Oil and gas-rich MENA countries look to nuclear and renewables

 Abu Dhabi aims to have 7% of its energy from renewables by 2020
 

What are the prospects for the development of nuclear power in countries of the Middle East and North Africa? And why has progress on renewable energy been relatively slow there, despite rapidly increasing energy needs? Paul Cochrane, in Beirut, and Mark Gao, in Istanbul, report.

First published in the July/August 2012 issue of Energy World from the Energy Institute, www.energyinst.org

Most states in the Middle East and North Africa region (MENA) have mulled developing nuclear power over the past decade, from Morocco to Egypt, and Jordan to Saudi Arabia, but only the United Arab Emirates (UAE) is coming close to embarking on the nuclear option thus far. Energy consultancies are often optimistic – arguing that the MENA region, including Saudi Arabia, the UAE, Jordan and Egypt will account for $300bn worth of nuclear new builds up to 2030.

That is based on plans for nuclear new builds in the region. But the real question of course, as is usually the case with nuclear energy, is which projects will see talk converted into split atoms? Also, with the region full of sun and sea, plus empty desert where wind turbines would disturb few bar some wandering camels – what role could renewables play in this energy rich region in the future?

These are not hypothetical questions. While the region is famously rich with hydrocarbons – its oil and gas producers usually make more money by exporting than by selling cheap energy at home.

And with economic development proceeding apace, especially in the Gulf, the region really does need alternative energy sources. Nuclear is some way ahead of renewables in this regard, although this far there has been more talk than action.

Nuclear prospects for Egypt, Jordan, UAE, Saudi Arabia

Australia-based WorleyParsons in 2009 secured a $160mn, eight-year contract to advise the Egyptian Nuclear Power Plant Authority on building a reactor in Al- Dabaa, a Mediterranean site first selected in 1983 but shelved post-Chernobyl. With politics still far from stable in Egypt, progress on such a sensitive file as nuclear power is not likely in the short term. Meanwhile, the Jordan Atomic Energy Commission (JAEC) in 2010 announced it would build a single 1,000 MW reactor in Mafraq province, in the middle of the country. However, a final deal is awaited here too – although the smart money appears to be on a French-Japanese ATMEA1 unit, supplied with fuel by France’s AREVA, which has a uranium mining joint venture with the Jordanian Energy Resources. JAEC chairman Khaled Touqan has said that Jordan has no option but to investigate nuclear, given extreme energy shortages and political uncertainty in the region undermining faith in the reliability of international gas pipelines.

But here too, there are plenty of obstacles, even though Jordan remains relatively stable politically for now. An energy investment conference scheduled for November in Amman will help decide how these reactors are funded: $5bn estimates exclude a required revamp of the electricity grid. Site selection may prove the biggest headache. Residents of the site have protested, pointing to shortage of water. The local arm of the Muslim Brotherhood warned against Jordan building reactors ‘for selling others clean energy at cheap prices and on their terms.’

Kenneth McKellar, an energy and resources leader for the Middle East at consultants Deloitte in Saudi Arabia, sees potential problems with both countries’ plans: ‘Egypt has been talking about the initiative the longest and the Jordanian initiative has been bubbling along but there is still a way to go. I see regulatory issues further down the page, which I think is critical for any energy source in the region,’ he said.

His view is that the Gulf is where the non-fossil fuel energy action will be in the near future: ‘Which NPPs [nuclear power plants] stand a real chance of being built? It has to be those with significant amounts of capital available, and the priority is then the Gulf countries.’

The UAE is certainly the region’s leader here. It has a reactor deal which might actually go ahead. This was picked up by a consortium led by South Korea power plant supplier Kepco in 2009: it has been contracted to supply four reactors worth $20bn to the UAE national nuclear utility ENEC for four new units. ENEC says it will build 12 more units, and Kepco has said it will begin talks later this year on building four of these. ENEC said last month that it hoped to start building the first plant by December this year, assuming regulatory approval was secured by September. The UAE aims to generate 25%, or 5.6 GW, of its power needs from these first four nuclear power plants, which are scheduled for completion by 2020.

The other big potential Gulf market is Saudi Arabia, which wants to build 16 units, according to Saudi government sustainable development agency the King Abdullah City for Atomic and Renewable Energy (KA CARE). It aims to build a zero-emission city run on nuclear and renewable energy. A $250bn project includes 16 reactors. Furthermore, the Saudi Arabian government has said it wants the country’s first reactor brought online by 2020, with 60 reactors in total online by 2030. That would mean six reactors would be installed annually between 2020 and 2030. But the Saudis are far behind the UAE in working out the details – formal tenders are awaited by the end of the year on even reactor number one. A Saudi consultant said: ‘Finance won’t be a problem but the legal framework and the expertise are two shortcomings that require a lot more detail.’ 

The Middle East is increasingly developing renewable energy, such as at Masdar in Abu Dhabi.

Three Russian reactors for Turkey?

There could be slower but steadier progress away from the Gulf – in Turkey – which in 2006 announced a plan for three reactors producing 4,500 MW to be built between 2012 and 2015. The Ankara parliament in 2007 passed a bill legislating for construction and operation of the reactors as well as energy sale. The three locations are Akkuyu, on the Mediterranean coast; Sinop, on the Black Sea; and Igneada, near Bulgaria. The Akkuyu deal (four 1,200 MW VVER pressurised water reactor units) was won by Russia’s Rosatom which has been contracted to put the first reactor into service in 2018. According to Turkish energy minister Taner Yildiz the three separate plants will be operational by 2023, although talks with Kepco to build the Sinop plant have been inconclusive.

Turkey certainly needs to diversify its energy sources though. ‘An energy crisis is coming. Turkey will need more than 60 billion cubic metres (bcm) of natural gas in the next five to ten years. There are contracts for 52 bcm, and some liquefied natural gas (LNG) contracts, but there is a need to find new energy. Turkey gets 10 bcm of gas from Iran but if that stops, then Turkey is in a catastrophic situation,’ said Dr Tugce Varol, a scientific advisor at the 21st Century Turkish Institute in Ankara.

Meeting growing demand, protecting exports

Pushing all governments in the region to consider the nuclear option is the sheer growth in energy demand, driven by economic growth and in particular by demographics, which is only set to become more pressing over time, with an estimated 50% of the MENA region under the age of 30 years old. Indeed, energy demand has been so significant that the World Bank estimates that energy consumption between 1980 and 2009 grew faster in the MENA than another other region on earth, with energy intensity increasing 14% between 1990 and 2005, some 60% above the OECD average and 40% above the global average.

McKellar says the key issue is a shortage of other fuels to fuel conventional power plants – rather ironic given the huge domestic fossil production in the region (much of which is exported). ‘Gas is in quite short supply for domestic consumption, and heavy fuel oil or diesel is environmentally unsustainable and can be exported for a high price and refined for more marketable products,’ he noted. Big money is to be gained from exporting gas for power production elsewhere in the future, with ‘demand in particular for electricity generation ... to go through the roof.’ And, meanwhile, many Middle East and North African countries have yet to be converted to the benefits of renewables, despite plentiful sunshine: ‘So, the primary motivation for NPPs is simply there is no alternative for a rapidly growing population and high electricity demand.’

McKellar’s view is echoed by other analysts – economic necessity requires export sales by developing NPPs and venturing into renewables. ‘I think the reasons are for oil and gas exports. It is not a green argument but to protect revenues and the integrity of reserves as a long-term strategy,’ said Phil Dominy, a senior executive at consultants Ernst & Young. And yet energy demand continues to soar, especially in the six Gulf Cooperation Council (GCC) countries (Saudi Arabia, the UAE, Oman, Bahrain, Qatar and Kuwait), with domestic demand growing by an estimated 8.5% annually.

The issue is particularly problematic in Saudi Arabia, with domestic demand for its own oil and gas growing at an estimated 7% per year, double the rate of GDP growth, while a third of the kingdom’s population of 27mn are below the age of 14 years. Current electricity generation capacity has doubled in Saudi Arabia over the last decade to 50 GW, and demand doubles in the scorching summer months when air conditioning accounts for around 52% of total consumption.

Currently the kingdom consumes over one-quarter of its total oil output, some 2.8mn barrels per day (bpd), according to BP, and its total primary energy consumption is around 4mn bpd, similar to the UK, despite the UK having double Saudi Arabia’s population. All natural gas in Saudi Arabia is consumed domestically, accounting for 38% of power generation, with the remaining 62% from diesel, heavy fuel oil, crude oil and LPG.

At the trajectory of consumption based on the BP figures, according to a Chatham House report: Burning Oil to Keep Cool: The Hidden Energy Crisis in Saudi Arabia, published in December 2011, Saudi Arabia will become a net oil importer by 2038. As a result of such demand, the kingdom aims to have 7–10% of electricity from renewables by 2020, according to Saudi Aramco figures, and for 16 nuclear reactors by 2030 to provide 20% of demand.

Seth Grae, CEO of Lightbridge Corp, a US-based consultancy and technology developer, underlined the trend, noting that states in the region ‘don’t want to consume oil internally when there’s a feeling there’s a limited timeframe to be able to export these.’ Grae also points out that some countries in the region lack either oil or gas, while hydro is ‘not an option’ for most states in the region.

There’s also a regional wish, particularly in Saudi Arabia, to keep pace with nuclear development of Iran – with whom relations are frosty – and Israel.

Filling a self-inflicted energy gap

Given these pressures – it is worth asking what role renewables can play in helping the region bridge its own self-inflicted energy gap. At present, this role is not large. While many renewables initiatives have been announced over the past several years in GCC countries, the financial crisis has slowed their roll-out.

‘It boils down to a very uneven energy regime in many of the GCC states, and I am quite cautious about how quickly renewable energies will develop,’ said McKellar. Potential political instability has also drained renewable energy budgets, with the region’s generally undemocratic governments seeking to purchase support through increased social spending. This is particularly important for renewable energy, which is grant and capital intensive – and hence commanding juicy budgets that have been transferred to areas such health, education and defence because of the Arab spring.

Leading United Arab Emirate Abu Dhabi is one hopeful for green energy – it aims to have 7% of its energy from renewables by 2020, with developments currently underway two 100 MW solar power plants and a 28 MW wind plant.

Meanwhile, neighbouring emirate Dubai plans to generate 1 GW of solar power by 2030. But even in property rich Dubai, this is not a sure bet. So, with renewables not able to provide enough energy, and nuclear reactors taking years to build once legislation is passed and tenders agreed, more conventional fossil fuel-based power will be needed.

In the GCC zone, an estimated $45bn is to be invested until 2015 to boost capacity by 32 GW, and some $252bn is to be spent over the next decade on new power plants and upgrades of all kinds, according to research by the Kuwait Financial Centre and Ventures Middle East respectively. Some 361 power projects – with an average size of 500–600 MW – are under construction or upgrades in the GCC area, with 161 in Saudi Arabia and 70 in the UAE, according to regional business intelligence service MEED. However, an estimated 14% have been put on ice or cancelled due to the financial crisis.

Presenting a further obstacle to any energy solution is the lack of cooperation between states, creating a kind of European energy market that would enable the sale of power across borders. That has yet to occur and is impeding project finance and development, said McKellar. And, with the Arab Spring making the unreformed traditional monarchies of the Gulf nervous, this kind of liberalisation is highly unlikely – governments need to make sure there is no surge in electricity prices. ‘We have seen that around the GCC when oil companies have been forced to provide long-term energy contract prices to energy companies overnight on what is basically a spot price, so they end up losing money,’ noted McKellar. This does not foster confidence amongst energy investors. In the short term, whatever the energy source, the likely winners in MENA energy diversification drive will be consultants – private advisers such as WorleyParsons and Lightbridge who can for instance help navigate the labyrinth of International Atomic Energy Agency (IAEA) rules and regulations. Lightbridge, for instance, has bagged a consulting contract with the GCC ‘to assess regional cooperation in the development of civilian nuclear power programmes.’

Lightbridge has partnered with US utility Exelon, consultants Rizzo & Associates as well as international law firm Winston & Strawn to evaluate GCC members’ approaches on legal issues and liability as well as nuclear regulation, site assessment and training. Lightbridge, whose associates include former Westinghouse Energy Systems CEO Charles Pryor, also advises on human resource capacity building and fuel cycle and nuclear waste management.

And there is a long way to go in terms of creating the necessary reserves of local expertise and supply chains. Noticeably, Turkey is addressing the skills issue by sending 600 students to the Russian National Nuclear Research University in Moscow: the students will, after graduation, staff the Akkuyu NGS Power Production Corp. Meanwhile, Abu Dhabi Polytechnic has started a new atomic energy training programme. And Saudi Arabia has signed agreements with China, France, Argentina and South Korea on nuclear cooperation, which include the transfer of knowledge and know-how.

Photos by Paul Cochrane

Above it all: Venturing into Ladakh

Selections magazine

Ladakh was cut off from the world until 1974, when the Indian government opened up its northern most region to tourism. It took time for outsiders to venture into the “land of high passes” or “Little Tibet” as it is also known, bordering as it does Western China-Tibet and surrounded by the mighty Himalayan mountains. 

 

Today, while the capital Leh is geared towards tourism with plenty of hotels, guesthouses and restaurants, and the markets crammed with Tibetan, Buddhist and Ladakhi trinkets, it is still relatively off the beaten track. This has been a blessing, curbing the region from becoming overly touristic, unlike other Indian mountain retreats like Darjeeling, Dharamsala-Mcleod Ganj, and Shimla, and is due to what has kept the region so isolated for so long: its geography. 

 

Leh is at 3,500 meters, and is an oasis amid a high altitude desert and mountains towering over 6,000 meters that are evident everywhere you go in the capital. With temperatures in the low degrees at night even in the summer, Leh is off-limits during the freezing winter months and only accessible for four months or so of the year, certainly by plane, between June and late September. The only other ways to get in and out are gruelling overland journeys, whether from Srinagar in Kashmir to the South-West, a 20 hour journey to cover just 450 kilometers, or a similarly long bum-breaking ride that traverses 5,000 meter high passes to Manali in the south. 

Such altitude requires a few days of acclimatization. Even clambering up 300 meters of stairs to visit the Shanti Stupa – a Buddhist shrine – on the outskirts of Leh requires a few breaks due to shortness of breath and the heart beating like piston as you reach 3,800 meters. There's a similar sensation when you walk up to the 17^th century Leh Palace that dominates the skyline of the city, with its nine floors built into the rockface and the architecture a smaller replica of the original seat of the Dalai Lama, the Potala Palace in Lhasa, Tibet. The lungs get a further workout when you climb up from the palace to an old castle garlanded in colorful Tibetan prayer flags blowing in the wind. 

 

However, a few days at over 3,000 meters in Leh and day trips to surrounding Tibetan Buddhist monasteries such as Thikse is only minimal preparation for a jeep trip to Pangong Lake, some 160 kilometers away. The route goes over Changa-La, the second highest motorable pass in the world at 5,360 meters (17,586 feet). With that height about half of what commercial airliners fly at, it is no wonder visitors are not recommended to spend more than 20 minutes at the pass. 

En route, the road passes through streams heavy with snow melt, past grazing dzo, a hybrid of the big hairy yak and the cow, until reaching Pangong, one of the world's highest brakish lakes at 4,300 meters. Shimmering with seven shades of blue, magical may be an overly used cliche, but such a sight at the rooftop of the world is no understatement, or to describe the wonders of this formerly inaccessible mountainous region.

Text and photographs by Paul Cochrane

Tweeted into shame

Social media holds MEA to account for racist behavior

Commentary - Executive magazine

 

Social media’s role in bringing about progressive change is a hot topic in the Middle East as much as, if not more than, elsewhere given the ongoing debate about its use in the Arab uprisings. On a collective level it is hard to gauge due to the multitude of factors that contribute to people taking to the streets —  mass demonstrations can and of course have happened without any social media — but when it comes to smaller, localized events social media’s power is clear. The online exposure last month of a Middle East Airlines (MEA) employee’s racist remarks toward Asian passengers is a clear case, and one that other companies should take heed of if they don’t want their name or brand dragged through the mud. 

In early October, passengers were waiting in Rafiq Hariri International Airport at a departure gate for a flight to Dubai, including a group of Nepalese women, when a MEA employee got on the public announcement system and said, “Filipino people, stop talking.” The woman told the “Filipinos” to stop talking twice more, giggling as she did so and goaded on by a male colleague. 

The incident outraged fellow passenger Abed Shaheen, who tried unsuccessfully to make a complaint. In the past Shaheen might have told just family, friends and colleagues about the incident, and his complaints would have had minimal if any effect. In our new world of social media, Shaheen wrote about the experience on Facebook and Twitter. The story was quickly shared and within three days 1,600 people had signed a petition on change.org, calling for “MEA to apologize publicly for their staff’s behavior.” 

The media promptly picked up the story as well, initially in Lebanon and then abroad. Under fire, MEA eventually came out to say they had launched an investigation, and the employee was first “disciplined,” then reportedly fired.

While justice has arguably been done, and a strong message sent to MEA staff to think before they speak, MEA’s reputation has been negatively impacted. A scroll through the 200 plus comments following the airline’s apology on its Facebook page shows a great deal of animosity toward MEA: “service sucks,”  “airline crew impolite” and, more worryingly for the carrier in these difficult financial times, is the number of people that wrote they would “vote with their feet” by no longer flying with MEA. Judging from the comments, many Lebanese opt for MEA out of solidarity with the nation’s carrier, despite its invariably higher ticket price. But patriotism only goes so far, and this incident will no doubt lose the airline old as well as potentially new passengers. 

MEA, and subsidiary MEAG that runs the airport, say they have gone beyond “damage control” mode and made effective changes that can be immediately seen; this includes mandating that staff be trained to treat everyone equally and respectfully, as paying customers. Numerous times on flights to the Gulf and East Africa, acquaintances and I have seen African and Asian passengers seated together at the back of the plane away from passengers despite numerous seats being available. This happens too often to be coincidence and the check-in staff, by designating seats in this way, creates segregation. Such a policy is racist, and even more insulting when it occurs on the national airline of the segregated passengers, such as Ethiopian Airlines. This has to change.

Then there is the small boxy room that domestic workers are forced to wait in upon arrival at Beirut airport until their new employers come to collect them, rather than being met like everybody else in the arrivals lounge. It is reminiscent of a prison with inmates awaiting bail. For many of these women, it is the first time out of their country; they are unsure, scared perhaps about what’s next, and they should be treated in a more dignified manner. Both MEA and the airport are, after all, people’s first impressions of the country, no matter where a passenger is from, and customer service should reflect that. 

Ultimately, MEA has now put itself under the spotlight of social media, and activists will be on the lookout for further misdemeanors. It is a useful lesson for MEA to change its policies and better manage employee behavior, as well as for other companies to realize the power of social media to hold them to account.

Lebanon: Big sales for small cars

Executive magazine

 

If you go by the headlines in financial reports, the car market is doing surprisingly well given the staid economic climate;  growth of 7.6 percent was registered in the first eight months of the year, relative to 2011, and up 2.1 percent on the same period in 2010. But delve further into the Automobile Importers Association (AIA) monthly reports and all is not well, certainly for most dealerships, with just three brands accounting for 61.37 percent of sales this year.

“The market is very bad. People feel all is well as volumes are up but turnover is much lower than last year,” said Samir Homsi, president of the AIA. “Only baby cars are selling, in the $10,000 to $12,000 range. The situation is very lousy and profit margins are down.”

Brands which have had strong sales this year all have compact models in the A, B and C categories, which have steadily grown in recent years, with low horsepower vehicles currently accounting for an estimated 80 to 90 percent of sales. For Rymco, dealer of Nissan, the A category (think of the Micra) has gone from 18 percent of sales in 2010 to 21 percent this year, and the B category (the Sunny) from 15 percent to 20 percent, while other categories have contracted by 10 percent.

“We are seeing a trend where nearly every household has a small car now; it is a must,” said Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet, Cadillac, Hummer and Isuzu. “The Chevrolet Spark is by far our number one seller, by a big, big margin.”

Kia, Hyundai and Nissan are the top three sellers, with the next leading four brands — Toyota, Chevrolet, Renault and Volkswagen — accounting for 15.21 percent [see page 64]. Out of some 70 car brands available in the market, these seven account for 76.58 percent of sales.

“It is amazing if you look at the sales results that three brands control around 60 percent of the market and all the others share the rest. There is something wrong. Consumers are being followers rather than choice makers,” said Nabil Bazerji, managing director of G.A Bazerji and Sons, distributor of Suzuki, Lancia and Maserati.

The shift toward smaller vehicles is driven primarily by rising fuel costs, the lack of public transport and financial constraints. “People don’t have the budget anymore, fighting to get $4,000 for a down payment, and some distributors are even selling without a down payment,” said Samir Homsi. “People are only buying because there is a need, not to put a key holder on the table to say I own X or Y. It is for commuting, so they want a small, economical car.”

With dealerships offering warranties and free servicing deals for up to five years, and banks aggressively financing loans, this has helped drive the surge in sales of lower-end models. For market leader Kia for instance, 60 percent of sales are through financing. 

On the positive side, demand for more fuel efficient vehicles has resulted in a drop in sales of used cars — in addition to individuals banned from importing second-hand cars — which plunged 28.89 percent last year on 2010, and year-to-date down 17 percent on 2011, from 25,281 cars to 21,424 in 2012.

Asian invasion

The biggest gainers from the shift to smaller cars and new vehicles, over buying that long popular second-hand choice of a Mercedes or BMW, are the Korean brands, which have a staggering 44.81 percent of the market — Kia with 26.88 percent and Hyundai with 17.92 percent. Cheap Chinese brands have also made gains this year, up 85 percent, albeit only selling 308 cars and accounting for just 1.18 percent of the market, indicative of how price sensitive consumers are. 

Kia has been number one for three consecutive years since knocking Nissan from the top spot, and sales are up 13 percent this year. “Lebanon is the only country in the world where Kia is number one, everywhere else it’s Hyundai,” said Dayala Dagher Hayeck, general manager of NATCO, distributor of Kia. “We’ll be number one again next year and in the coming years. The challenge is to remain there. As long as there’s no public transport it’s good for sales.” 

Korean cars have been popular in the Lebanese market before, when in 1995 five brands were available (including the now defunct Daewoo, which was absorbed by Hyundai) with 43 percent of the market share. The share steadily dropped to 18 percent in 1999, to 7 percent in 2003, and then started to steadily rise from 2008 with a 19.3 percent share until the current new peak. The rise in Korean sales correlates to an exchange rate change in the Japanese yen to the dollar, from over 100 yen to the dollar for a decade until late 2008, when the yen’s value rose. As of the end of October, the exchange rate was around 80 yen to the dollar, and sales of Japanese cars were down 1.8 percent on last year.

Bazerji argues that the exchange rate has made Japanese cars uncompetitive versus Korean brands, as Japanese vehicles would be on par price-wise if not actually cheaper. “Japanese cars are cheaper than Korean cars. If you take for example a Toyota Rav 4, Honda CRV or Suzuki Grand Vitara versus the Kia Sportage, with the exchange rate at 78 yen it is $34,000, whereas at 110 yen it is $24,400,” said Bazerji. “Koreans are taking advantage of the yen’s appreciation to sell cars for more than they should be, but the consumer is not looking at this; they should bargain for Korean products and not accept the prices.”

If the yen managed to trade at over 100 to the dollar again — and there is a lot of pressure on Tokyo to do so to bolster exports — Japanese brands might regain some of the ground lost to the Koreans. “From my experience automotive sales are cyclical. Nobody stays at the top,” said Bazerji. “Till 2009 the Japanese were market leaders then they lost ground. But if the yen improves they [the Koreans] will be killed in the market as they were unable to sell in 2008 when the yen was at 110.”

Manufacturers, however, are not banking on a weaker yen. “It would be fantastic as it is a head wound at 79 yen to the dollar, but you can’t run a company on hope,” said Trevor Mann, senior vice president of Nissan, at the launch of the new Altima in Beirut. 

What may impact on Korean brands’ competitive pricing is the recent decision by Hyundai and Kia to scrap overnight shifts at manufacturing facilities, replacing two 10-hour shifts with an eight to nine hour workday, while wages have also been increased.

But it is not just pricing that has made Korean brands cars of choice in the Lebanese market. The improvements in Korean car quality, design and re-salability over the past decade have made it harder for Japanese, as well as European and American brands, to tout their advantages of heritage, safety, reliability and so on. In global brand recognition for instance, Koreans are on the up. Interbrand’s survey of brand values for 2012 showed Hyundai and Kia’s respective brand worth improve 24.4 percent and 50 percent, respectively, with Kia in the survey’s top 100 for the first time, ranked 87th. Among automotive brands, Toyota remained on top (ranked number 10 among all brands), followed by Mercedes in 11th place, BMW (12), Honda (21), Volkswagen (39), Ford (45), Hyundai (53), Audi (55), Porsche (72), Nissan (73), and Ferrari (99).

The Koreans are equally upping their game, bringing out hybrids, and Kia is soon launching a new sedan, the Quoris. “In 2013 we’ll launch a new model that’ll compete with BMW and Mercedes, a high class luxury sedan to attract a new category. This will be a big challenge to make people buy Kia at a high price,” said Dagher Hayeck. 

Middling along

The bulk of automotive sales, some 65 percent, used to be in the $22,000 to $90,000 price bracket, but with an increasingly financially squeezed middle class, brands selling in that range are having to go the extra mile to generate sales. Extended warranties and competitive pricing are major tactics, with a shift over the past year toward advertising the cost, which used to be primarily in the lower price segment. “You used to advertise to emphasize the brand image. Now it is what GM calls ‘bretail’ — a focus on retail with some branding,” said Farid Homsi.

Price wars between dealers are also generating sales, enabling certain luxury European and American brands to have had a relatively good year. As of the end of September, BMW has sold 524 units compared to 396 in the same period last year, while for Audi it was 422 compared to 462 last year, and Mercedes 514 compared to 616 units.

“Everyone says business is bad but when I see the figures it is not too bad, and there’s been growth. It is a bit weird,” said Cesar Aoun, general manager at Gargour & Fils, dealership of Mercedes, Smart, Jeep, Chrysler and Dodge. “In general, consumers are getting good deals due to price wars  between dealers.”

Gargour arranged with Mercedes-Benz to only buy cars in dollars to avoid price fluctuations in the euro and remain competitive, as the brand can oly offer incentives by way of free optional extras; price discounts are only allowed for year-end specials. Instead, Gargour is planning to introduce securitization to self-finance sales, working on improved customer service and building a new showroom in Dora. 

Volvo is also banking on financing to bolster sales. “We want to double sales in the next few years through financing, to 200 to 300 cars a year,” said Marwan Naffi, general manager of Gabriel Abou Adal and Partners, distributor of Volvo. 

Building new showrooms is a recent strategy among dealers. Volvo plans to build a flagship showroom in Ashrafieh, while Mazda and Nissan look to new showrooms on the coastal road north of Beirut. Impex plans to build a new one in Beirut, and dealerships are going more regional in outlets rather than being focused on the capital. 

While such a move is considered necessary to bolster sales and retain customers in the lucrative after-sales market, some dealerships are not happy about it due to the current tight margins, as the new spaces are being forced on them by regional headquarters in the Gulf. 

“We wouldn’t have invested now due to the situation, but regional management is based in Dubai where it is stable and there is the mood for branding. If the region were broken down, to Syria, Lebanon and Jordan, they wouldn’t have asked for expansion but we’re included in their Middle East plans,” said one dealer.

Optional extras

With the market extremely competitive, as it is around the world with car sales projected to grow by just 5 percent this year, from 75.69 million cars in 2011 to 79.70 million, it is optional extras and new technologies that are setting brands apart in the higher end categories. Volvo is to introduce its Polestar technology — similar to Mercedes’ AMG — which is a chip that boosts engine power by up to a fifth, and next year will launch the V40, which will have a pedestrian airbag, a global first as part of its 2020 strategy to have no mortalities connected with a Volvo, whether inside or outside the vehicle. 

Meanwhile Cadillac is to launch a new compact luxury model, the ATS, to tap into the trend for smaller vehicles, and in other models introducing its CUE technology, a combination of intuitive control, like smart phones and tablets within the car, with the US brand having patented the technology for two years. 

Such extras are expected to bolster sales in what has been a poor year for sales of luxury and premium vehicles. No Ferraris, Lamorghinis, Rolls Royce or Maybach have been sold so far, and just two Aston Martins and eight Bentleys, whereas by the same time last year 10 Aston Martins, nine Bentleys, and one Lamborghini were sold. Maserati, however, is up by two units on last year to 17.

As we move into the last two months of the year, dealers are hoping that the government does not decide to reintroduce diesel for passenger cars [see page 68] or increase value added tax from the current 10 percent. “It would be stupid to raise VAT as it would kill the market completely, which is already going through a very severe crisis,” said Samir Homsi.

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.”

Vresso
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.

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. 

Brahimi offers long shot for Syrian peace

Global Times

http://www.globaltimes.cn/content/732898.shtml 

The bodies keep piling up, thousands of people have fled Syria, money keeps pouring in to fund the conflict, and diplomatic efforts are seemingly at an impasse. In short, the Syrian civil war looks like it is destined to spiral further out of control unless a diplomatic solution is somehow achieved.

But for words to work instead of violence, diplomatic efforts have to come from Middle Eastern actors. Any solution imposed by non-regional actors like the US or via military intervention by NATO will only add fuel to an already raging fire.

However, inter-regional solutions to the Middle East's conflicts have been few and far between, with the last success story perhaps the Taif Agreement in 1989, when all parties sat down in Saudi Arabia to hammer out an end to Lebanon's 16-year civil war. This time, Riyadh is not willing to act as mediator, but instead has become deeply involved in backing the Syrian rebels, providing cover for private financiers to arm the fighters, and producing favorable media coverage of the Syrian uprising.

That a man central to ending the Lebanese civil war, Lakhdar Brahimi, has replaced Kofi Annan as the UN envoy to Syria, and is also the Arab League mediator, initially seemed promising given how widely respected Brahimi is and his track record. But already the outlook is not good, with Brahimi telling the BBC last week that attempts to diplomatically end the conflict are "nearly impossible."

Indeed, on one side there is the entrenched regime of Bashar al-Assad which appears bent on stubbornly following the same route as the former Libyan regime, going down with the sinking ship. When Egyptian President Mohamed Morsi spoke in Tehran in late August at the Non-Aligned Movement (NAM) summit of the Syrians' struggle against an "oppressive regime" and his support for a "peaceful transition to a democratic system of rule that reflects the demands of the Syrian people for freedom," the Syrian delegate walked out.

Syria however is not alone. Damascus is supported by Moscow and Tehran, with neither backer willing to give up Syria's geo-strategic position as a warm water port for the Russian navy and its part in Iran's "axis of resistance," while both players benefit politically from opposing US hegemony.

On the other side is a motley crew of rebel fighters, ostensibly working together under the banner of the Free Syrian Army (FSA) to overthrow Assad, that is supported by Turkey, NATO, the US and the Gulf states, in particular Qatar, Saudi Arabia and the United Arab Emirates. Notably, the rebels have appeared to make major inroads lately in their assaults on Syria's major cities. The rebels are not going to back down now and the regime has everything to lose.

One reason Brahimi has a nearly impossible task in Syria is the questionable credibility of the UN, dominated as it is by the Security Council, and that of the Arab League, which expelled Syria in November from the 22-nation club and is unashamedly a tool of the Gulf states.

It is not too late to rise above real-politik cynicism though, especially if Brahimi can tie his policies to the Syria Contact Group proposed by Morsi, to consist of Egypt, Iran, Saudi Arabia and Turkey. Quite remarkably, Morsi managed to get Iran and Saudi Arabia to the table. Riyadh's role in supporting the rebels is clear, and Tehran's support of Damascus is even clearer, but this gives all the more reason to talk of solutions given their respective leverage.

While the recently unthinkable troika of Cairo, Tehran and Riyadh may come up with a solution if the contact group moves forward, it will not succeed without Turkey being in on the talks. Istanbul openly supports the FSA and hosts NATO bases that are providing operational support to the rebels, and has re-buffed the group, barely showing when invited to NAM.

If the contact group can get together to agree on a regional solution, and then send emissaries to Washington and Moscow to secure international backing before turning up in Damascus, "nearly impossible" diplomacy may turn into possible solutions.

NAM in spotlight as global South reemerges

Illustration: Sun Ying

Global Times | 2012-8-27 http://www.globaltimes.cn/content/729345.shtml

Non-Aligned Movement (NAM) summits have typically been treated as non-newsworthy events by Western media. But this NAM summit, which began Sunday in Tehran, has aroused unusual interest.

The attention focused on the 16th NAM summit is not due to the movement's founding principles of peaceful coexistence and standing against Western hegemony and neo-colonialism. After all, such aims are not deemed newsworthy, but are instead considered as rather wishy-washy utopian and naive ideals, if not downright knee-jerk anti-Western rhetoric.

The significance of NAM, set up in 1961 in Belgrade to provide a voice for the Third World and create some political talking space in a bipolar world, has admittedly waned in the two decades after the end of the Cold War and US triumphalism in a unipolar world.

While NAM has struggled to find its footing in a new world order, it has shown that the people of the global South still have a voice and that the desire for equal footing in global affairs is still there. Over the past decade the movement has been given a boost by the economic rise of the BRIC countries (Brazil, Russia, India and China), the political swing against the US and institutions like the International Monetary Fund (IMF) and World Bank in South America, and the gradual shift eastward of economic power since the 2007 financial crisis.

One only has to recall how obsequious former British prime minister Gordon Brown was in 2008 when he went to the Persian Gulf cap in hand to beg for bailouts and financial assistance for the IMF. When the United Arab Emirates and Qatar, both NAM members, stumped up cash, Brown was forced to concede that countries that contributed in this way should have a greater say in the overall governance of the IMF.

While nothing has changed in the IMF's governance, Brown's statement is indicative of potential changes in the economic order. Likewise, foreign creditors of US federal debt has ballooned since 2007, going from $2.4 trillion, or 53.5 percent of total debt, to approximately $5 trillion, or 56.9 percent of total debt in 2011. If change is to happen in the relations between the North and the global South, then it may well come through economic leverage rather than political demands.

But while changing capital flows may make some in the West sit up and take more notice of the "darker nations," this NAM summit is getting attention for political reasons. The recently elected president of post-revolutionary Egypt, Mohamed Morsi, snubbed an invitation to visit Washington in favor of a visit to China and then to attend NAM.

While this is diplomatically significant, the main reason for the renewed focus on NAM is that it is being held in a country the West has tried to isolate for three decades, recently slapped on tough economic sanctions, and is threatening conflict over its alleged nuclear weapons program. Unsurprisingly the US and Israel have condemned the summit, with the US State Department stating Iran was not "deserving" of being the host. Both countries have urged UN Secretary-General Ban Ki-Moon to not go to Iran.

However, the place for the head of the UN is certainly at a gathering of leaders that represent the majority of the world's population. It would in fact go against the founding principles of what the UN is supposed to be about, uniting nations, for Ban to not be there.

What riles the US and Israel is that the summit may undermine their efforts to isolate Tehran at this time, that there has been overwhelming support among NAM members for Iran to develop nuclear power for peaceful purposes, and that NAM supports a nuclear-weapon-free zone in the Middle East.

That Iran will try to maximize its position as the host and next leader of NAM to bolster its international standing is a given, but what member states will decide upon is another matter. Indeed, Tehran will try to rally support for its ally Syria at the summit, but this may prove hard to do, with 70 out of the 119 NAM members in favor of a UN General Assembly vote in early August condemning the Syrian government's violence against its people, and only eight voting with Syria, Iran, China and Russia.

What is certain is that under Iran's leadership, NAM is likely to be more vocal on the world stage than it has been for decades, and because of that may very well garner more media coverage outside of the global South.