Thursday, December 08, 2011

Mixed Fortunes: Lebanon's automotive sector

Executive, year in review 2011

The industry’s players have been dealt differing hands in a year of duress

With the International Monetary Fund forecasting the Lebanese economy to grow by just 1.5 percent in 2011, it is no surprise that the automotive sector has not had a stellar year. As of October, sales were down by 5 percent, with 27,473 new cars sold, compared to 28,404 in the first 10 months of 2010, according to the Association of Car Importers in Lebanon.

The year started off badly, with consumer purchasing behavior negatively affected by political wrangling over the formation of a government and given a further hit by the Arab uprisings. The plunge in the number of tourists to the country also affected sales to rental car companies, down 49 percent to 1,646 units as of the end of September, compared to 3,238 units in the same period last year. As one car dealer remarked, it was the worst first quarter the industry had experienced in a decade.

“For us, the year was tough January to June due to the domestic political situation, and then we were impacted by the regional situation and the global economic crisis. Nothing helped us in fact,” said Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet, Cadillac, Hummer and Isuzu. “But, as of July sales started to pick up.”

The lower sales are indicative of a financially squeezed middle class that in the past purchased vehicles in the $22,000 to $60,000 price bracket. That segment has dropped by 25 percent this year, often in favor of cars priced between $9,000 and $22,000.

“Increasingly in Lebanese society both parents are now working. It means there is need for a second car, especially in the absence of public transport, whether a new, used, big or small vehicle,” said Nabil Bazerji, managing director of GA Bazerji and Sons, dealer for Suzuki, Lancia and Maserati. “It is not fuel consumption that is the concern, as distances are short, so there is little difference between a 1.2 liter and 1.6 liter engine, but what makes the difference is the monthly installment to pay off the car.”

The primary beneficiaries of the economic slump have been Korean brands Kia and Hyundai, experiencing their third consecutive year of double-digit growth by offering affordable cars with monthly installments as low as $200. Korean brands’ market share has increased from 31.01 percent in 2010 to 42.26 percent this year.

“The surge in Korean cars is due to the fact that the Lebanese consumer is poorer and looking for a cheaper product; in both cases it means economic crisis. So it is not that the Korean brands are taking from others, just that [Lebanese] purchasing power is lower,” said Bazerji. “If Korean brands were not available with cheap cars, the market would have returned to 2007 levels when 20,000 units [were sold].”

On top of low purchasing power, foreign currency exchange rates have also played a role over the past few years, with a high yen and euro against the dollar impacting prices. Between 2010 and 2011, Japanese brands’ market share has dropped 8.5 percentage points, as the number of vehicles sold contracted from 11,148 units to 8,125.

European brands, typically the cars of choice for the middle and luxury segments, have seen their market share whittled down by 4 percentage points since 2008, from 25 percent to 21 percent in 2011.

Japanese car dealerships have also been hit by events this year in the Far East. The devastating tsunami and the disaster at the Fukushima nuclear power plant affected exports and then in October heavy flooding in Thailand, a major source of parts for the likes of Toyota and Honda, resulted in disruptions to production.

“After what happened in Japan this year we expected the yen to get weaker but instead it got stronger.” said Negib Debs, brand manager of Infiniti and Kawasaki motorbikes, part of the Rasamny Younis (Rymco) dealership. The yen has strengthened from ¥93 to the dollar at the beginning of 2010 to ¥76 in November 2011.

The downsizing trend

What has retained sales volumes in the market is the downsizing trend. “I feel the mini and compact segments are growing in size; they are the value makers today. In fact the compact, sub-compact and compact-plus are a big category all together,” said IMPEX’s Homsi. “I also think that while people have the means for a bigger car, they are moving downwards not only due to the fuel economy, but buying small due to traffic congestion. The real advantage is you can park anywhere.”

Indeed, the number of smaller vehicles on the roads is visually evident, while there are fewer of one of Beirut’s urban icons, the 1980s Mercedes “service” taxi, curb crawling in search of passengers. They are increasingly being replaced by more compact cars, with drivers trying to make the most out of a LL2,000 ($1.33) ride as fuel prices have risen, with 20 liters of 95-octane graded fuel selling for LL33,300 ($22.20).

“The fuel price, the price of the car itself, the yearly ‘mechanique’ vehicle test, plus better re-sale value, have led to a demand for smaller cars,” said Debs. “The upper luxury segment is down, and even then based on the smallest engines in the category. Sports Utility Vehicles (SUVs) are still selling but the trend is also down.”

Last year, SUVs accounted for 17 percent of the overall market at 4,898 units, dropping to 4,540 units or 16.53 percent of the market this year. The largest decrease was for American brands, dropping from 35.8 percent market share in 2010 to just 26.6 percent, while Japanese brands fell from 20.4 to 19.3 percent. However, SUV sales have picked up for certain brands, with European SUV sales up from 18.4 percent to 20.2 percent. Yet it was the Koreans again that saw the biggest boost, up 40 percent on last year. In 2010, 802 Korean SUVs were sold, 11.5 percent of the market, but that number has jumped to 1,332, or 20.5 percent market share so far this year.

With dealers’ margins tight and competitive prices ever more important, they are welcoming manufacturers’ moves toward smaller engines and models as a result of higher fuel prices and the economic crisis.

“I don’t see any strategies for boosting sales other than reducing prices and offers. I’m not a fan of doing so, but when the market is down you have to,” said Debs. “But I think Infiniti sales will catch up within two years because the creation of the Infiniti was for the American market, which is not into four-cylinder engines, whereas now the aim is to get into the European market, so Infiniti is developing four-cylinder engines.”

As for Cadillac, a compact model will be introduced late next year. “It gives us a lot of hope of competing with the BMW 3 Series and the Audi A4, which is important as the luxury market also wants compacts,” said Homsi.

For Rymco, dealership for Nissan, the second biggest brand in the country for the past two years, sales have been driven by compact models Tiida and Sunny and further bolstered by the launch of the b-segment vehicle, the Micra, last September. “We’ve had great success with the Micra, with the model quickly running out of stock due to high demand,” said Fayez Rasamny, vice chairman of Rymco. Seven new Nissan models are to be introduced next year.

Tactical maneuvers

In the face of cheaper models and Korean competition, European, American and Japanese car dealerships are keen to emphasize differentiators such as their heritage, technology and value-added options in an attempt to lure potential Kia or Hyundai buyers.

“Our strategy is to go niche. If you want value go for a Tiida or Kia, but if you want something unique go for a Mazda or BMW,” said Anthony Boukhater, deputy general manager of ANB Boukhater, dealer for Mazda and Piaggio motorbikes. “The brand value of Mazda is high, as is the image perception, and Mazda are produced in Japan while (Nissan’s) Micra is made in India, the Sunny in Korea and Tiida in Mexico.” Like other dealerships, Mazda is also banking on a new showroom and what Boukhater calls the “best service in town” to attract and retain clients.

T. Gargour & Fils, distributor of Mercedes, Smart, Chrysler, Jeep and Dodge, has restructured over the past year, building a new showroom and repositioning their sales tactics. “Our strategy for Mercedes was to reposition ourselves to be more sporty-looking while keeping the existing customer base of over-50-year-olds,” said manager Cesar Aoun. “This is mainly through price strategies, product packaging and options to target a wider segment. Our successful strategy led to market share going up, while we released four new models this year.”

The company has also revived the ‘Smart’ car to tap into the compact segment. “The Smart Fortwo is a compromise between a motorbike and a big car, as it is convenient for Beirut and you can drive 250 kilometers to 300 kilometers for 20 liters,” added Aoun.

For Chevrolet, which rose up a rank to fourth most-sold brand in 2011, the expanded model range has helped bolster sales, notably the compact Spark automatic. “With what is happening today you need to be tactical. Price talks but other segments want value and technology. People want a compact [car] but not to sacrifice on style, comfort, safety and good handling. Not too long ago, a compact was a bit boring, but not anymore,” said Homsi. “What we are focusing on is the heritage of Chevrolet, which is celebrating its 100th anniversary, so we plan to build on iconic models. With all due respect, Korean brands have not had a model winning Le Mans, like the Corvette, or the World Touring Car Championships.”

Korea’s rise

Like rival manufacturers, non-Korean dealerships are clearly rattled by the country’s global growth, with the Hyundai Kia Automotive Group ranking number four worldwide in sales volume this year. Indeed, in Europe, Kia aims to bolster sales of its three-door Picanto by 70 percent by 2013. Rival dealers are keen to suggest it is the smaller models that are selling the most, emphasizing the low price. But the Korean dealers give a different perspective.

“Many people think Korean cars are low cost. That is no longer the case for me,” said Assaad Dagher Hayek, general manager of Natco, dealer for Kia, Peugeot and Citroen. “Only one car is, (India’s $2,000) Tata Nano. A Kia Picanto is $9,000 to $12,000 — that is not low cost, you could get a Peugeot or a Citroen for the same price. And we don’t really have a single best-selling model, although number one is the Sportage (an SUV). Some think it is Picanto, but they’re wrong as they only see the old Picantos on the roads.”

The country’s best-selling brand, Kia, outpaced its closest rival, Nissan, by over 2,000 units this year, gaining a 25.8 percent market share. Hayek puts Kia’s success down to three factors. “Firstly, we’ve a full range of cars, from 1 liter to 3.8 liter engines. Second, the designer, Peter Schreyer, is ex-Audi. Third, and most importantly, we offer a five-year warranty and the quality is the best in the world. We could have sold more if I had more in stock.”

For a car manufacturer that had to be bailed out by the Korean government in 1997 and was later acquired by Hyundai, Kia has certainly made startling progress. Yet in terms of percentage growth Hyundai leaped ahead this year, although unlike Kia, sales are dominated by smaller models, with 45 to 50 percent the i10, and 20 percent the Accent.

“While the market went down by 5 percent, we managed to grow by 32 percent, the highest of any car company in Lebanon. Why? I attribute it to Hyundai launching four beautiful models in 2010 and 2011. Another factor is the brand image has really improved tremendously,” said Walid Rasamny, chairman and chief executive officer of Century Motors, dealership for Hyundai. “And why are we not number one in sales? The reason is simple; we have back orders of 2,500 units at present; all Hyundai dealers are facing a shortage of supply. Seoul is working on it but didn’t expect such success worldwide. We don’t have one Tucson or Elantra to sell.”

European and Japanese dealerships said they think that the Korean brands will lose their momentum and edge next year, although several dealers said the same thing to Executive in 2010’s end-of-year review of the automobile sector. Rasamny thinks this is not likely.

“I completely disagree [that we will lose momentum]. The Koreans are bursting with success, and it is not a fly-by-night operation anymore,” he said. “Many dealers, especially Japanese car dealers, blame the high yen. It is a small factor. Put a Hyundai next to a Japanese car and the shape is far better, the reliability and excellent re-sale value — you’ve got all the ingredients of a winner,” he added. Indeed, Hyundai have won numerous awards worldwide since 2007.

China, for its part, is forecast to manufacture 10.26 million cars this year, with this figure set to triple by 2015, with the annual output of China’s 30 major car makers expected to reach 31.2 million vehicles, according to the country’s National Development and Reform Commission. Yet the effect on Lebanon is yet to be noticeable. Chinese brands Brilliance, Chana, Chery, DFSK, Geely and JAC have cumulative sales of just 212 units so far this year (up by 4 units on 2010), compared to 1,746 American cars, 11,611 Korean, 8,125 Japanese and 5,779 European.

And while dealerships may complain of Korea’s rise, it is also having a negative effect on the used car market, which accounted for around 70 percent of cars bought in 2010.

“Used car sales are affected by us due to a new awakening of the Lebanese public that they are shooting in the dark buying a used car, and better off buying a new car from a reputable company with a warranty of a major manufacturer, as there is somebody to complain to if there is a problem,” said Century Motor’s Rasamny. Used cars sales dropped 29 percent this year, from 46,800 units as of September 2010, to 33,600. Sales also dropped due to restrictions imposed by the central bank and the US government on money transfers following the taking down of Lebanese Canadian Bank in February on accusations of money laundering, allegedly carried out in part via used car dealerships in the US.

“Another factor that brought sales down is that the government introduced new regulations in September that banned the import of cars under a person’s name,” said Aoun. “We’re happy about this, and the total imports of used Mercedes dropped by 25 percent versus 2010.”

The outlook

As the year draws to an end, dealers expect overall sales to be just under 2010’s, at around 32,000 units. As for 2012, it depends on the dealership, new models to be launched and the overall economic landscape. “I think the top three — Kia, Nissan and Hyundai — will remain the same, and market sales will be 28,000 to 32,000 units, but not down to 17,000 unless there is a war. The planned increase in value added tax (from 10) to 12 percent will have an effect,” said Natco’s Hayek.

“Next year will be similar to 2011,” said Debs of Rymco. “I don’t see the political situation improving in the region anytime soon. The whole region is practically stagnant, while currencies are all over the place.”

IMPEX’s Homsi is upbeat that next year will have similar results to 2011, but strikes a note of caution. “Unfortunately, today we have Lebanese issues, Syria, problems throughout the Middle East and the global crisis, in addition to production constraints of natural disasters like in Japan. The whole chain is affected so there are a lot of challenges; it looks like one big question mark.”

Bazerji expects a difficult year ahead. “I think 2012 will be harder than this year, as we are in a difficult neighborhood, which will affect us. For instance we haven’t profited from wealthy Syrians coming to Lebanon. But we’ll manage, as that is what we’re good at.”

No comments: