Business Times reported that there was just pain but no panic in the recent bidding exercise on April 7 with the result:
Category A Cars/Taxis $34,001
Category B Cars $45,501
Category E Open $49,000
These are statements from the article's interview with car salesmen and dealership owners:
"There were only a handful of new car bookings. If not for the top-ups, the Cat A premium would surely not have increased by so much."I feel that the current bidding system of successful bidders paying the lowest winning bid price does not encourage individual bids. Why?
"With the top-up exercise, the distributors had a bigger margin to bid for COEs."
"Bidding was a very painful process. Premiums are so high that my profit margins have disappeared."
As all successful bidders pay the same quota premium in the exercise, dealers can price their cars to include the forecasted quota premium plus a buffer to ensure that they make a decent profit plus a bonus should the winning bid be lower than the forecast. After all, the dealers will not be penalized since many buyers take the non-guaranteed bidding option and the dealers will just let the purchase agreement lapsed.
Let me illustrate the two different scenarios:
1. Dampen Demand (late 2008 through 2009)
COE bidding requires a deposit of S$10,000 which is a substantial amount for new buyers. Dealers also offer motor loan up to 100% which covers the COE quota premium. Thus, it is very convenient for buyers to get a COE-inclusive package from the dealers.
Dealers will make windfall profits when COE quota premium heads south since they always priced in the COE quota premium and a buffer for aggressive bidding. On top of that, the COE rebate is mostly set at a low base to return a token sum back to the buyers in the case of a sudden plunge in quota premium. The case in point was the November 2008 2nd bidding exercise when Category A quota premium fell to S$2 and buyers without comprehensive purchase agreement from some parallel importers ended up getting little or no rebate.
Dealers do not usually entertain buyers who are going to bid for their own COEs. The only time that they have a ready price list for ex-COE is the weekend after S$2 quota premium result when they can get orders for walk-in buyers holding those COEs.
2. Uptrend Demand (the past few bidding execises)
After the news that the formula to allocate COEs was released, quota premium started rising rapidly and some buyers were disappointed by the dealers who could not successfully bid for their COEs. One case that made it to the local news and motoring forum is Borneo Motors, distributor for Toyota. I read from MyCarForum that BM failed to get the COE in the later rounds of bidding for buyers who took up the "hefty" discount during the Chinese New Year sale. I was surprised that BM had prepared to bid up to about S$26,000 so BM is technically making a profit (maybe indirectly from their after sales servicing) as long as COE is below that reserve bid price.
These dealers that were caught wrong footed by the quick jump in COE quota premium lose nothing (in cash) and they are also protected legally by the signed agreements. They bore only the lost sales, some damage to the reputation and some bad press. Who truly suffered the most? Genuine buyers who were locked in by the non-guaranteed purchase agreement and are now left in the lurch. Need help from the dealers? The only offer is for the buyers to cough up more cash for COE bidding top-ups.
Another interesting development over the last few months was that LTA lowered the bidding deposit to S$5,000 from October 2009 to September 2010 but I was amused by the second item in the announcement:
2. The COE bid deposit is intended to deter frivolous or speculative bids which deny genuine bidders from getting a COE. LTA has received feedback from motor traders that companies are still facing some cash flow problems. This reduction in the COE bid deposit is a temporary relief measure to help businesses, particularly motor traders and prospective vehicle owners reduce their financing needs and free up funds currently used as deposits.None of the reasons stated in the announcement addressed individual bidders' need - this revealed that the COE bidding system may only be tweaked to the industry players while individual buyers are sidelined. Why not lower the deposit for individual bidders so as to encourage them to take responsibility to bid?
I believe that the "Pay As You Bid" model will encourage more individual bidders to join the fray. How will the bidding exercise look like? I think there are three groups of bidders:
1. Dealers for luxury make - COE is a small portion of the overall car price, so the package may include a COE at S$50,000 or an auspicious bid at S$88,888. The rich buyer will just factor the COE cost into the purchase.
2. Dealers for mass market make - the buyers are more sensitive to the COE quota premium and the dealers can choose to sell their cars inclusive or exclusive of COE. The dealer may choose to bid more than the agreed component in COE-inclusive deals, forgoing part of their margin.
3. Individual bidders - they will monitor and try to secure the COEs at the lowest cost before heading to the showroom to book a car with a COE in hand.
The biggest advantage of the scheme is that dealers should submit the agreed bid on behalf of buyers (especially those who do not know how to go about bidding by themselves) and thus, the final value of the COE in the sale should no longer be a guessing game. Even though the lowest winning bid is $2, the COE for the other successful bidders are valued at what they had bid.
How will this scheme impact LTA's coffer? In almost all cases, LTA should see an increase in revenue from COE as some motorists are willing to pay more than others to get the car timely. It will also prevent the revenue shortfall in sudden plunges since many of the bids during the S$2 outcome are much higher than the lowest bid. It should be easy to make the change on the IT system.
Related posts: Cheaper to Bid?, Bid for your own COE