Text: The CarBuyer Team

SINGAPORE –
HERE’S A SIMPLE thought experiment: let’s say mobile phone bandwidth is severely limited in a country, and to keep the network running, it becomes necessary to limit handset sales.

What would happen to handphone prices if, say, only 1,000 of them were allowed to be sold every year? And how many of them would be iPhones, Samsung S5s or Vertus, and how often would you expect to see a plain vanilla Nokia with no features?

You could carve up a quota for, say, smartphones and another one for dumbphones. But what if the dumbphones and smartphones began to converge in features one day? How would you reclassify each one then to keep everyone happy? Welcome to the marvelous headache that is the Quota System.

February this year saw the introduction of new COE category rules for passenger cars. Category A, which was previously for cars 1.6-litres in engine capacity and below, received a power cap of 97kW (or 130bhp).

Cars with more than 130bhp were bumped up into Category B, which was previously set aside for cars with an engine capacity of above 1.6-litres. As illustrated in the photo above, this puts the Suzuki Swift Sport with a 135bhp, 1.6-litre engine in Category B, but the Audi A3 1.4 Sedan in Category A.

Six months on, we’ve gathered feedback from industry insiders to take a retrospective look at this ruling.

First, here’s why the recategorisation was done in the first place:

1. To separate ‘mass market’ cars from ‘premium’ ones

The key driver for reslicing the COE pie was, according to the LTA’s September 2013 press release, the need to keep buyers of mass market cars from clashing with premium car buyers for those prized certificates. “A new set of categorisation criteria to better delineate mass market from premium cars will be introduced,” said LTA then.

It went on to point out that half the cars registered in Cat A in 2012, would have been Cat B vehicles under the new rules. No names were named, but these cars would have included such strong sellers as the BMW 316i and Mercedes C 180 CGI. Was it fair that buyers of those cars with luxury nameplates could scoop up all the Cat A COEs, and leave the would-be buyers of the Toyota Vios or Suzuki Swift out in the cold?

The implied value here was by eliminating premium (or premium-branded) cars from Category A, that COE would return to its ‘original’ purpose as the ‘mass market’ category. With 50 percent fewer car types in the category, the LTA presumably expected demand for Cat A COEs to fall.

READ MORE:

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2.  To allow an additional method of judging a car’s value

In the same press release, the LTA said horsepower was an additional criteria for identifying the value of a car.  “The new twin criteria of engine capacity and engine power will be an improvement as a proxy for the value of a car, compared to the single criterion, while giving buyers certainty over the COE category of the car model they are intending to purchase.”

The identification and categorisation of cars is something needed in order to judge their merits impartially, but as you will see below, the resulting rules and laws must have a concrete, measurable benefit to society to be of any real use.

Here’s why the recategorisation hasn’t worked:

1. Mass market cars can’t sell because of COE price, not category

This is a key reason the new category rulings don’t make sense. Even if a hypothetical, perfect re-categorisation of luxury and mass-market cars takes place, if the COE prices are so high there is really no such thing as a mass-market car. (see point 5).

One sales manager for a Japanese brand CarBuyer spoke to said, “In the past when COE prices weren’t so high, say about even $30,000 to $40,000, the cars that really are affordable would automatically ‘sell themselves’. And you also need to take into account the difference between Cat A and B, which can be less than $5,000 in some cases.” Where, it’s worth asking, is the more affordable COE that the recategorisation was meant to bring about?

In fact, in 2014, the difference between the two categories has been less than $10,000 at its largest, but averaging less than $7,000, with the smallest price difference at a mere $1,403 for February’s second round.

The historical effect of high COE prices pushing sales of premium cars is plain to see here.

As we reported in CarBuyer 199, June 2012, Audi, BMW and Mercedes-Benz took an amazing 40.9 percent of total car sales in Singapore. This year, it’s widely expected that the Mercedes-Benz E-Class will be the best-selling car here, with more than 600 units sold to date, and the recently-launched C-Class should be not far behind. Premium cars, it seems, continue to dominate post-recategorisation.

READ MORE:

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2. It’s quota, not classification, that needs management

The COE system is one that, by necessity and design, artificially limits the car market. But it’s worth pointing out that the LTA only regulates the supply of COEs, and lets the free market decide prices.

Yet, simple economics tells us that the more scarce something is, the more expensive it becomes.

So the real reason why COE prices have been very, very high in the past few years is because of COE quota cuts. Back in 2005 a Cat A COE cost $16,551 on average. Alas, there were around 5,000 of them available every month. Last year the average price was $74,690, with only 700 to 800 Cat A COEs up for grabs per month.

It’s clear that how you cut up a very small pie is still going to make each slice scarce, and thus, expensive. Recategorisation does nothing to address this fundamental characteristic of the Quota System.

Currently the LTA looks at mostly at de-registrations (or how many cars leave the roads) to determine how many new cars should be allowed, in the form of a fresh COE apiece.

As we noted in our COE analysis in CB225, a key point of anxiety for car buyers and dealers both is the lack of a concrete long-term plan for managing COE quotas, and thus the car industry as a whole, at stable levels. In fact the LTA itself acknowledges this in its September 2013 press release, but only that it’s ‘continuing to study’ methods and has not released any statements on the topic since.

Engine power, meanwhile, seems like a clumsy thing to look at. Besides, the 130bhp line is a very porous one. Just because someone’s new Cat A car leaves the showroom with less than 130bhp, what can car dealers do to make sure it doesn’t gain a bit of aftermarket power somewhere down the road? So it’s a problem of enforcement too.

READ MORE: August COE Analysis: Insecurity & Paranoia

3. Powerful, efficient small-capacity engines are the new norm globally

The current trend of engine downsizing (smaller capacity engines with more power and efficiency thanks to a range of technology including turbochargers and direct-injection) is one that’s been in motion for some time.

Add the fact that it’s been pioneered largely by German (read: premium) brands like Vol
kswagen and BMW, and you have a recipe for perceived inequality within Category A. A power cap punishes cars like these which may have more power, but in most cases ironically, these cars also pollute less.

For example, a small Japanese sedan with a 1.5-litre naturally-aspirated engine has 99bhp, emits 159g/km of CO2 and consumes 6.9L/100km, while a larger German executive sedan with a 1.6-litre turbo engine has 136bhp but emits only 137g/km of CO2 and consumes 5.9L/100km.

The thing is, some East Asian carmakers, like Honda and Kia,  are getting on the tech bandwagon (if they aren’t already) and when they do, once again the idea of a ‘mass market’ car will have to be changed.

What has also undermined the effectiveness of the power cap is the range of models available. European brands have responded by introducing less powerful variants of their cars – for example, the Mercedes-Benz CLA 180 with 122bhp debuted last year, while Peugeot introduced 1.6-litre turbodiesel engines with less than 130bhp to replace its 1.6-litre, 156bhp turbocharged petrol variants.

By looking backwards to see how a 130bhp limit could exclude existing cars from Category A, the LTA seemed to have forgotten that different models could always be imported to sneak back under the limit.

READ MORE:

Audi A3 1.4 Sedan Review: The best Cat A car? 

VW Golf 1.2 Review: Poor Man’s Golf 

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4. Social equity is not possible in a financially-based COE system

In March, the LTA released a statement saying there was a higher proportion of less expensive cars in Category A, with median open market value (OMV) decreasing by 28 percent and that “that Cat A better achieves its original social equity purpose of serving mass-market car buyers, in view of the rising proportion of higher-end cars appearing in Cat A in recent years.”

However in its earlier September release, the LTA already admitted that “However, it is not practical to use the OMV of a car model for categorisation as OMV can fluctuate quite significantly for different batches of the same car, due to variations in exchange rates and car model specifications.”

On the one hand, its seemed to say that OMV was not a useful way to sort premium cars from mass market ones, but on the other, it certainly seemed to imply that it was a mighty fine way to show how successful the COE recategorisation had been at making the average Cat A car a cheaper one.

Yet, has so much really changed? With car brands no longer reporting their full sales figures, it’s difficult to see what cars make up Cat A registrations, but the year-to-date registration figures for Jan-July 2014 still sees a heavy bias towards Germans: Toyota/Lexus may be back in the top spot, but those brands are followed by Mercedes, BMW, Volkswagen and Audi, none of which could be accused of being cars for the modest.

The bottom line is, with COE prices at a certain level in Singapore, it’s a universal truth (around the world, too) that not everyone can afford a car and we shouldn’t pretend anything otherwise. The COE system, let’s not forget, was designed to exclude people from owning cars, not to include them.

5. There’s no clear idea of exactly what is a mass market car here

Incentives and taxes modify buying behaviour, but there should be a measurable, quantifiable justification in this – not the murky shifting of cars into one general category or another. Because once you label something as ‘mass market’, then you also have to define what it is not.

Is a Mercedes-Benz with a 122bhp engine and a basic interior still a luxury car? Is a Kia with two-doors, air-con seats, a sunroof and Bluetooth a luxury vehicle? Is a coupe with less than 130bhp but sales of only three units still ‘mass market’?

While there’s no doubt that say a Toyota Corolla is a mass-market vehicle, while a Lamborghini Huracan is not, the problem lies in that there is a broad spectrum of cars that mix the hallmarks of both – accordingly, the judgement on what constitutes a luxury/mass-market also needs to be a spectrum, like the CEVS system which categorises cars based on pollution. Equally important, the reasons for doing so need to be clear and measurable, which doesn’t seem to be the case here.

“The new rules haven’t really benefited anybody,” said the sales manager of a German brand, “maybe for now it makes buyers of less expensive cars feel ‘shiok’ that premium brands are being ‘penalised’. But buyers aren’t static – today’s mass-market buyer could very well be tomorrow’s ‘premium’ car buyer.”