Apr 4, 2010
End of the road for budget cars? Rising COE premiums are set to hit sales of budget brands most, say industry expertsBy Christopher Tan, Senior Correspondent
It has happened before. Sky-high COE premiums 'kill off' cheap new cars but send buyers to upmarket brands.
Certificates of entitlement (COEs) for cars are now between $28,000 and $42,000 - at least $15,000 costlier than average premiums last year.
And they are poised to go higher still, say motor traders and industry watchers.
Also likely to be hit are parallel imports. The sale of off-peak cars - those with red plates and subject to restricted use - which the Government has been encouraging, may dive too.
But the used cars business, which was in the doldrums while COEs were plentiful and prices were 'low', is set for a revival.
The chief reason for the mixed fortunes, as far as new vehicles are concerned, are the dealers' profit margins.
Budget brands - such as those from China, Malaysia and even South Korea - have thinner margins to bid for COEs. The parallel importers too.
Hence, as COE premiums rise, this component of a car's sticker price becomes disproportionately larger.
So, although all new car prices would have gone up, budget buyers will be priced out as COE premiums climb.
A 1990s phenomenon might return: The more established and premium brands hogging the top sellers' list.
In 1996, when COE prices were in the $45,000 to $50,000 region, Mercedes-Benz was No. 2, behind bestseller Toyota.
In recent years, with the relatively low COE prices, Mercedes slipped to the lower half of the top 10 billing.
Mr Zafar Momin, a lecturer at Nanyang Business School, foresees a repeat of this phenomenon of 'shrinking mid- to budget brands'.
'But this time round, I am not sure we'll see outright market leadership by the premium brands over others, in terms of volume,' said Mr Momin, a former automotive expert with the Boston Consulting Group.
Still, he believes the premium brands will shine simply because there are more affluent buyers today than in the 1990s.
Veteran motoring writer Winston Lee said: 'With rising COE premiums, it is hard to imagine budget brands doing well.
'First to suffer would be the ultra budget brands like Geely, Hafei, Chery and the like. COEs would cost more than three times the open-market value of these cheap cars.
'Buyers of premium brands have deeper wallets, so a COE premium rise of $20,000 or more is relatively less painful.'
He added that a COE, no matter how costly, forms a smaller percentage of the overall cost of a luxury car than a budget car.
'Better respected Japanese brands like Honda and Toyota too would do reasonably okay,' Dr Lee added.
He said these makes might benefit from potential buyers of entry-level premium marques who 'downgrade' in the face of rising prices.
Motor traders concur. 'Marginal brands will be wiped out,' declared Automotive Importers and Exporters Association president Neo Nam Heng. 'The export market will also be smaller, as many used cars will stay in the local secondary market.'
Mr Eddie Loo, managing director of used car dealer CarTimes, said many parallel importers will switch to selling used cars as the competition for COEs hots up.
Ms Jeslin Teo, chief executive of Fiat agent TTS Eurocars, is now more bullish about the prospects for new European cars here.
'People will prefer to buy a better car when COE prices are high. It's more worth it,' she said, noting that European cars of late have become more competitive because of the relatively weaker euro.
She said some models from Fiat and Volkswagen today are priced almost as low as some Korean models.
She too feels that Chinese car sales will sputter. The Chana brand from China is sold by associate company TTS Chana.
But Mr Kevin Kwee, executive director of Group Exklusiv, which represents Geely, among other Chinese makes, is not about to lose hope. 'It will be tougher, so we will have to be more imaginative in the way we market our cars,' he said.
Looking at the bigger picture, transport researcher Lee Der Horng of the National University of Singapore said the COE premium uptrend could lead to some frustration among certain buyers.
'Those who can afford high COE premiums may not necessarily need a car; and those who need a car may not be able to afford one.'
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, she is living way beyond her means if she just depends on a teacher salary. A beginning NIE trained teacher gets about $3K/month. 
