The recent COE bidding exercises have seen a trend of high flying premiums. And it seems that the high prices are set to follow suit in 2013, as supply of COEs will undergo another round of reduction later in the year.

The aniticipation has set premiums climbing in the first round of biddings for 2013. Premiums for Category A, for cars up to 1,600cc, have experienced a sharp hike of 11 percent, from $81,889 late last year to $92,100 while Category B premiums, for cars bigger than 1,600cc, were valued at $93,501 last December, and reached a new high of $96,210 - a 2.8 percent increase.

However, based on the latest bidding, Category A clocked $91,010, a slight drop of 1.1 percent while Category B premiums were valued at $95,501 - a slight drop of $709.

These figures have been a growing concern across the board, with cries to revamp the system particularly from the lower income group. These voices may have been heard - there are chances that authorities will embark on a review of the system.

Currently, COE for passenger cars work based on their engine capacities. Category A COEs, for instance, are allocated for cars below 1,600cc; and Cat B - for cars above 1,600cc. Category E is an open category that is applicable for any vehicle.

Power output based COE system

According to recent reports, there have been calls for the Land Transport Authority (LTA) to look into the possibility of regrouping vehicles based on power output, more specifically for the passenger cars.

The new system is likely to affect the local automotive market in several ways.

Implications of the new system

Firstly, there is the possibility that hybrid cars will lose their popularity. Hybrids in general are more powerful than conventional cars, as they come with an additional electric motor which provides a secondary source of energy for the car. As such, the higher power output is likely to attract a more costly COE under the new scheme. This will in turn raise the price of hybrids, making the savings in running costs unjustifiable against the new premiums.

Hybrids from Continental automakers, especially, are more likely to be more affected. This is because the majority of them boast less fuel savings than their Asian competitors.

Shift in brand preference

On the other hand, the new system may level the competing grounds for Continental and Asian automakers.

Recently, Continental carmakers have adopted small engine technologies. Using force induction (turbo/super charging technologies), these smaller engines are able to produce similar power output with their larger capacity Asian counterparts.

As such, it is a growing trend to see European cars sporting smaller engines than their respective Asian rivals in the individual segments, as illustrated on the right. 

In the current COE framework, cars with smaller engine capacities generally stand to gain from lower premiums. As seen in the above illustration, the Continental sedan is likely to attract a lower COE premium, which gives it a competitive edge in terms of pricing. This has resulted in the relatively small price gap between a Continental car and its Asian rival. As such, people tend to go for the former as they are perceived as more prestigious - creating more value in the car itself.

With the new system in place, however, Continental cars with downsized engines may lose their cost advantages. This is because they will now belong to the same group as their Asian counterparts, hence attracting similar COE premiums. The initial cost advantage will be lost, enlarging the price difference between Continental and Asian cars.

While the public hope that a new COE system will be in place to bring about lower premiums, it is highly unlikely that a system of this nature will solve demand issues. Instead, it may cause a shift in consumer preference for the different car makes.