Wednesday, December 30, 2009

Lebanese industry slips a gear

Lebanon's factories struggle to keep assembly lines moving

Executive magazine, by Paul Cochrane in Beirut

Industry attracts little investment in Lebanon, though overall imports of industrial equipment rose this year in Lebanon

If Lebanon’s real estate, banking and tourism sectors can be called the country’s golden sons, then manufacturing is the under-appreciated, underfed and less glamorous black sheep of the family. Last year, real estate attracted 68.62 percent of Lebanon’s total foreign direct investment (FDI) of $3.19 billion, and the tourism sector 20.6 percent, according to the Investment Development Authority of Lebanon (IDAL).

Industry, at the other end of the stick, attracted just 0.68 percent of FDI in 2008, or $21.3 million, down from 3 percent in 2007. Exports have also declined, from $2 billion from January to August in 2008 to $1.71 billion over the same period in 2009 — a decline of 15 percent, according to the latest figures from the Ministry of Industry and Petroleum. On the other hand, Kamal Hamdan, economist and managing director of the Consultation and Research Institute, said overall imports rose 36 to 40 percent last year.

“In the last few years quite a number of industries have disappeared off the face of the planet,” said Marwan Iskander, economist and managing director of MI Associates.

Awaiting restoration

Lebanese industry has been sliding down a slippery slope since the Civil War, or in a state of “fiasco,” as Hamdan put it, and “the weak partner in the establishment, which is more commercial and financial than industrial.” He estimates industry and agriculture account for just 15 percent of gross domestic product.

Over the past few years, industry has struggled to rebound from the devastating effects of the July 2006 war with Israel, which not only saw 900 factories and commercial buildings bombed to bits, but also torpedoed exports during the 60-day siege of the country’s ports.

Such devastation in part explains the positive blip in FDI the sector received in 2007, as $104.6 million poured in to fund reconstruction and development — more than double 2006’s $46.4 million in FDI.

But while the war clearly had a negative impact, so did the ensuing political crisis that was followed by the global financial crisis, all on top of a sector struggling to compete with relatively high labor costs, high energy costs and daily power cuts, no government subsidies, import monopolies and a lack of long term vision and investment.

Yet while the outlook may seem gloomy for industry, imports of industrial equipment have risen steadily over the past three years, from $163 million at end-2007, to $188 million at end-2008. The 2009 August figure of $140 million looks well on its way to surpassing both marks. Industries are investing, and there are plenty of manufacturers that not only have a strong presence and reputation in the Middle East but on a global level as well.

“People often talk of the negatives in Lebanon, but they never talk of the positives,” said Nizar Raad, managing director of Universal Metal Products (UMP), a leading manufacturer of collapsible aluminum tubes for pharmaceutical and cosmetic companies that exports 85 percent of its products.

After the July war, with tens of millions of dollars in debt payments due, Raad said they turned to the government, “and the government has helped us, they rescheduled debts…with a 12-month grace period and this helped us a lot.”

Dearth of data

Given the lack of up-to-date and accurate data on industry in Lebanon it is hard to access the long term impact of the July war on the sector, and whether the 169 factories that closed over the last year (see chart) went bust because they were badly managed and inefficient, victims of the war, or victims of the global financial crisis.

Indeed, the latest survey on Lebanese industry carried out by the government was over a decade ago, in 1998, finding that there were “around 22,000 industrial establishments,” the bulk, at 88.6 percent, focused on eight sectors: food and beverage, metal products, non-metallic products, furniture and assimilated products, clothing and fur, wood products, leather and tanning, and textiles.

The 169 closed factories therefore account for less than 1 percent of all industries going by 1998 figures. Furthermore there is no indication of the size of the factories that ceased production, although presumably they were small scale, as according to the governmental survey the average number of workers per company is 5.2 people, with 95 percent of enterprises employing less than 10 workers, including owners, and less than 1 percent of firms having more than 100 employees.

The Lebanese Industrialists’ Association was unable to clarify the size of closed factories or the number of jobs lost, although they estimated it in the thousands. Nevertheless, even a few thousand jobs lost have an impact on a country whose population totals scarcely four million, and is indicative of industry’s current state.

“There is not much competition at the high end, but smaller scale industry that needs consolidation,” said Jad Chaaban, acting president of the Lebanese Economics Association and assistant professor of economics at the American University of Beirut.

A less-than-free market

Iskander said the whole industrial sector has suffered over the years with the exception of “implicitly protected industries,” such as cement and electrical cables, which have been protected since 1977 and 1992 respectively.

Why such sectors are protected by the government as “strategic industries” is not clear, with the March 14 political alliance blaming the March 8’s Amal Party, which ran the industry ministry for decades, while March 8 puts the blame on March 14, which has run the ministry of late. Such industries are connected to the country’s political-sectarian hierarchy however, with the Maronite Patriarchy, affiliated with March 14, a stakeholder in the country’s largest cement manufacturer, Holcim.

Lebanese imports of industrial equipment and machinery ($millions)

Lebanese industrial exports ($millions)

Changes to free up the market are not likely however, said Iskander. “Over 50 percent of the GDP is in the hands of the political system, and politicians are used to giving hand outs to supporters and don’t want to rock the boat.”

Competitive pricing is another area that has a negative impact on industries, particularly smaller companies trying to compete with import oligopolies and larger industries that practice price fixing. While a competitive pricing law was drafted in 2003, it has yet to be approved. This fact has had particular impact on food manufacturers.

“The problem with food here is oligopolies and cartels, with, for instance, labneh (yogurt cheese) going from $2 a kilo to $2.33, then to $3.66 for 250 grams because of price fixing,” said Chaaban.

While the law still has to be passed, external pressures are being imposed on Lebanon to free up the economy. Lebanon is still in membership negotiations with the World Trade Organization, but has signed a raft of free trade agreements, namely the Greater Arab Free Trade Agreement, which came into existence in early 2005, and the Euro-Med Association Agreement, which came into force in 2003.

Both agreements have been mixed blessings for industry, enabling Lebanese firms to export more easily throughout the region, but also having to compete with manufacturing giants China and India.

“China has benefited, but not the Arabs,” said Naji Mezannar, a board member of the Beirut Chamber of Commerce, Industry and Agriculture, citing the problem of dumped goods from the Far East.

He added that although such agreements have not negatively impacted on the likes of the textile sector, the Lebanese government’s decision to adopt free market policies has.

“The government decided to reduce customs protection for textiles and left 5 percent protection on cloth, which means more or less nothing,” said Mezannar.

This signaled the beginning of the end for Lebanon’s clothing sector, bar high end products and haute couture. Indeed, of the recently closed factories, 57 were textile companies.

Look for the silver lining

Economists are pessimistic about Lebanese industry, but do say the sector could aspire to greater levels of achievement if incentives are provided and regulatory issues overcome.

“A huge amount of jobs could be created in sustainable energy, public works, agro-food and water exports but Lebanon needs large scale specialization and to think of regional compatibility,” said Chaaban. He added that “everyone thinks short term and big profits, not long term and of the next generation.”

Such change requires greater focus by the government on the real economy said Hamdan, rather than focusing on public debt and a rentier economy dominated by real estate. Return migration could help in this regard.

“If there is return migration it may have some limited breakthrough in value added industries,” said Hamdan. “We have good human resources abroad, and if they came back industry could benefit.”

The new government that was finally agreed on in November after five months of political wrangling could also signal positive change for industry, particularly given that the head of the Lebanese Industrialists’ Association, Fady Abboud, has been made Tourism Minister and the Industry Minister is a technocrat, Ibrahim Dedeyan.

“Exports could increase next year, and maybe a new government...will make a difference, as it’s no longer the warlords [running the show], and this will be a better environment for industrial growth,” said Hamdan.


Cortas was founded in 1928 by current chairman and general manager Ramzi Cortas' father, who was 15 years old during the famine in Lebanon in World War One. “This was an incentive to start a food industry to support people and stop starvation in hard times, a principle that is still there,” said Cortas. The family run firm is now one of the largest food manufacturers in Lebanon, and has introduced numerous products to the market, including orange marmalade during the Second World War - with expertise provided by the British government to cater to soldiers diets - and the first company to ever can hummus tahini.

Employing 75 staff, Cortas produces millions of tins a year, and has revenues in the “teens of millions.”

“We've had a lot of attempts by the Turks and the Israelis to go after our market, especially in tahini and grilled eggplant,” said Cortas. The company is currently working on an ISO certification for tahini, and is adding new equipment due to the “digital invasion” to become more computerized. “There is a lot of competition from Israelis on short shelf-life products in mainstream supermarkets, and they are chipping into our market, but we are working on that with polypropylene packs. It is more a distribution than technical challenge,” he said.

Rival preserved food firm Alwadi dominates the shelves in Lebanon, but outside the country Cortas has the upper hand, exporting 85 percent of its products, with the highest percentage to the USA and Canada. Cortas is planning to up domestic sales through a new marketing campaign as the company been “ignoring” the Lebanese market. “In one supermarket chain in California we sell more jam than in the whole of Lebanon,” said Cortas.

Universal Metal Products

Established in 1971, UMP was the first company of its type in the Middle East to manufacture collapsible aluminum tubes. “In our business today, we are a top quality producer in the Middle East and comparable, if not better, than Europe,” said Nizar Raad, managing director.

Raad's statement is no boast, with clients major multinational and big brand firms, including for export to Europe itself. “International brand companies rely on quality and then price, not price and then quality,” he said.

An advantage for UMP over the five other major aluminum tube factories in the Levant is his native workforce, a relative anomaly in a region which uses foreign labor that typically stay for just three to four years. “We don't have a turnover as the average is 20 years in the company, which gives experience and expertise,” said Raad. “And we're relatively stable because we don't depend on the Lebanese market.”

Expertise is essential for UMP to maintain competitiveness, with 85 percent of its products exported. Raw materials are also of a high quality, with the aluminum pellets used to make the tubes imported from Europe along with specialized paints. But with such import-export dependency, the July War badly impacted UMP, losing 25 percent of its clients. It was also a close call as to whether the factory might have suffered the same fate as other bombed out industries. “A drone hovered over the factory and everyone panicked, but luckily [the Israelis] didn't drop a bomb on us,” said Raad. “And in industry, overheads are sky high and we've over 100 employees, it's not like retail, so we were affected financially by the conflict.” A governmental loan has helped UMP weather the sustained losses and the company is making headway in regaining clients.

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