Thursday, October 04, 2012

Special Report Lebanese Industry: Keeping alight the spark

Executive magazine

Lebanese industry has been dealt many a bad card in its recent history. Yet when the sector went through a five-year boom, with exports nearly doubling in value from $2.17 billion in 2006 to $4.059 billion in 2010, it seemed as if industry had finally found some playable hands. The sector could raise the stakes, throw out an ace or two, and show the banking, real estate and tourism sectors that industry was an equally important player at the country’s economic big-boys’ table.
But the winning streak was not to last. The global financial crisis — which the sector had managed to bypass for a while — political uprisings throughout the region, and sluggish domestic economic growth all started to affect business in 2011, the second half in particular. In the words of the president of the Association of Lebanese Industrialists (ALI), Neemat Frem, “It was not a slowdown in growth but a complete stop”.
Although 2011 marked a new record in industrial exports from 2010 at $4.064 billion, growth was minimal and hardly comparable to the $729 million jump in exports between 2009 and 2010.
Furthermore, despite export figures being used as a benchmark to gauge the sector’s general health, they do not give the overall picture, given that exports account for only 40 percent of sales in domestically manufactured goods with the remainder destined for the local market.

The glass half empty?

The mood of industrialists certainly reflected the downturn. In the central bank’s quarterly business survey, it showed that by the fourth quarter industrial production had retreated, with a balance of opinion (the proportion of surveyed managers who consider that there was an improvement in a particular indicator and the proportion of those who reported a decline in the same indicator) standing at -11, compared to +18 at the same time in 2010 and zero during the third quarter of 2011. The balance of opinion for overall demand for industrial goods was no brighter, at -14 in the fourth quarter of 2011 compared to +4 in the same quarter of 2010.

To the sector’s relief, 2012 did not start out too shabbily, in exports at least, with first quarter results up 9 percent on 2011 at $808.1 million, according to Ministry of Industry figures. Yet the downbeat sentiment that had prevailed at the end of last year lingered, with the same debilitating factors deteriorating moods further: higher oil prices, more frequent power shortages and the situation in Syria on a slippery downwards slope. By the end of July exports were down 9.5 percent to $1.7 billion, when compared with the first  seven months in 2011.
  Consumer confidence was also in the gutter. A survey conducted in March and April 2012 by United States-based opinion polling think tank Pew Research Center indicated that 53 percent of Lebanese considered that the economic situation in Lebanon was very bad and 35 percent thought it was bad, compared to 12 percent who believed it was good. “Three channels were hit the most: One: the flow of tourists was down, which lowered demand for industrial and agricultural goods; Two: exports through Syria were down, and Three: the loss of foreign investment into Lebanon, including industry, because of the security and political situation and heightened risk,” said economist Mazen Soueid.
Indeed, tourism figures were down 8 percent in the first half of the year. Exports that had gone overland via Syria were down, notably plunging by 40 percent to Turkey and by 15 percent to Iraq. Indicative of reduced investment in industry, imports of machinery were down 12 percent.
While Lebanese industry has long struggled to be price-competitive within the region and other emerging economies, from wages to operational overheads, the sector had another cost to factor in this year when the government raised the minimum wage.
“The increase in salaries has affected us. Our products are customized and cannot be mechanized so we rely on labor. Our prices are up 6 percent, so it’s significant,” said Daniel Abboud, general manager of Carosserie Abillama, which has a staff of 300 to manufacture trailers and other automotive add-ons that are exported to some 27 countries.
“The wage increase from $333 (500,000 LL) to $450 (675,000 LL) is a big jump if you have 150 women working for you. That is the basic minimum,” said Nizar Raad, managing director of Universal Metal Products (UMP), a leading manufacturer of collapsible aluminum tubes for pharmaceutical and cosmetic companies. “It is a big increase in costs for us and we can’t pass that on to customers easily as competition is worldwide, from Pakistan to India and China. And they don’t have the fuel costs we have. We are paying $0.15 a kilowatt while others are paying just $0.04.”
The country’s chronic power shortages, with Électricité du Liban (EDL) producing only 1,500 megawatts (MW) of electricity and peak demand at more than 2,500 MW, has long been an existential problem for industry. This year the power outages were even more frequent than in the past and were further compounded by oil prices averaging more than $100 a barrel, which has bitten into industry’s margins as well as lowered consumer purchasing power.
Some industrialists want to solve the crisis by developing their own power plants, with excess sold to the grid. They have submitted a proposal to the government but it has been stymied by EDL holding the monopoly on energy sales (see box below).
Logistics costs have also risen, partly due to oil prices but primarily because of the conflict in Syria affecting overland trade, with the number of trailers crossing the border down by around half, from 450 a day last year to 200 to 250 a day, according to Gezairi Transport. Trucking costs are up by around 15 percent to the Gulf due to oil prices and insurance premiums have increased to cover the risk of transporting through Syria. Such factors have prompted a rise in sea freight, but add further costs to companies, with sea cargo to the Gulf around 40 percent more expensive than by land, as well as taking an average of two weeks longer to get to the end destination.
Regional issues are also playing their part, with Saudi Arabia no longer allowing Syrian drivers multiple entry visas — Syrians account for around 80 percent of the truckers of Lebanese products — presumably for political reasons, which adds on more time for visa applications, while the kingdom is also squeezing the Lebanese electricity generator sector.
All in all, industry is facing many obstacles. “I think Lebanese industry is going through its worst period since the end of the Civil War,” said Soueid. “We have never had this agglomeration of domestic, regional and global factors affecting supply and demand. If this continues, and unfortunately the indicators point in that direction, we will see closures of industries in Lebanon.”

The glass half full?

While the economic situation is certainly not rosy, with overall growth forecast at 1.2 percent this year by the Washington-based Institute of International Finance, it is not all doom and gloom. Taking the ‘glass is half full’ approach, ALI’s Frem is confident that the sector will prevail, stating that while industrial machinery imports have dropped, they could have dropped more — especially after significant investment in recent years — and this year he forecasts that up to $200 million of newly purchased machinery will go “straight to the expansion of the sector”. Since being interviewed in early September, Frem’s outlook has been somewhat confirmed, with statistics released by the Ministry of Industry showing that industrial imports at the end of July were up 22 percent, to $172.2 million, on the same period in 2011.

Industries not overly reliant on the local market are stoic about the situation. “We have to live up to the challenge, otherwise we shouldn’t be here,” said Raad of UMC, which exports 85 percent of its products. “We will maintain the same figures as last year; not more or less growth.”
“Business is good, despite the situation,” said Asaad Saccal, general manager of generator manufacturer Saccal Industries. “The reason is 85 percent of our turnover is export. Lebanon is good business of course, but small in terms of quantities; we need bigger markets to sell to.”
To Abillama’s Abboud, companies should have anticipated the regional and domestic situation and adapted their business model accordingly rather than whining about the obstacles in place. “This is a problem I see many people complaining about, but they don’t look ahead, taking the punches while sitting down — move!” said Abboud. “The key is not to be static and wait, but to be proactive. As soon as things started to happen in Syria and we saw that the economy might slow down here, that the road to the Gulf might be difficult and we would have to focus on sea export, we put all [our] sales people on West Africa to be dynamic, and it worked,” he added, with Abillama having a “nice order book” for the year ahead.
Indeed, as the saying goes, one man’s loss is another man’s gain. Some exporters have benefited from the current regional crisis by picking up orders that Syrian and Turkish manufacturers cannot fill.
The economic sanctions imposed on Syria by the United States and the European Union (EU) have also been a boost for certain Lebanese companies, with imports from Syria down 8 percent in the first half of the year, and exports to Syria up 18 percent, according to global information company IHS. It would appear, though, that the negative impact on some Lebanese companies in losing the Syrian market and that export route outweigh the opportunities for their industries to fill the gap left by the collapse of Syrian industry.

Government support?

The government is not helping the sector through these trying times, with the Minister of Industry, Vrej Sbounjian — a Utopian at heart — stating there is no cause for concern.

“We don’t have any complaints concerning the economy or industry... We need to be more realistic and enjoy life a little bit. We don’t have to make money every year,” he told Executive.
The ministry itself could certainly do with more money, with a budget of just $5 million, just more than half that of the Ministry of Youth and Sports, at $9.7 million, and a third of the tourism ministry’s $14.6 million.
“The ministry’s share in the budget seems way too low to me,” said Abillama’s Abboud. “There should be more than just enough to pay salaries.”
“The ministry should be able to afford promotion programs and to fund delegations from the ministry to visit seminars and industrial meetings with specialized bodies in the Arab League, the EU  or others,” he added.
There have also been no steps made to set up dedicated industrial zones despite government pledges over the years to do so. As Frem observed, “Forget about it, there is a complete paralysis on the economic zones.” Industry, as in the past, is being left to its own devices to stay alive, not even getting governmental contracts to bolster domestic sales.
However, the Ministry of Industry has put its, albeit limited, weight behind a joint scheme launched in September with the ALI to promote Lebanese products under the slogan “Your industry your identity: Buy Lebanese.”
While a promotional campaign may help, industry needs more than just marketing, it needs solid support from the government and for the ministry to tout the sector at international exhibitions, just as other countries do. A bigger industrial sector would, after all, help to lower unemployment and boost the overall economy.
“It is not that Lebanon cannot be industrial, but that it should be seen as a sustainable sector,” said Abboud. “It is great to have an ad agency here, but they could leave tomorrow; industries can’t get up and leave like that. Industry should be a priority and not be seen by the government as a cash cow. Industry is a social contributor as well as a fiscal one. In the past, industry was looked at as a polluting sector or as exploiting the masses — this is not the case anymore.”
To economist Soueid, the government needs to implement any of the economic plans drawn up over the years, whether by external actors such as the World Bank, or by ministries and economists. “Industries in Lebanon don’t need a ministry, they need an economic policy that supports industry and reforms in power, infrastructure and telecoms,” he said.
Given the rough ride this year, Lebanese industrialists could use some better cards to play.

Box: Local Power Generation Solution

When the Ministry of Energy and Water concluded two years of talks with a Turkish power company to provide 270 megawatts (MW) from two electricity-generating ships, the June agreement was generally welcomed by the public. With the country short by at least 1,000 MW, any increase in energy was viewed as a plus, even if the electricity from the ships – once they arrive - will initially be used to offset the shutting down of a power plant for an overhaul.
The industrial sector however was not as enamored with the deal struck with Turkish Karadeniz Holding, at a price tag of $390 million for three years.
I'd have preferred the ministry had used local companies not a foreign one, as Lebanon has generator companies,” said Asaad Saccal, general manager of Saccal Industries. “And if they bought locally it would be of great benefit to the local economy. We're installing a 40 MW generator in Baghdad for the Iraqi government. If we can do 40 MW, we can also do 100MW. Why is the government not contracting Lebanese companies?”
Saccal added that his company could provide 180 MW, and that Lebanon's second largest generator supplier, Caterpillar Jallad, some 90 MW, just short of the Turkish ships' output. “All private power generation plants are ready to connect to the grid, if the government would allow it. But it needs a law,” he said.
Under Lebanese law, the state-owned Electricite du Liban (EDL) has the monopoly on power production, sales and distribution. For private companies to provide electricity to EDL the law would have to be amended, despite the fact that Lebanese are forking out over $1.7 billion a year on subscription fees for private generators to survive the power outages, according to estimates by the Energy and Water Ministry.
The Association of Lebanese Industrialists (ALI) is also not happy with the deal with Turkey, and has submitted a proposal to the government for industrialists to set up private power plants for not only industrial demand but also to sell to the grid. “As industrialists (we would like the) same contract and conditions as the government signed for the Turkish power ships; this is nothing but fair. What the government gave to a Turkish company should be starting conditions for Lebanese industrialists on the ground to sell electricity to the grid,” said Neemat Frem, president of the ALI (see Q&A). As Executive went to print the ALI is still waiting for the Industry Ministry to submit its proposal to the Cabinet.

Special Report Lebanese Industry: Exports in mayhem


Executive magazine

Syrian industry has been seriously hit by the ongoing conflict, suffering from a lack of raw materials, workers, energy and capital amid heightened risk. Multinational companies such as Proctor & Gamble that sold fast-moving consumer goods exited the Syrian market last November when European Union sanctions went into effect.
Turkey has not filled any supply gap, with exports from Turkey into Syria dropping from $2.3 billion in 2011 to just $302 million in the first five months of this year. However, exports from Lebanon to Syria have risen by 18 percent to date on 2011, to $126 million, while for the first time in years Syrian products headed the other way have fallen, by 8 percent to $142 million, according to Lebanese Customs data. Are Lebanese industries stepping up to fill an apparent supply and demand gap?
The short answer is: not really. Firstly, demand for non-essential items in Syria has plummeted as prices have risen, people’s finances have been squeezed, and stores are infrequently open, if at all. Take for example the sales of Lebanese cosmetics firm Ch. Sarraf & Co., part of the Malia Group, in Syria. When the group started a distribution company there in 2008, sales quickly reached the same volumes it had taken 10 years to achieve in Lebanon. It was a good market. But since the uprising began in March, 2011, business has dropped.
“We are facing export difficulties so a few months ago we put aside stock as a preemptive measure, but demand [for cosmetics] is about half of what it used to be as purchasing power is down,” said the company’s general manager Joanne Chehab. “People are only buying products of first necessity, although shampoo is still one.”
A second factor is that demand for more life-sustaining essentials has also not risen. According to a report in As Safir newspaper, the Lebanese Farmers Association said that exports to Syria have dropped by two-thirds on last year. Demand has equally not risen for items more suitable for life under a siege than fresh fruit and veggies — tinned and packaged foods. According to the head of a leading Lebanese agro-industry company who asked to remain anonymous, there has been no marked demand by Syrian companies or traders.
One necessary product that is facing production shortages in Syria is pharmaceuticals, yet while there may be demand, potential increased exports from Lebanese pharmaceutical companies are complicated by the borders still being under the regulation of the Syrian state.
“Until now, exports from Lebanese pharmaceutical companies to Syria are subject to regulations by the Syrian authorities; that is why it’s not as easy as one would think [to export],” said Neemat Frem, president of the Association of Lebanese Industrialists. “But in areas that are unregulated, that is completely different, and we might see more in those areas.”

Cash flow curbs

While generator manufacturer Saccal Industries has witnessed a 100 percent growth in demand for generator sets due to power shortages, Syria is not as lucrative a market as one would expect. “We are selling more but there is the problem of cash flow. People are afraid of spending money in the current environment,” said the company’s general manager Asaad Saccal.
The United States sanctions banning the use of Visa and MasterCard, as well as transactions in dollars, and the considerable depreciation of the Syrian pound are both major contributing factors to the squeeze. “We are selling for cash not credit as the currency is fluctuating a lot,” said Chehab. “We sell in Syrian pounds and then transfer on the spot.”
Compounding the situation is problematic  distribution, which has become more difficult. Traders are looking for higher margins to cover inflated insurance premiums and container hires.

A little silver lining

So what has caused the up-tick in exports to Syria reported this year? Data is not broken down by category, but one reason for the increase is a 25 percent spike in exports of machinery, spare parts and engines due to international sanctions, according to economist Kamal Hamdan.
Another factor is fuel. Subsidized Syrian fuel used to be smuggled into Lebanon; but as the conflict dragged on and shortages emerged in Syria, this flow has reversed, causing Lebanese imports of fuel from abroad to jump, both to make up for lost supply to the domestic market and to feed the export and smuggling markets in Syria. Lebanon’s imports of oil and mineral fuels have surged 89 percent year-on-year, to $3.2 billion. Non-hydrocarbon imports on the other hand have grown just 1.8 percent, according to Byblos Bank data.
In addition to fuel exporters and smugglers taking advantage of the conflict, some other companies are also directly and indirectly benefiting from industry shutdowns in Syria. Aluminum tube manufacturer Universal Metal Products (UMP) has noted an increase in orders from Saudi Arabia, which the company does not attribute to the closure of three Syrian manufacturers in the same field — they did not have the ISO specification required in the kingdom’s market — but rather the drop in Turkish trade with Syria.
“Due to the broken trade links with Turkey we are picking up slack from Turkish business they have lost,” said UMP’s general manager Nizar Raad. On the labor side, for manufacturers such as Carosserie Abillama, the closure of Syrian manufacturers provided the Lebanese firm with skilled workers that had been laid off.
All in all, there is little silver lining to the Syrian crisis for Lebanese industry, with the situation causing more damage to the sector than any potential sales up-ticks due to shortages over the border.
Where industry may well experience an upside in the near future is if goods that have been hoarded away start running out. Otherwise, it will not be until the conflict is over, when the rebuilding effort in Syria creates a massive demand for materials and products.

Box: Saudi Arabia Squeezes Lebanese Manufacturers

Saudi Arabia is not making life easy for Lebanese manufacturers. Riyadh has stopped issuing multiple entry visas to Syrian truck drivers, who account for an estimated 80 percent of truckers from Lebanon. This means that Syrians have to apply for a new visa every time they have a cargo at the Saudi Arabian embassy, which can take up to 12 days. It is not only causing transportation delays but also a shortage of available drivers, as other nationals are not willing to take the risk of driving valuable cargoes through conflict-ridden Syria.
While this is causing a logistical headache, Saudi Arabia is trying to protect its generator manufacturing business from the recent surge in Lebanese imports. “Over the past two years the Lebanese have invaded the Saudi market and they don't like it as we're cheaper. It is not about labor costs but about scale as Saudi manufacturers have small volume capabilities,” said Asaad Saccal, general manager of Saccal Industries, which has the largest generator manufacturing facility in the Middle East.
Under the Greater Arab Free Trade Agreement (GAFTA), imports are supposed to be tax free if a minimum of 40 percent of a product's value was made in the originating country. But Riyadh is playing with taxation rates by claiming Lebanese-made generators do not meet GAFTA's criteria and have instead slapped on a 12 percent import tax. 
“They don't consider our generators to be Lebanese, as value added has to be 40 percent. It is not true, we can prove it and we have lawyers and the Economy Ministry working to prove it,” said Saccal, adding that 10 percent of the company's exports are to the kingdom. “It is a war on Lebanon by Saudi businessmen.”

Special Report Lebanese Industry: Round-about routes

Executive magazine 
If the Syrian crisis escalates further and the border with Syria closes, Lebanon would be cut off from the rest of the region with the only way in and out being by sea or air. So far the border has remained open, but the Syrian conflict has already caused a significant drop in cross-border trade and a rise in maritime shipping.  
Last year, an average of 450 trucks crossed the border daily with goods destined for Syria, Turkey, Jordan, Iraq and the Gulf countries. But with the security situation deteriorating, exporters are increasingly reluctant to transport cargo by land. Insurance is up 3.5 percent to cover the risk, and companies are being held financially responsible for hired trailers. The deposit on a 20-foot  (6.1 meter) container is $4,500 to $5,000, and $7,500 for a 40-foot (12.2 meter) container. “It is a cash deposit for the empty container to cover all issues, from accidents to kidnapping,” said Fadi Haddad, general manager of shipping and logistics firm Masafat International.  
In addition, there are increasingly delays at border crossings onwards from Syria, driver shortages and visa issues for Syrian drivers to enter Saudi Arabia (see box page 56). “We are facing a lot of obstacles: risk, the shortage of drivers, visa delays, and visa costs, and all this is adding up. There are also more checks at Masnaa [the Lebanon-Syrian crossing] and at Deraa [between Syria and Jordan], which holds up convoys for three to five days,” said Nizar Raad, managing director of Universal Metal Products. “So far Deraa has remained open but sometimes we wait a week or two for a trailer to go through.” 
Higher oil prices have also added to costs and the overall price of transporting a trailer to the Gulf has risen by 15 percent on last year. All of this has led to an approximately 50 percent drop in the number of trucks crossing from Lebanon into Syria, to between 200 to 250 a day, according to Gezairi Transport. 
Paying for Safety
With land transport having accounted for an estimated 70 percent of cargo to Iraq and the Gulf, unsurprisingly exports to Iraq have dropped, down 39 percent in the first quarter on the same period last year, and by 15 percent overall in the first half of the year. “Before the Syrian conflict, Beirut was a good transit point for cargo for Iraq, now there are a lot of doubts,” said Haddad. “Traders are asking what will happen to their cargo if it gets stuck due to a crisis during transportation in Lebanon or elsewhere.”  
The re-export trade has certainly been hit, at $193 million worth of goods moved in the first half of the year compared to $379 million for the same period in 2011. Meanwhile, exports to Turkey have dropped 40 percent, despite the launch in June of a privately operated roll-on, roll-off (ro-ro) vessel between Tripoli and Mersin to circumvent Syria. Sea transport has become an increasingly viable option for traders, especially if the cargo is expensive. “We’ve had requests from clients to study sea routes, as by land it is risky. But shipping costs are higher [so] trucks are still going,” said Haddad.   
Indeed, land transport is still the preferred option as it is more straightforward for a single trailer to go door-to-door than have to transport cargo to the Beirut port, load it into a container, unload it at the receiving port, and then re-load it into a trailer. It is also more time-consuming and costly.  
While a trailer would take roughly a week — without any unusual border delays — to get to the Gulf, by ship it takes on average 20 days. “[A] one week delay at sea is very common, and you can’t claim for a delay,” said Haddad. Shipping costs to the Gulf are also around 40 percent higher than trucking.  
Nevertheless, with land transportation increasingly fraught and time consuming, companies are clearly willing to pay the premium to make sure cargo arrives in one piece. According to statistics released by the Port of Beirut, export shipping operations by the top eight freight forwarders reached 26,305 TEUs (Twenty-foot Equivalent Unit) in the first half of the year, up 18 percent from 22,293 TEUs in the same period of 2011.

Special Report Lebanese Industry: Outside the box

Executive magazine

To Lebanon’s older generation, Carosserie Abillama is a household name, with ‘Abillama’ stenciled on the back of nearly every truck, tipper, tanker or ambulance in the country. The company, which has been around since 1933, is still at the forefront of trailer manufacturing and other automotive add-ons, although its name does not stand out as much as it used to amid the surge in vehicles and trucks on Lebanese roads over the past few decades.
Lebanon is also no longer the company’s major sales market, selling to 27 countries and approved for its high international standards by leading European companies Scania, MAN, Renault and Volvo. Abillama has even built trailers for Formula 3 racing cars, “which is at a very high level as it’s so image orientated,” said general manager Daniel Abboud.
Last year, however, Lebanon was a significant market, at 50 percent of sales, then dropping to 15 percent in 2012. “In terms of sales, Lebanon has not dropped that much, but exports have risen,” said  Abboud. “This year our biggest market is West Africa, at 45 percent, followed by the Gulf at 25 percent and institutional buyers 15 percent.”
The surge in exports to West Africa was a deliberate strategy by Abillama to anticipate a potential drop in sales due to the crisis in Syria and its spillover to the Lebanese economy. Abboud put a dedicated sales team on the West African market, and “it worked.”
“I think we’re going to have a good year and next year even better. We have a nice order book,” he said, projecting annual revenues at $16.5 million, up from $14.5 million in 2011.
Part of the company’s success over the past 80 years has stemmed from predicting downturns and keeping sales diversified. “For a while, 90 percent of our market was Iraq before the Americans came [in 2003],” said Abboud. “We saw the dangers so stopped taking orders. It was a good approach, as if we’d  stayed we’d have been in bad shape.”
A further key to success is Abillama’s research and development, and bringing out new products to stay ahead of the competition, such as a new cement mixer developed with an American company for whom Abillama manufactures to order, primarily for the Saudi Arabian market. “There is a lot more research and development in Lebanon than elsewhere in the region. In Saudi Arabia, Syria, the Emirates, they just copy others. The ‘Abillama tipper’ has been a generic term in Saudi Arabia for the past 40 years,” said Abboud.
In terms of competition, in West Africa Abillama vies for business with European firms, while in the Middle East, Iraq in particular, the company is facing stiffer competition from Turkey. “High quality Turkish producers were focusing on the European market, but they have lost it due to the economic downturn there so are turning to other markets where quality is important,” said Abboud.

Universal Metal Products

While Turkey poses a competitive threat to Abillama, aluminum tube manufacturer Universal Metal Products (UMP) sees the closure of Syria as a market and transport route for Turkish products to much of the Middle East as a boon for the company. “We are picking up slack not because of Syria so much, but due to Turkish suppliers being out of the market. They are now being restricted due to logistics and political reasons, and that trade link has been broken,” said general manager Nizar Raad.
UMP has experienced a major up-tick in sales to Saudi Arabia this year for the collapsible aluminum tubes it manufactures for the cosmetic and pharmaceutical industries. The situation in Syria, however, is causing logistical problems and heightened transport costs, deriving from export for which overland transport is the most cost effective method.
“We’ve made contingency plans for sea as there is the possibility of Syria blocking the route to Jordan,” said Raad. “We got the cost by sea freight, to Jeddah, and that is okay but the problem is the delays in offloading. Then the goods have to be driven to Riyadh, the main pharmaceutical hub. These time factors and delays are a problem.”
UMP’s exports are not totally dependent on the Middle East though. “We do export indirectly to Europe and the United States, so the lower euro is helping. We also export to Pakistan for special clients,” said Raad. He expects business to be similar to last year, neither growing nor contracting.

Resource Group Holding

Resource Group Holding, soon to be called just RGH, expects to have similar revenues this year as 2011, at over $100 million. But this is not down because of less business in the Middle East and Africa, its core markets, or any loss in trade to Syria. Indeed, RGH’s telecommunications infrastructure arm Serta was granted permission by the United States Office of Foreign Assets Control (OFAC), which oversees sanctions, to sell equipment sourced from the US to Syria this year.
Revenues are expected to hover around the $100 million mark because the group is going through a period of consolidation as well as significant investment, with Chief Executive Dany Eid expecting to see returns next year and for RGH’s revenues over the next five years to grow by more than 100 percent to exceed $200 million.
In Lebanon, RGH is expanding its 4,000 square meter Inkript facility, which handles high-security printing, from checkbooks to lottery tickets, electoral voting cards and bonds, to bank cards and electronic-passports, by a further 16,000 square meters, financed through a subsidized loan from the central bank and the Investment Development Authority of Lebanon. The expanded facility is slated to open by end 2013, and will create further employment, adding to the current 500 working at the plant in South Beirut. Elsewhere, RGH has 200 employees in lottery business Intersektion’s brand Afrijeux in Chad, and 300 other employees in Lebanon and abroad.
In further expansion, RGH bought a factory in Saudi Arabia last year to make mobile phone SIM cards and scratch cards. “We bought the facility to cater to the sizable Saudi market and have proximity to our customer base,” said Eid. “The plant is still in the restructuring phase, so we expect this investment to yield results as of next year.” The group is also involved in the smart phone gaming business through investing in a startup called Game Cooks, which co-produced the hit game Birdy Nam Nam. “With the Arab world as the primary target, games like Run for Peace and Déjà Vu have witnessed over 1 million downloads so far in less than a year,” said Eid.
Eid sees Lebanon’s strength as being able to not only manufacture goods at a high quality, but also to combine development with value-added and follow up solutions. “The future is in value-added and solutions. At a group level, our products are already highly technical, such as printing, and through products that provide solutions, like software for SIM cards. What makes our products hard to compete with is that they are relatively unique, as clients for printing, for instance, are mainly governments and banking sectors, and competition at that level is lower.”

For Vresso, a manufacturer of customized stainless steel kitchens and exclusive distributor for 50 food service equipment and laundry brands, the dampened economic climate in the Middle East has slowed sales this year, most evident in Syria with hotel and tourism-related projects on hold. But with exports accounting for 60 to 65 percent of business and selling to over 30 countries, Vresso is weathering an economic downturn in one area and focusing on others. “We are optimistic about the future, especially emerging markets opening up, but I won’t say where because our competitors would be on a plane tomorrow,” said Carl Sabounjian, Sales and Marketing manager at Vresso.

Sales have been surprisingly good for the company, even for stainless steel kitchen units that have a price tag anywhere from $10,000 to more than $200,000. To bolster sales of such expensive items, Vresso has been offering more credit facilities. The tactic has worked. “Business has been very good, quite great in fact, especially for restaurants, super markets and coffee shops, as well as with private villas and wine cellars,” said Sabounjian.
Vresso has 120 employees within the group, and 40 employed in manufacturing stainless steel cabinets, tops and refrigeration units. Steel sheets are bought from local importers, then cut, bent and welded at Vresso facilities, with products manufactured from scratch to customer specifications.
“Next year a lot of new models are coming out, and a lot of foreign franchises — especially internationally renowned restaurants — are coming to Lebanon so we see a good market ahead,” said Sabounjian, forecasting that once the conflict in Syria is over there will be significant business opportunities.

Monday, October 01, 2012

Buy Lebanese, please

Commentary - Executive magazine

A new campaign was launched in September by the Ministry of Industry and the Association of Lebanese Industrialists (ALI) with the slogan “Your industry your identity: Buy Lebanese.” It is aimed at giving the sector a boost in the current economic downturn, given that some 60 percent of industry’s sales are local.

It is a good move, but the sector could have done with greater recognition from the government of its contribution to gross domestic product (GDP), which has gone from 9 percent in 2009 to an estimated 19 percent today. Such a move could have included giving the ministry governing the sector a decent budget and pushing state agencies to actually buy Lebanese products.

The Ministry of Industry’s current budget is a measly $5.14 million, which is barely enough to pay for salaries yet alone have a decent marketing budget to promote Lebanese industry around the world. Indeed, ministerial employees have said that if they want to attend exhibitions abroad, they have to pay for flights out of their own pockets and then hope they get reimbursed.

Other countries have industry budgets in the billions of dollars, and set aside sizable allowances for trade fairs and expos, with dedicated stands to tout the nation’s wares. For instance Jordan’s Ministry of Industry and Trade had a budget of $8.8 billion in 2011, and the United Arab Emirate’s Ministry of Commerce and Industry some $11.2 billion. The small island of Singapore, less than a 10th the size of Lebanon but with a similar population size, has a budget of $3.3 billion for the Ministry of Trade and Industry.
While these countries include commerce or trade in addition to industry, even if you combine the Lebanese Ministry of Economy and Trade’s $21 million budget with that of the Industry Ministry’s, it is still shockingly underfunded.

As an overall percentage of the $14.71 billion budget, the Ministry of Industry’s cut accounts for just 0.035 percent. The sector’s GDP contribution generates significant revenues for the government as well as being a major employer, accounting for an estimated 26 percent of the total 1.48 million Lebanese workforce, according to website Economy Watch. That works out to 370,250 jobs, meaning the ministry’s budget allocates just $13.5 per employee in the sector.

The Ministry of Agriculture has a budget of $59.3 million, while representing a quarter of the GDP contribution of industry, and the Ministry of Youth and Sports — that well known contributor to economic growth and prosperity — has a budget almost double that of industry, at $9.7 million. Tourism, an important economic sector, still contributes a third less to GDP than industry, but has treble the budget, at $14.6 million.

While there is the counter argument that some countries earmark billions for industry and are still not competitive, and others are competitive without much state assistance, it cannot be ignored that Lebanese industry is currently facing a lot of challenges. A higher budget for the Industry Ministry would no doubt help, but so would addressing other stumbling blocks, notably the endemic shortfalls in energy and infrastructure.
Where the government could show true support is by buying Lebanese. But according to industrialists, the government more often than not shuns Lebanese products for foreign brands, believing them better.

This has led to bizarre situations where the government has ordered products from France yet the good is actually made in Lebanon; the winner in this scenario is the middle man and the loser the Lebanese tax payer. One industrialist told how at a recent expo in Beirut, European companies placed orders for specialized products while the Lebanese government queried that same local company’s experience in the order application process — the deal later fell through.

Among the public there is also a certain snobbishness towards Lebanese products. “We export to 30 countries and the image of Lebanese industry is higher elsewhere than here,” said an industrialist. “A Lebanese would buy a Turkish-made product over a Lebanese one, I don’t understand it.”

Whether the new “buy Lebanese” scheme will work remains to be seen, but its effectiveness would certainly be bolstered if there was a bigger ministry budget for marketing, and the government itself began practicing what it preaches.