been complaining of weak sales for months, and the ongoing financial gloom will not have helped things, so the story here is a familiar one: weak sales translate to weak demand for COEs, in turn leading to low prices.

In all likelihood, it is mostly down to some dealers having to clear a backlog of orders from November’s $2 COE sales bonanza that Category A is still able to hover above $6,000.

Once those cars booked in November are all registered and the leftover demand has flushed through the system, who knows what level prices could sink to?

That could even happen fairly soon – a source says Honda has almost cleared its backlog of orders from the $2 sale, for example.

And judging from dealers’ lament that fresh buyers are nowhere to be seen these days, we could even be in for another crash.

“Honestly, it’s impossible to predict what’s going to happen in the next COE round. It could be similar to now, but I believe there’s a good chance COEs may fall to $1 in the near future,” says a senior manager we spoke to. In times like these, never say ‘never’.

In any case, current market conditions have thrown up an interesting talking point or two.

Is it time for a smaller COE quota?
One source we spoke to wishes the Government would step in and cut the COE quota. It might be counterintuitive for a dealer to say that, since it would by definition reduce the number of cars sold here.

But it would at least stabilise prices, which would help dealers tremendously. When the COE market collapses, local sales managers are caught in a bind: they know a $2 result is a fluke and unlikely to be repeated, so have to price their cars for the next round of COEs when there is almost sure to be a big rebound.

Cut prices too much, and you pick up many orders that you can’t fulfill because the next few rounds’ COEs might be too expensive for you to bid meaningfully to secure a certificate for every customer.

Fail to cut prices enough, and customers simply wander down the street until they find someone willing to deal more aggressively.

It throws the whole market-share-versus-profit-margins mechanism out of balance, and certainly can’t be good for the blood pressure of any sales manager. Hence the call for a smaller COE pool (and fewer sales) but more predictable prices (and thus, profits).

When is a sale not a sale?
Most sales involve three willing parties: a seller, a buyer, and a lender. All three have to be happy before an order can be translated into a transacted sale.

But as far as lenders are concerned, ay, there’s the rub: for in that sleep of diligence what delinquencies may come?

Banks, once so free with their funds, are now nervous about lending. One sales manager insists that this very factor is what caused Category B’s slump this week.

Some dealers say that as many as one third of their sales are tripped up at the financing hurdle, with banks refusing to lend at all, or offering to lend less, putting the onus on the hapless customer to come up with more cash for a larger down payment.

Banks are casting their eye on Mr. Borrower with increasing scrutiny, as well. Apparently, school teachers and Civil Servants are likely to be welcomed with open arms, for instance. If you’re in the finance industry, you’re no longer regarded as a solid bet.

And if your income is variable or heavily commission-based, like for an insurance or property agent? “Forget about it,” sighs the sales manager…

Category A – CAR (1600cc AND BELOW) AND TAXI: $6,200
DOWN $1,521

52-week high: $17,999
52-week low: $2
Quota: 1,851
Bids: 2,788

A 20 PERCENT drop in the price of the Cat A COE wasn’t unexpected. Relatively few new orders were placed over the last two weeks compared to the fortnight before (after the $2 COE), so it’s safe to assume the majority of bids were placed by dealers clearing their backlogs of orders. Many of these were taken at low prices, so the dealers had limited bidding power and this naturally led to a softening in the quota premium.

With 937 unsuccessful bids in this round, there are clearly still orders waiting to be fulfilled and there’s going to be a three-week break between bidding exercises (instead of the usual two), so don’t expect a major crash in the next round.

Category B – CAR (ABOVE 1600cc): $2,656
DOWN $3,845

52-week high: $19,539
52-week low: $2,656
Quota: 1,102
Bids: 1,318

MANY IN THE trade say tighter loan controls are the main reason for the decline in the number of Cat B cars sold. The bid ratio (the number of bids divided by the number of COEs available) fell from 1.28 in the last round to just 1.20, sending the Cat B premium plunging to an 11-year low.

‘Cash back’ deals – where banks finance a car at a higher interest rate but give an upfront cash payout to the buyer – have also seemed to have dried up in recent months. This makes it harder for buyers to settle the outstanding loans on their existing cars, and the effect really shows in Cat B since customers at this level are mostly upgraders rather than first-time buyers.

Category E – OPEN: $6,509
DOWN $1,080

52-week high: $19,389
52-week low: $6,509
Quota: 759
Bids: 1,138

IN THE CURRENT volatile COE market, it’s unlikely that speculators would have been bidding for these fully transferable certificates and hoping to sell them for a profit later. Parallel importers are usually big players in Cat E too, but with credit drying up, they can’t risk securing certificates now only to have no car sales later.

The fact that the Cat E premium closely mirrors Cat A’s is no coincidence. Once dealers found the Cat A premium going beyond a comfortable level during this week’s bidding exercise, they would have turned their attention to trying to secure a Cat E certificate at around the same price to register the car with.