Muddling through

Lebanon’s industry hopes for a better 2015

Technica manufactures automated production lines (Executive |Greg Demarque)

For Lebanon’s manufacturers, 2014 was a difficult year. The promising gains the sector had made in the preceding year were diminished as the many oft-cited impediments — those of political and security instability, and high operating costs — hindered a continuation of industrial growth. It was, at best, a year in which factories muddled through the wasteland that is the country’s ruined economy — encapsulated in November when Minister of Industry Hussein Hajj Hassan called for an economic state of emergency. But as difficult as 2014 was for mainstream manufacturing, there were indicators that, at least in the niche subcategories, point toward a more hopeful 2015.

Plenty of obstacles

The first half of 2014 was indeed a bumpy ride for the sector. Exports declined by 12.5 percent compared to the same period the year before, totaling $1.58 billion in the first six months. Imports, meanwhile, reached $140 million, declining 15.7 percent from the same period in 2013. While the sector has not traditionally been the driver of Lebanon’s economy — tourism and services have overshadowed manufacturing in terms of steering gross domestic product (GDP) growth — 2013, when the economy grew a meager 1.5 percent, was pushed forward by the manufacturing industry.

[pullquote]Manufacturing is a driver of employment in Lebanon[/pullquote]

Statistical data on the sector is sketchy as Executive noted — not for the first time — in its industry special report earlier in 2014. A former president of the Association of Lebanese Industrialists (ALI) guesstimated the sector’s contribution to 2013’s GDP at about 10 to 12 percent; the Investment Development Authority of Lebanon (IDAL) on its website reports that industry contributes only 7.5 percent to GDP annually; the World Bank, meanwhile, cites the most comprehensive figure — its methodology is robust and publicly available — on manufacturing’s contribution to the nation’s GDP at 8.6 percent in 2013.

Naysayers will point to the obstacles obstructing their paths. Security concerns throughout the country and region have discouraged productivity, and raised the costs of shipping, as factories have had to reroute paths of export to Lebanon’s primary markets in Arab countries, which accounted for 53 percent of industrial exports for the month of June 2014. Where once these paths traversed by land through Syria to Saudi Arabia, the United Arab Emirates and Iraq, they are now using sea routes. And while the cost — according to ALI data — of clearing inbound trucks carrying raw materials for use in Lebanon’s factories used to be somewhere around $7 per ton, clearing containers through the Port of Beirut costs a pricey $70 per ton on average. The waves of political instability — an oft-cited inhibitor of growth in any sector — might be less choppy in 2015 as the Parliament has extended its mandate. The hope is that a new president will also be elected in the opening months of 2015, leading to a period ripe for legislation, lending stability and setting the stage for growth in the coming years.

Phoenix Energy: automating manufacturing Greg Demarque | Executive

Phoenix Energy: automating manufacturing

The high cost of energy, too, hinders manufacturing, where factories generally rely heavily on energy inputs to produce their products. Ask any owner and the likely response is that their factory must pay two electricity bills — one for the state and one for a private generator — on top of its raw material costs. While it is very premature to say that a revolution in the production of electricity is underway, there are indicators of some structural changes to the way the country generates electricity. For example, the UNDP’s CEDRO program — implementing large and small scale renewable energy projects — is installing photovoltaic systems (electricity harnessing the sun’s rays) in three Lebanese factories (LibanLait, LibanJus, and Gemayal Frères) that will supply the facilities with their electricity needs and feed oversupply into the national electrical grid. Likewise, the Beirut River Solar Snake — constructed by local company Phoenix Energy — is the first of 10 photovoltaic projects that form part of the government’s goal to build solar farms producing a total of 200 megawatts by 2020. Looking into the crystal ball over the coming decade, were Lebanon to become a natural gas producing country in the future, part of the government’s vision is to supply power plants with gas to generate electricity, and factories with gas as a feedstock — reducing energy input costs and enabling a diverse new range of production opportunities for manufacturers.

Finally, the lack of reliable and easily accessible data is arguably the Achilles’ heel of industrial sector governance in the country. But just as Executive wrote in its report on government statistics, private companies are stepping in to produce data that fits their needs. One such example comes from Technica — a manufacturing company specializing in the construction of automated production lines and robotics — which collaborates with other manufacturers to produce a baseline for labor and human resource data, including compensation, benefits information and other HR issues, according to the company’s strategy management officer Cynthia Abou Khater. 

[pullquote]Manufacturers like Technica are benefiting from industrial zones throughout the country[/pullquote]

Supporting manufacturing

Manufacturing is a driver of employment in Lebanon, contributing from 130,000 to 140,000 jobs, depending on whether you rely on ALI or IDAL figures. Many of these individuals are employed by family owned businesses and other small and medium sized enterprises (SMEs). Minister of Industry Hassan, citing unemployment numbers, pointed out in November that more support is needed for these companies to — among other improvements — increase job opportunities.

When looking at what limited data is available in the country’s manufacturing sector, one might simply consider the decline in total exports as a negative indicator. Upon closer examination, however, Lebanon’s main export product was its jewelry — much of it handcrafted and featured in Executive’s luxury special report. Jewelers are typically family owned businesses exporting approximately $431.7 million, or 17.3 percent of total exports through the first nine months of 2014, according to a report by Byblos Bank.

Jewelry and furniture manufacturing are two subcategories that will receive technical assistance from the latest phase — launched in mid November 2014 — of a UN Industrial Development Organization and Ministry of Industry collaboration aimed at boosting the manufacturing quality of products. This support is sorely needed to further strengthen the production and export capabilities of Lebanon’s talented craftsman and artisans, as Executive wrote earlier this year, targeting not only the luxury markets but also mid range and economy products.

Similarly, the Lebanese Center for Policy Studies launched a series of roundtable workshops with industry stakeholders in September 2014 — including the Ministry of Industry, ALI and private sector actors — to identify products that Lebanese manufacturers could potentially produce and export across manufacturing subcategories, such as machinery equipment, furniture, textiles and clothing.

One such program, to leverage the talents of small businesses and boost jobs in rural areas, comes from the US Agency for International Development’s Lebanon Industry Value Chain Development (LIVCD) program — though the project in its current stage focuses exclusively on agricultural products, rather than manufacturing. It is, however, an example to replicate for the SMEs in manufacturing, where simple products can promote in-country value chains with the goal of integrating local products into regional and global value chains.

Promoting SME manufacturing capacities and developing value chains would boost sophistication and product value, in turn bringing more wealth back to the factories and into the greater economy. A 2010 report published by the United Nations Conference on Trade and Development outlined how government policy might approach industrial integration into value chains, but the report also highlighted the obstacles facing support for SME integration. According to the report, governments “have industrial policies and may promote certain economic sectors, they have been less supportive of SMEs … nevertheless, there is growing awareness of the contribution of SMEs to income, employment and exports.” Though linking SMEs and local suppliers of goods and services into regional and global value chains is no simple feat, the effects of doing so can positively impact local economies, labor and trade.

Incentives for manufacturers

In many cases, the difficulty of operating in Lebanon can prohibit a business’ success, but even in the most arid of deserts plant life persists. Panning Lebanon’s manufacturing landscape identifies several such companies and entrepreneurs that are thriving, in part with support from the government. Technica — the manufacturer of automated production lines — is one such example. From what started as a small operation in a single car garage 32 years ago, the family owned business is forecasting revenues of approximately $15 million for 2014, and will finalize expansion of its production floor capacity in late 2015 — the company has clearly found its niche in building automated technologies.

Manufacturers like Technica are benefiting from industrial zones throughout the country. To spur investment in the sector IDAL has, on behalf of the Lebanese government, simplified the work visa process for companies needing specialized foreign labor not readily available within the Lebanese workforce, while also emphasizing a number of tax incentives and permit fee reductions to companies establishing operations in these specified zones.

State of the art industrial unitGreg Demarque | Executive

State of the art industrial unit

Likewise, the niche entrepreneurs and SMEs of Lebanon are formulating new solutions for the manufacturing sector, receiving support from Kafalat — the government sponsored loan guarantee company focusing on SMEs. According to a quarterly report by Bank Audi, financing for industrial sector SMEs recorded a rise, with the number of loans increasing by 15.4 percent year-on-year during the first half of 2014. Executive’s Entrepreneurship Top 20, an annual survey of the country’s most innovative startups, has featured many SMEs in past surveys benefiting from the Kafalat loan scheme — using the money to reinvest and expand operations. 

The Top 20 edition of 2014, which focused on entrepreneurs in science and technology, featured one collaborative business effort leveraging its founders’ academic background in mechatronics — a holistic engineering approach to the field of robotics — in building robotic devices for prospective clients. Though not a formal company, the collaboration, E2, is benefiting from close ties to the entrepreneurship and academic communities, with ties to Beirut Digital District and the American University of Beirut — itself in the process of establishing an incubator to support its talented student body and faculty in transforming academic work into business models.

There is, however, an expressed need for the modernization of, and access to, industrial technology for Lebanese companies. Manufacturing could benefit from more money pouring into research and development to modernize industrial technology. Several programs within government institutions, such as the National Council for Scientific Research or the Industrial Research Institute, support this category of research, but the researchers are hindered by a lack of adequate funding, minimizing the scope and quantity of unique research projects. “In Lebanon there are no funds, the government is really — if you compare to other countries how much they fund — [providing] practically zero,” says Fadi Fayad, business advisor to ELCIM, the Euro-Lebanese Centre for Industrial Modernisation. More financial support from the government or the donor community might boost industrial research and development; likewise, links to research uptakes for practical applications in the factory setting deserve strengthening.

[pullquote]“In Lebanon there are no funds, the government is really … [providing] practically zero” [/pullquote]

Embrace flexibility

 So, while Lebanese manufacturers have been clawing their way through the economic struggle that was 2014, they should still be commended for their unwavering application of elbow grease. Fresh challenges and opportunities will surely lie ahead for them in 2015. In recent years Lebanon has entered into a number of trade agreements — like the most recent agreement to export products to the Russian markets — and trade liberalization is likely to continue into the future. Lebanon is still intent on joining the World Trade Organization; Lebanon’s Customs Administration — the body governing import and export policy in the country — has recently taken to modernizing its clearance process to introduce e-governance and reduce costs, while optimizing efficiency, intent on aligning with international trade standards.

As noted in previous reviews of the sector, the government will still need to strive to get its act together and provide manufacturers with the stable operating environment and infrastructure investment that will spur innovation and productivity, while reducing operating costs.

And, for their part, manufacturers must strive to be flexible in approaches to innovation in the ever difficult and changing operating environment in Lebanon.

Correction: An earlier version of this article erroneously claimed that when completed, Lebanese solar projects would produce 10,000 megawatts — a ridiculously high figure. The first phase of the Beirut River Solar Snake is slated to produce 1.08 megawatts at peak capacity, while later additions promise a total of 10 megawatts. More generally, the government has set a national goal of building solar farms producing 200 megawatts by 2020. Very sorry.

Jeremy Arbid

Jeremy is Executive's in house energy and public policy analyst.