Saturday, January 7, 2012

VICOM - Part 2B (Market Share of Vehicle Inspection Business)

For all of its annual report since 2005, VICOM has always claimed that it has a market share of 70%. However, is this market share derived from some form of monopolistic advantage or is it simply a result of VICOM being a market leader? Now, we shall examine the truth behind its 70% market share.

Fig 1 VICOM's Market Share

By taking the number of vehicles that VICOM inspected with LTA's figure, we can see that VICOM has managed to garner a market share of 70% from 2005 to 2010. While we see a dip in market share from 2005 to 2009, I am sad to say that I am unable to find any data or reason to support such an occurence. From the LTA's list of APPROVED vehicle inspection centre, we can see that VICOM's main and only competitor is STA Inspection (Under Singapore Test Services which is under ST Engineering).

Let's now assume that you are one of those that have just received a letter from LTA stating that you have to send your vehicle for inspection. Between VICOM and STAI, who will you choose? Price competition is out as both are similarly priced other than STAI offering a 50 cents discount for repeat inspection of motorcycles. The answer is either as it depends on where you live. Simply put, both inspection centres compete on its strategic location, the one that is the nearest to the most number of people. VICOM currently have 7, while STAI used to have 3 but it just closed down the one at Ayer Rajah while the Jurong West's was opened late 2009. Through a very simple scuttlebutt, I got to know that the Ayer Rajah one was closed on 13 August 2011 and will not be reopened again. However, a further probe as to why did it close down and I never get any more reply. Now, I will like your to look at the maps below where I have labelled the location of the inspection centre. (The map belongs to
Fig 2 Location of Inspection Centres before August 2011

Fig 3 Current Location of Inspection Centres

The red star stands for VICOM, Black Circle stands for STAI and Purple Square stands for JIC. For those that still does not know, VICOM has a 78% stake in JIC. The red lines that I have drawn symbolised the supposed market share of VICOM, taken by splitting into half the distance with the nearest STAI centre. As it can be seen, even before Ayer Rajah branch was closed, VICOM has some sort of a regional monopoly of the East, the North and Tuas. JIC is strategically position such that the one at Tuas is to captured heavy vehicle inspection, while the one at Ang Mo Kio is right beside SBS depot.

What is more important to us now is its market share in the future. What STAI did was more of maybe choosing Jurong West as a better location than Ayer Rajah. However, I have serious doubt about their decision. (all thanks to Lizardo, the reason for closure of Ayer Rajah centre is due to relocation for a media hub) From fig 3, we can see that VICOM now has a monopoly of the Southern part of Singapore, while the Jurong West's STAI centre can only capured a market share of Jurong West. The light green part above Jurong West is the super ulu place known as Lim Chu Kang, which houses mainly military camps. I supposed this is a reason why VICOM's market share did not get affected in 2010 and well, I expect its market share to rise by at least 4-5% now that the crucial Ayer Rajah STAI centre is gone.

One peculiarity about the map is the cluster of vehicle inspection centre at Bishan- Ang Mo Kio. The explanation is simply that the vehicle and transit licensing division of LTA is located there. VICOM used to be a government body until it got privatised by Comfort.

With such monopolistic power, is VICOM able to utilise them through increasing the price of inspection as a result of inflation or reduced demand? Currenlyt, cost of vehicle inspection for a car is $58, while the initial cost of inspection when it started out in 1980 was at $40. Here's the timeline regarding increase in fee:


1997-$50 (VICOM was allowed this limit earlier in 1980 when it was formed but it chooses not to charge at that price)


2005-$55 (due to a drop in demand)

2006-$58 (due to the same reason. However, this is not the confirmed year of increase in price but a speculation that I have calculated through dividing revenue by number of vehicle inspected through fig 4 below).

This is an increase of 45% in 26 years, which is a compounded increase of 1.5% per year. This might not be very impressive but the fact that it can do so during years when demand for inspection service has fallen is worth noting.


Here's something interesting that have been overlooked by a lot of people and that is the combination of CDST and Vehicle Emission Testing Laboratory.

Look at fig 4 where there is a significant increase of $8 per inspection from 2007 onwards. This is due to LTA's regulation that all diesel-powered vehicles need to undergo CDST during their routine vehicle inspection and this cost an additional fee of $17-$26. For now we shall put this aside first to look at the Vehicle Emission Testing Laboratory

Fig 4 Revenue Per inspection

In 2009, a $4.7 million Vehicle Emission Testing Laboratory (VETL) was being set up of which $2.3m is being forked out by LTA. This VETL is the first of its kind being set up in the region and is compliant with Euro V standard. FYI, Singapore has adopted the Euro IV standard and will be adopting Euro V standard by 2014. This VETL is currently serving two purposes :

1)Mandatory Fuel Economy Labelling Scheme

2)Supporting a test trial of diesel particulate filter

The Mandatory Fuel Economy Labelling Scheme is an initiative under the Environmental Protection and Management Act and as the word mandatory implies, every vehicle supplied to Singapore must be affixed with this label (the yellow label thats pasted on nearly every new electrical appliances). As it is the only one of its kind here, it has a monopolistic market here. However, this is a rather small market currently as it mainly affect parallel importer whose imported car does not possess this label. A check with NEA and they say that one of every vehicle model need to be inspected. "Ie 5 honda Fit bearing model code abc1, you will only need to test 1. But if there is a Honda fit bearing model code abc12 subsequently, you will need to register for that particular model." And the price of each inspection is around 2-4k per model.

Fig 5 LTA's plan

Fig 6 LTA's Plan

One of the reason why LTA is willing to fork out half of the building cost is that it intends to use it for a trial. The trial is basically to test out the emission level of diesel vehicle after installing the diesel particulate filter. The significance of this trial is that it implies that the government is looking at the alternative of diesel car instead of petrol car (This is purely my speculation as the LTA guy refuses to give me any direct answer as he says that this will be at a higher level of policy-making and that the trial is still on-going).

In the past, diesel vehicle used to be very environmental-damaging as all the black smokes rises from the exhaust. However, modern diesel technology has make it such that it is more environmental friendly than petrol car. Moreover, diesel is a cheaper option and is much more efficient than petrol. In 2008, the government decided to reduce special taxation on diesel car by 30-50% as current Euro IV vehicle has proven to be better. In some part of Europe, diesel car now accounts for half of the total car population. For the past decade, number of diesel cars (not taking into account taxi) has remain less than 20 due to government intervention. In 2009, this was 43 and in 2010 it rises to 138. This signifies a longer-term trend of having more diesel car on the road and the result is that they will have to undergo the CDST which will boost the profit margin of the inspection business. Please refer to the below links for more information on diesel cars.

Building for a trial is just part of the reason in the sharing the cost in building VETL. The other reason lies in Singapore's planned adoption of Euro V standard by 2014. The difference between Euro IV and Euro V is that Euro V requires emission of particulate matter to be controlled at less than 0.005 for all vehicles including petrol vehicle, which is what VETL is capable of.

With the VETL at a high cost of $4.7 million (STAI Jurong West took only $10m to build), it may not be likely that all inspection centres will have it. Thus in 2014, only VICOM might have VETL, and it will likely undergo an inspection of all vehicle imported into Singapore. (This is again pure speculation on my part) With such an high cost built, even if VICOM does not have the monopoly in this area, LTA will allow it to "cover cost" for PM inspection like how VICOM justify the $17 CDST inspection fee with the CDST facility built ($5m spent in total for all 7 inspection centres).

Part 3 will be on VICOM's non-vehicle testing and inspection business SETSCO. But it might not be ready so soon as I will be a bit more busy the next few days.


  1. your deep research is even deeper than alot of what analyst actually put out.

  2. Excellent in-depth research. Its always good to dig for as much data as possible, but sometimes less might be more. For example, to make an investment decision on VICOM, I would essentially only judge on dividend yield. No doubt your analysis prove VICOM to have potential in growing its revenue/market share etc. But to what extent in percentage terms will this growth be?

    VICOM is in a very mature business that lack significant growth prospects. Any investment in VICOM would in nature be income based, in which other counters like SPH offer greater yield anyway. So I would require more incentives (potential capital gain) for an investment in such a stable company.

    Nonetheless, like I said the analysis was really really good. I too am a current student and its pretty exciting to know of fellow ones who actually read fisher, graham, lynch and buffett. Don't really know any to begin with. which school do you happen to be at btw? Anyway, you might want to spread your net wider when sourcing for companies. Catalist hold a variety of impressive ones that are under radar with low coverage and loads of growth potential. Putting your analytical skills to use there might yield significantly greater returns.

  3. STAI moved out of Ayer Rajah because the area is under redeveloped into a media hub.

    STAI's Jurong location is probably optimised with the rest of its parent ST Kinetics. It's also near to a MRT station.

  4. To Drizzt, I supposed the reason why my analysis might be slightly deeper than the std analyst's is mainly that I do it from the angle of buy-side while in-house research of securities firm is doing it to support their commission earning.

  5. To jc, while sometimes less might be better, it's still best to have as thorough a research as possible. We may have a lot of positive points but one very big negative might just be enough to deter us from touching the investment.

    While VICOM might be in a so called mature industry, growth potential still exists and I can also see that the management has been trying hard to seek further growth.

    As for what school I am from, i am sorry to say that i prefer some level of privacy. I am just fresh out of NS and waiting for my uni to start in Aug.

    When sourcing for companies, I don't really start from a macro, micro, top-down, bottom-up approach. I try to keep my eyes and ears bigger when i am outside, with my friend, or just reading news. And when i think that a company or industry might have a good business model or story then i will try to do some research on it.

  6. To Lizardo, many thanks for your insight. This has been a doubt which i have not been able to understand. With the industry being very profitable and that it opened one new centre 2 years ago, I have been trying to figure out why did they close it down? Be it for any reason, I expect VICOM's market share to improve next year.

    I believe that Ayer Rajah is still being better positioned than Jurong East because the latter is only serving the Jurong area while Ayer Rajah serves a much more significant southern part of Singapore.

    So the next qns will then be, will STAI open another centre elsewhere?

  7. Ayer Rajah seems to be a good locale for the science and engineering folks at Science Park I/II, NUS, Polys, One North region. Wonder where they would now go to.