Thursday, January 5, 2012

VICOM - Part 2A (Impact of LTA's Vehicle Growth Policy)

Fig 1 Vehicle Inspection Revenue and Profit

From fig 1, we know that the vehicle inspection business is an extremely profitable business, with a 2010 profit margin of 37%. And vehicle inspection business is a hgue proportion of VICOM's overall profit.

In this part 2A, I will examine how LTA's recently announced vehicle growth policy is going to affect VICOM's inspection business. In 1990, Vehicle Quota System was introduced where the government will be able to control the vehicle population.Since then, LTA has set the vehicle population growth at 3% until May 2009 where it was cut to 1.5%. On October 2011, LTA announced that it is going to reduce the vehicle population growth rate from current 1.5% to 0.5% until the end of 2014. For this year rate of 1.5% will be maintained until August before it is reduce to 0.5% to achieve a 1% increase in vehicle growth this year. With such a policy, many feared that VICOM's most profitable segment is going to take a hit from it. However, one thing to be noted is that with a 0.5% growth rate, the number of vehicle will still be growing albeit at a slower rate. Now I am going to take you through the statistics to examine the impact on VICOM's profit. The following sources are all derived from LTA's statistics.

Fig 2 Singapore Vehicle Population Statistics from 2000 to 2011

Private Car has always occupy around 50-55% of the total vehicle population and is increasing its proportion steadily. From 2003 onwards, total car population has been increasing reaching a peak in 2007 before the growth slowed down. Many might have wondered wasn't LTA controlling the growth rate at 3%? Have a look at this article to understand why :
So in fact we do understand that LTA has not been very successful in controlling vehicle population growth as their prediction for number of vehicles deregistered are flawed.

Another point to note is that number of private cars owned per 1000 population has been increasing. This does not means a saturation of demand for cars as such increase is much slower than the real GDP Growth. Even at the previously set 3% growth rate, the demand still outstrips the supply of COE. The previous data is just a primer for everyone to understand the vehicle population situation. Now we shall look at how vehicle inspection business will be affected by the change.

Fig 3 Vehicle Inspection Frequency

The above table shows that the impact to revenue for every 6 additional car is the same as 2 additional Goods Vehicles and 1 additional Taxi or Omnibuses(SMRT and SBS buses). With this data, we shall first look at the impact on Car inspection.
Fig 4 Age Distribution Data

As we know private car get inspected every 3rd, 5th, 7th and 9th year, and from the 10th year onward it will be annually. The above is the age distribution data that I have compiled showing the % of vehicle from each age group. Those highlighted in red is the proportion of cars that has to undergo inspection. From 1998 onwards, percentage of vehicle undergoing inspection has drop from 51.4% all the way to a 2006 low of 34.6% where cars that are less than 2 years old occupy 47.8% of the total population. After 2006, lesser people start to buy a new car as a result of reduced amount of COE and higher COE cost and proportion undergoing inspection increase to a high of 47.3% by the end of 2011. This is a clear example that lowering of vehicle growth rate will in fact cause a spike in the percentage of vehicle undergoing inspection. However, some might still prefer a higher vehicle growth rate as they argue that increase in population of vehicle will result in a net increase in number of cars going for inspection. On the table above, the blue bolded shows the total population of the car, while the green is number of vehicles going for inspection at a given year calculated through multiplying percentage of cars undergoing inspection with the total population. And I charted these 3 pieces of data in fig 5 below:

Fig 5 Chart

Total number of cars inspected has been stagnant from 2000 to 2006 despite a 20% increase in total car population. Instead there is a 8.6% drop in total number of cars undergoing inspection as a result of a 24% drop in percentage of cars inspected from 45.4% to 34.6%. Thus it can be concluded that for the vehicle inspection business to grow, there must be an increase in population of cars as well as an increased in percentage of cars undergoing inspection which is that people do not change their car as frequent.

Fig 6 Number of Vehicles inspected (excluding private cars)
Fig 7 Distribution of Vehicle's inspection

Over at Fig 6, I add up the total number of all other vehicles (number of taxi and omnibuses was doubled to reflect their twice a year inspection) to arrive at total number of inspections. As can be seen, this portion is much more steady compared to private cars and has been consistently rising around 1% to 3% year-to-year. In total, private car's inspections occupy 40% of total vehicle inspected. Thus, for VICOM's Vehicle Inspection, 60% has a very steady, yet slow growth while 40% of it is determined by the government's regulation and the market price for COE.

To conclude, the restriction in supply of COE (which pushes price of COE up) will cause age distribution of car to tweak in the favor of VICOM. This coupled with a continual slow growth in vehicle population will therefore result in an increase in revenue for this particular segment over the next few years.

Part 2B will be a discussion on VICOM's monopoly power and market share.


  1. Nice Analysis, Vicom's vehicle inspection business is a cashcow due to recurring demand and being part of a duopoly. I'd be interested to see non-vehicle business - how much of it is recurring and would it be affected by a downturn in construction...

  2. I wish i had this thought process when i was 20 years old.