Slower sales seen as Lebanon's automotive industry cools

Executive, by Paul Cochrane in Beirut

Car sales in the Gulf dipped by an estimated 27 percent this year in the wake of the financial crisis, but Lebanon, like Syria, has had a second successive year of burgeoning sales, defying the tumultuous 16 months car manufacturers and dealers have faced in most of the world.

However, while growth in 2009 met and in certain cases exceeded 2008’s record year, the sector has not been immune to the global financial crisis. Dealers have had to adjust to restructuring at mother companies, American brands have had to handle their manufacturers’ brush with near bankruptcy, and marketing budgets have been constrained.

On top of this, there has been a surge in imports of used luxury and sport utility vehicles (SUV) from impacted markets in the United States, Europe and Japan, due to excessive inventories and dealership downsizing. Currently two used cars are sold for every one new car bought in Lebanon, up 10 percent from an estimated 60/40 split in 2008.

These used high-end vehicles foster the perception that the transportation of choice for the Lebanese is in the luxury range, whereas in terms of actual volumes of new cars sold it is the less flashy mid-range cars — the Nissan Sunnys, Renault Clios, and Hyundais — that account for the lion’s share of sales in the Lebanese market.

Dominating the sector is Rasamny Younis Motor Company (Rymco), dealer for Nissan, GMC and Infiniti, with 6,182 units sold as of October, the bulk in Nissan sales at 5,638 units. This is up 8.57 percent from the 5,193 Nissan units sold in the same period of 2008.

Last year, the car sector had an “exceptional year, the best year ever,” said Cesar Aoun, manager of the Chrysler Car Group of Chrysler, Jeep and Dodge, with the sector up 45 percent from 2007, increasing from 20,082 registered new units to 35,416 new units in 2008. As of October 2009, new car sales totaled 26,664 units, down by 2.48 percent on the October 2008 count of 27,341 units, according to the Association of Car Importers in Lebanon.

Last year set a new benchmark for the sector, said Fayez Rasamny, vice chairman of Rymco, adding that while 2009 may not be as strong a year, “it is a good indicator for the auto sector that the market has increased considerably.”

That new benchmark is now between 31,000-35,000 new units a year. But back in January, few dealers expected a successive year of strong sales, thinking that consumers would be wary about purchasing in the uncertain world financial climate and ongoing political turbulence of Lebanon.

“We started 2009 pretty weak and I don’t know what happened, but June, July and August were fantastic. We are projecting 2009 sales will be up 9 percent on 2008,” said Negib Debs, brand manager of Mercedes and Smart dealership T. Gargour & Fils.

BMW was also caught off guard, said Nagy Heneine, general manager of Bassoul-Heneine, dealer for BMW, Mini, Alfa Romeo, Dacia and Renault.

“Nobody expected the market to be as strong as it was,” he said.

Riding market fluctuations

While sales have defied expectations, Rasamny expects cumulative sales for 2009 will be “a bit less” than 2008. Profit-wise however, 2009 will not be as good as last year.

“The margin on sales has definitely deteriorated because of promotions and inventories,” Rasamny said. “Even if Lebanon has not been affected by the recession, consumers are well aware that they can bargain for prices and purchases. All companies have campaigned to liquidate stocks. Companies are really scared to have large inventories,” he added.

Dealerships have been offering a slew of incentives to entice customers, from low interest payments to subsidized interest, trade-ins, lotteries and assorted gifts. But it is loans from banks that have been crucial to keeping sales buoyant at a time when financial institutions elsewhere have reined in lending.

“At the beginning of the year banks were a bit cautious about lending, but from June to July onwards [it was] back to aggressive competitive offerings and it helped the sector not be affected by the financial crisis,” said Aoun.

The summer boom appears to have tided the sector over given the slow start to the year, with the fall months seeing a downturn in consumer purchasing.

“We started seeing from September onwards that the market was slowing down, like the crisis had hit Lebanon with some delay,” said Heneine. “October and November have been weak and did not meet sales expectations, but we’re confident we will hit 1,000 cars this year.”

It is sales to rental companies that have been the real boon for the sector, as firms had held off purchasing new cars on a mass scale after being stung in 2006 during the July war between Israel and Hizbullah, with rental companies having significantly expanded their fleets in the expectation of a bumper summer. The following year witnessed reduced demand for rentals, rising again in 2008 and this year. Bolstering demand was the legal requirement for rental companies to buy new cars every three years.

“Every year something happened [politically in the country], so rental companies didn’t buy until they had to,” said Heneine.

But such unexpected demand has presented problems for dealerships in regard to inventory, cagey about ordering too many in case there is insufficient demand, yet given the time lag for delivery, wanting to meet consumers immediate needs.

“It’s like juggling with fire,” said Debs. “You need a lady with a crystal ball because sometimes you hold onto stock too long, then suddenly in three months you’re empty and need more. The hardest thing to do is inventory.”

“We don’t have anything to hook onto and say, this is sustainable when you have 60 percent growth in one year – who would’ve expected that? And is this a new trend? We hope so,” he added.

A dime a dozen

The biggest struggle for new car importers has been the flood of used cars into the country, with used car dealers and individuals taking advantage of the glut of cheap, secondhand cars on sale in the US from Americans selling up and downsizing. This is in addition to the thousands of dealerships affected by forced closures, with GM eliminating up to 40 percent of its US dealers and Chrysler closing 789 dealerships this year.

“Any individual has the right to import cars from the US and sell them under their house, it’s a joke, and control is starting to be a joke, despite the “mechanique” [required road safety tests at authorized mechanics],” said Debs. “We are not only competing with used car dealers, but with doctors and lawyers who have friends in the US. When the euro went up, all used car dealers rushed to the US. Some dealers have so much stock there is no space in their parking lots, so there are cars for sale even out on the streets.”

Heneine said that used car sales have risen from 60 percent of the market to 70 percent.

“I don’t want a war with the used car dealers, but they’re waging a war on us,” he said.

Damaged goods

Dealers say that the used car sector needs to be better regulated, as it is not only affecting the sales of new cars, which pay higher taxes to the government, but it also results in inefficient vehicles entering the country, cars that would not be allowed on roads in other countries. One dealer highlighted this with an anecdote about an acquaintance that bought a used car and had the vehicle checked with a key reader, which can assess mileage.

“When we checked the key reader, we found that the car should have been put out of circulation,” he said. Other dealers related accounts of cars that were flooded during hurricanes in the US being on sale in Lebanon.

“There should be a government strategy to improve the quality of vehicles on the roads of Lebanon, and a correlation in duties between new and used cars,” said Aoun. “To change this, to have safer and more ecological cars, needs a whole strategy between ministers.”

“You can still import cars from 2001, and the majority come with high mileage that are changed here, or they are damaged and then fixed here,” he added. “I don’t understand how it’s open for everyone to import and compete with a registered company that employs people, pays taxes and has proper representation.”

“The government should apply a lot of laws, and be strict on the flow of cars, such as those from the Gulf as many people bring luxury cars, don’t pay customs or VAT and profit in the long term at the expense of dealers and the government,” he said.

Car importers have lobbied the government to bolster regulations, with scarce results.

“We will always try, but we didn’t succeed in the past,” said Rasamny. “If the tax on new vehicles was dropped by 5 percent, income for the government would go up by 50 percent. When you decrease taxation you promote sales of new cars and take out all the used crap, as used cars are not as environmentally friendly. What’s happening is the recycling of a whole industry,” he added.

A mixed forecast

Dealerships are upbeat about the year ahead, although they realize that sales may not reach the same levels as this year, due to inventory expansion in the rental car sector, as well as after effects from the financial crisis. Nonetheless, with new models being launched, dealerships are banking on new inventories to keep sales buoyant.

“We expect growth again in 2010 from new models, and 2011 even more volume due to new vehicles,” said Aoun. But with a new benchmark set for the sector in 2008 and 2009, any decrease in sales will be difficult for the sector to handle, particularly when reporting back to mother companies expecting such strong growth.

“At the beginning of 2008, we thought maybe we’ll reach 500 units, but we closed near 600. Now it is difficult to go back to these [lower] figures,” said Debs.

Rasamny expects a good year ahead, albeit with a need for cautious optimism.

“I think 2010 will be similar to 2009, but we need to increase margins, be smart about inventories and focus on after sales to sustain the market,” he said. “But if in 2009 we sell 32,000 units, it doesn’t mean 2010 will be the same, we need to be careful.”