Sunday, April 11, 2010

The Middle East's rising risk

As the saber rattling continues financial ratings come under pressure
Commentary - Executive magazine

BAE, proudly displaying their Eurofighter Typhoon jet at the Dubai  Airshow last November were heavily involved in a corruption scandal

Getting labeled as a high risk country for firms to operate in, or receiving a low financial rating by an agency, is like a movie getting slapped with a XXX rating instead of the General Release investors had hoped for — meaning the mainstream conservatives are going to stay well away. Recently, ratings agency Moody`s downgraded seven state-linked firms in Abu Dhabi by a notch or more due to “no explicit formal” government guarantee to support the companies, and is considering downgrading four United Arab Emirates banks.

This comes as predominantly Western financial analysts are mulling not only higher risk ratings for Middle Eastern and North African (MENA) countries, but the region at large. The recent situation in Yemen, ongoing insurgency in Iraq and Israel’s sabre-ratting on Lebanon’s border are all causes for concern, as is as the potential for widespread conflict if the situation between Iran and the United States/Israel deteriorates into actual war.

On top of this, US regulatory watchdog, the Treasury Department's Financial Crimes Enforcement Network (FinCen), is widening its offensive on the global financial system, from the now well-established anti-money laundering and counter terrorist financing regulations all banks operating with the US have to comply with, to a heightened focus on corruption – the Foreign Corrupt Practices Act (FCPA). This onslaught by Washington and US-based ratings agencies is making life hard for Middle Eastern financial institutions and foreign firms that work in the region, and in particular for raising capital in an already tight lending environment. But while the UAE is being a touch sensitive about the downgrades — after all, British and American banks received lower ratings following the financial crisis and resultant government bailouts — the regulatory side is decidedly political.

Since the creation of the US Patriot Act in 2001, doing business with the “wrong sort” has been taken increasingly seriously. Early last year, British bank Lloyds TSB was slapped with a $400 million fine by a New York court for illegally transferring funds on behalf of clients in Iran and Sudan, both of which are under US sanctions.

The lesson to be learned is clear: if you do business with the likes of Iran, don’t get caught, and if you do get caught, make sure you are making enough profit to pay the fines. Lloyds TSB was slapped on the wrist financially — eventually agreeing to pay $350 million — but the bank was not blacklisted by the US. It is hard to imagine a Middle Eastern bank, caught playing the same game, would be let off as easily.

As for the FCPA, FinCen going after firms using bribes to get deals in the MENA region would open a Pandora’s Box given the rampant and endemic nature of corruption here, as a cursory glance at Transparency International’s Corruption Index shows. British aerospace firm BAE felt this when it was investigated in London for greasing palms in Saudi Arabia to secure multi-billion dollar contracts. While cracking down on corruption is laudable, the case of BAE, like Lloyds, is a relative exception to the rule; corruption is blatantly practiced by Western firms, domestically and internationally.

In any case, a greater focus on corruption and a higher collective risk level for the MENA would not necessarily dampen business or financial confidence; if that was the case, many firms and multinationals would have given the region the cold shoulder long ago. There is, after all, the maxim that big risks equal big rewards. Then there is the classic of “getting around” the rules and the regulations. On the regulatory level, institutions use tactics such as acquiring stakes — silently or not — in local banks and firms to operate in riskier markets. What such international firms need to watch out for is how far down the money trail US regulators may want to go. But unlike in the movies, financial institutions cannot edit or re-write the script where politics is involved; risks have to be faced head on, and it will no doubt come down to who you know.

PAUL COCHRANE is the Middle East correspondent for International News Services and writes for Money Laundering Bulletin

Fixing it on the cheap - Lebanese cars dealers feel the pinch as fake and second hand parts see a surge in sales

Executive magazine

Second  hand parts offer a cheap, legal alternative to branded goods, but lack  the safety guarantees of their more costly counterparts

The use of counterfeit spare car parts is a growing phenomenon in Lebanon due to the high number of luxury and used cars on the roads, coupled with the country’s low per capita income.

There are an estimated 1.646 million vehicles in Lebanon, of which 76.5 percent are more than 10 years old and a mere 3.7 percent were manufactured in the last three years, according to data compiled by research firm Information International. While the new car owners are provided with warranties that require them to service at dealerships — or void the warranty — used car owners have an open market to choose from: brand originals, certified parts from original equipment manufacturers (OEMs), cheap but still legal parts and outright counterfeits.

The value of the branded spare parts market is estimated at $70 million to $100 million, with dealerships and retailers dividing market share at 50 percent each, while the OEMs and other legal parts are valued at a further $100 million. Some estimates peg the fake parts market to be worth more than $10 million, while others put the figure at 20 to 30 percent of the market. The cost differences can be startling, with a pair of fake brake pads selling for as low as $11, compared to $66 at a dealership. On average, the price difference between real and fake parts is around 60 percent. But the difference in quality is equally alarming, especially in fast moving products related to safety.

“Everyone talks of pirated DVDs and fake medicine, but on the car side the situation is really gliding out of hand in Lebanon — the danger is high,” said Joachim Zeitler, after sales director at T. Gargour & Fils, distributor of Mercedes-Benz. “Everybody has a copied movie, but it’s not killing anyone. It’s wrong if you can’t cross a road because you’re worried about being hit by a guy who has saved $50 on his brakes.”

In addition to counterfeit, fast-moving products, everything else is available to fit out a car, from windshields and discs to shock absorbers and tires. “There is, amazingly, a lot of fake suspension items, and I even saw a fake hood. It was 1 millimeter less in width, definitely in thickness and maybe 50 percent cheaper,” said Ronald el-Khoury, quality manager at Rasamny Younis (Rymco), dealer for Nissan, GMC and Infiniti. The majority of fake parts that enter via the Beirut port are from China and Turkey, or are transported via the Gulf, where the goods are packaged for distribution throughout the Middle East.

‘Cut-n-shuts,’ made of opposite ends of different cars, are passed  off as genuine second-hand vehicles

Luxury fake

The Lebanese penchant for luxury cars, even if used, means brands like Mercedes and BMW are particularly affected in spare parts sales. Mercedes is the most popular brand in Lebanon, with more than 309,800 vehicles, or 18.9 percent of the total volume. Next is BMW with some 150,800 vehicles, or 9.2 percent of the total.

“We are selling the most, so that’s why we are affected the most, as Mercedes parts are not cheap,” said Zeitler. “In a market where a large part of the population has a low income yet is driving a luxury car, the risk is higher than elsewhere.”

Zeitler backed up his statement with research carried out by Mercedes in Lebanon, which showed some 60 percent of counterfeits are sold outside of Beirut.

It is not just parts that are counterfeit and increasingly sophisticated, at least in appearance. The quality of packaging has improved in recent years from bad spelling, copied holograms and other minor differences to near perfect copies that only the trained eye can see.

“Counterfeiters are very professional. It used to be easy to spot them, but not now,” said Zeitler. “They are even faking invoices from our company [which show] the parts were bought from us.” While fakes are dangerous, so are used car parts, which are increasingly coming onto the market. “The amount of competition here in spare parts, it’s unbelievable,” added Zeitler.


Curbing counterfeits is an uphill struggle, given minimal governmental oversight and insufficient punishment for offenders. “It is a business like organized crime, with a whole supply chain,” said Zeitler. “This is how it should be treated by the police as counterfeiting is highly profitable, but the risk of being punished is minor. Drugs have a lower profit margin, but if you’re caught with cocaine you are in big trouble.”

Fake and substandard parts are also not being checked during a vehicle’s annual roadworthiness test, the “mechanique.” Khoury said that it is easy to pass the test by renting spare parts from vendors nearby the inspection center, which are then returned after being given the green light by the mechanic for another year on the road. “And who is controlling cars driven in places like Faraya?” he queried.

“Only 500,000 cars go through the mechanique every year, so 40 percent or less of all cars on the road,” said Walid Rasamny, chairman and chief executive officer of Century Motor Company, dealership for Hyundai. “The government is being lax in enforcing inspection,” he added.

While enforcement is lackluster, there have been raids of late. Three illegal businesses were shut down, there were 12 nationwide raids on warehouses and mechanics, five shipments containing counterfeit parts were seized at the Beirut port, and 933 windshields and windowpanes were confiscated and destroyed.

“In the last three years there has been progress,” said Zeitler. “The customs has a special department for spotting fakes, and they are really good.”

Affordability vs. safety

“It is impossible to stop counterfeits in a free market – they can be smuggled in, and it can’t be controlled. Car dealers should have competitive prices to have higher customer retention,” said Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet, Cadillac, Hummer and Isuzu.

Automotive dealers feel the pinch as thrifty motorists turn to fake  and second hand parts over their expensive official alternatives

Many dealerships share Homsi’s view that lower prices for original parts could drive down sales of fakes, while dealers such as IMPEX buy parts in bulk to lower costs. Dealers are also developing service “menus” for customers with a variety of options and prices.

“We mark down and don’t overcharge,” said Rasamny, who added that fake spare parts had not overly affected the South Korean-based Hyundai brand. “Japanese brands are very affected, as I think they mark down the price of the vehicle and make up the difference in spare parts, by maybe 20 to 30 percent. What’s encouraging the grey market is the fact that distributors mark up; they should be more competitive.”

Luxury car dealers, however, point to the fact that significant amounts of research and development go into manufacturing the original parts, and have embarked on publicity campaigns to inform consumers about the safety risks of fakes.

Revoking a car’s warranty if fake parts are used is another policy.

“The only fighting point we have is to relay to the customer that you have to preserve the warranty,” said Khoury. “But manufacturers must also revise prices. A difference of 20 percent is acceptable, but not 50 or 60 percent.”

Curbing the number of used cars in Lebanon is a further policy that dealers want enforced, which would be a boon not only for sales of original parts but also new car sales.

Counterfeit car part sales distribution in Lebanon

“Much more serious [than fake parts] are the wrecked cars coming into Lebanon. You have cases of a car with a back-end collision and a car with a front-end collision, and the cars are split apart then welded together. Innocent customers believe they are buying an average used car,” said Rasamny. “Eight year old cars should not be allowed to be imported, as we get all the junk of Europe and the United States, especially as neighboring countries and the Gulf don’t allow imports of used cars,” he added.

Lebanon's automotive sector - The end of the road?

Executive magazine
After two exceptional years, Lebanon's car market may finally begin to slow

Traffic  crawls through Beirut. Car sales almost doubled from 2007 to 2008 and  saw similar figures in 2009

In 2008 and 2009 sales of new cars in Lebanon hit record highs, setting the benchmark for annual sales at well over 30,000 units. But over the past five months the sector has slipped a gear, down 12 percent in the first two months of 2010 (compared to last year). This has prompted dealerships to question whether that annual benchmark will be reached for the third year running.

“The best year we’ve ever had was August 2008 to August 2009. From September 2009 onwards the whole market has gone down dramatically,” said Nagy Heineine, general manager of Bassoul Heineine, dealer for BMW, Mini, Alfa Romeo, Dacia and Renault. “In October, the total market dropped by 31.52 percent on 2008; in November, it was down 24.65 percent; in December, it was down 8 percent and down 13 percent in February. It’s a real slowdown in the market altogether, a 17.68 percent drop.”

“The financial crisis hit Lebanon later than other [markets],” he added.

While dealers point to the delayed effect of the global financial crisis for lackluster sales, the other culprit is instability and the potential for regional conflict, which has psychologically dented consumer confidence.

“We are always operating under the specter of war, which is not conducive to business,” said Walid Rasamny, chairman and chief executive officer of Century Motor Company, the dealership for Hyundai. Used car sales are the third factor that is biting into dealership sales, with roughly two used cars sold for every new car. Nearly 67,000 were sold in 2009, up from some 46,600 in 2008. Last year just less than 34,800 new units were sold.

But while overall sales of new vehicles has gone down, this is not the case across the board. For instance, while Honda sales dipped 75 percent and troubled Toyota was down 55 percent in the first two months of the year on 2009 figures, Hyundai spiked 80 percent in the same period and Mercedes-Benz sales were up 13 percent on January 2009.

Hyundai attributes its sales increase to an expanded dealership and the growing rise of the brand, number two in the Middle East and fourth globally in terms of sales. Mercedes’ dealership T. Gargour & Fils however could not explain the uptick in sales, a fairly common answer given the complexities of the Lebanese market.

After  two exceptional years, Lebanon's car market may finally begin to slow

“Our advertising has been consistent, so I’m not sure why sales are up,” said Negib Debs, brand manager. “I asked myself this question in early 2009, ‘Will the market stay like that of 2008?’ and it did. This year, I’ve no idea. It all depends on what happens in the country; if there’s a war, we’re screwed, but if it is like June 2009 onwards — we’re selling 80 cars a month — we’ll have our best year ever.”

Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet, Cadillac, Hummer and Isuzu, said he thought 2010 would be a good year for the sector. “Although every year I’m afraid of giving an opinion,” he added.

Back to “normal?”

Homsi said that the sales spikes of the past two years were not normal, jumping from the previous benchmark figure of just more than 19,100 in 2004 — the intervening years were hit by political instability — to some 35,400 units in 2008.

Lebanese car sector (2009)

“It was not a normal year; 2008 was a year when frustration went away after the Doha Accord. Logically speaking a wonderful year is 20,000 units but 2008 raised the bar,” he said. “This year, until now, the sector has sold an average of 1,750 cars a month. Multiplied by 12, that is 21,000 units, so I think no more than 25,000 units this year.”

Whether the market will revert to a more sustainable growth rate over the year is unclear, but it appears unlikely to top 2008 or 2009 figures. “It will be very tough to reach this benchmark, judging by the first two months. I think we may reach 30,000 or 31,000 units,” said Heineine.

Such variable swings in the market — from dips to double-digit growth — is making it hard for dealers to plan ahead.

“Every month we forecast for five months. [If we request] too low an inventory then maybe manufacturers will not supply it. After the crisis, they want maximum efficiency and to not have high overheads,” said Homsi. “It’s tough when living in a volatile country and the market changes a lot. We adopt a system of nus wa’ayi, nus majnoun: half sane, half mad.”

While reading the Lebanese market is complex, there is a degree of certainty to be found in the first half of the year. Homsi pointed to the upcoming car show in early April, the first to be held since 2004, after the last two biennial events were canceled because of political instability. With new models on display and automotive events, the 10-day show is expected to bolster sales.

Number  of new cars registered in Lebanon

“It will drive traffic and help sales in the second quarter. Shows have an effect for months afterwards,” he said.