Lebanese move towards smaller cars

Lighter wallets causes move away from 4x4s

It has been a year most car dealerships would not like to see repeated. The economic downturn, inflation, high gas prices and political uncertainty have taken their toll on sales, with only a handful of dealers meeting, yet alone surpassing, their sales projections. In short, the automotive sector is yet another segment of the Lebanese economy that can be considered to be in ‘crisis mode’.

At first glance there would seem little cause for concern, with sales stronger than last year’s. In the first four months of 2012, 10,169 new passenger cars were sold, an increase of 12 percent on the same period in 2011, according to figures from the Automobile Importers Association (AIA). While sales slowed down over the summer, by the end of August sales were still up, by 7.6 percent on 2011, and up 2.1 percent on 2010, indicating that unit sales in 2012 would reach the benchmark figure set in 2008 of more than 30,000 new cars sold in one year. As of the end of October, overall sales had reached 29,198 units, up 6.28 percent on the previous year.

“Overall sales of new cars are very close to last year in terms of volume, although it’s not real growth,” said Nabil Bazerji, dealer for Suzuki, Lancia and Maserati, given that these statistics are for volumes, not turnover or dealership profits.

And it is turnover that is giving dealers headaches when they crunch the numbers, as 2012 has proved for the fourth year running that Lebanese are increasingly opting for small cars, with cars under $11,000 now accounting for an estimated 90 percent of all sales according to the AIA. This is important as, while selling a car is arguably, well, selling a car, the difference in margins between a vehicle with a $10,000 price tag and one twice or treble the price is huge, being around just $500 for a compact model; when you consider a dealership’s overheads, advertising campaigns and so on, that profit disappears about as fast as a liter of gas in a Hummer. As one dealer remarked off-the-record, “A mobile phone retailer has a higher margin on a mobile than we do on compact models.”

So, while volumes may be marginally better than last year, it is the smaller cars that are propping up the figures and making the sector seem falsely buoyant.
“There is a crisis when the market is up 6 percent but the luxury sector is down by over 10 percent,” said Pierre Heneine, financial manager at Bassoul-Heneine, dealer for Renault and Dacia. “Consumer confidence has been down for the past two to three years, and is down every month; why would you buy a luxury car?”

Unsurprisingly then, it is the brands with compact models that are having the best sales, and this has resulted in a kind of oligopoly, with seven brands accounting for three-quarters of sales, despite 70 brands being available on the market. Kia, Hyundai and Nissan are the top three sellers, with the Koreans brands accounting for 45.1 percent of the market and Nissan with 15.9 percent, followed by Toyota, Chevrolet, Renault and Volkswagen with a collective 15.46 percent.

“The Koreans have taken over the Toyota empire. Elsewhere in the world Koreans have risen, but they haven’t taken the same share like here,” said Marwan Naffi, general manager of Gabriel Abou Adal and Partners, distributor of Volvo. Kia has 27.2 percent of the Lebanese market, with 7,962 units sold as of the end of October, making Lebanon the only country in the world where Kia is the top-selling brand. Hyundai trails close behind with 17.91 percent of the market, at 5,230 units sold. For Renault, it has been “their best year since 1975,” said Heneine, with sales up 9.67 percent, with 1,066 units sold, and Dacia up 23.81 percent, with 338 cars sold.

Chinese brands have also had a bumper year, up 85 percent on 2011 with 308 cars sold, although accounting for just 1.18 percent of the market. Geely, which entered the market in June and is represented by Rasamny Automotive Industries — also the dealer for Hyundai — sold 143 cars in less than three months, signaling strong demand for low-priced models and raising questions whether Chinese brands could, in the near future, be the next usurper after the Koreans. After all, it was European car designers that turned around Korean brands, and Geely, for instance, has acquired Volvo, from which it is expected to benefit from Swedish design and technology expertise.

A perfect market

The dearth of public transport has driven demand for small vehicles as city run-arounds, and the transport ministry’s plan to introduce 250 public buses in the near future is not likely to dent sales of compacts until a more nationwide plan is, if ever, implemented. High fuel prices are pushing compact sales further, averaging more than $20 for 20 liters this year, and this has also had an impact on used car sales, down 17 percent on 2011 as of September, a trend compounded by dealerships pushing three to five-year warranties and service deals on new wheels. “People are asking about fuel efficiency. With the minimum wage $500 a month, people have no choice but to opt for a small car,” said Dayala Dagher, Natco, distributor of Kia.

There may also be a correlation between the surge in sales of compact cars, the drop in used cars sales and the loss of cheap smuggled fuel from Syria due to the conflict there, a supply loss which has been offset by Lebanon’s imports of oil and mineral fuels surging 89 percent in the first half of the year relative to 2011, to $3.2 billion, according to Bank Byblos data.

 

Losing the middle ground

Dampened economic sentiment in general has clearly impacted car sales, certainly in the above-$20,000 price bracket, and it has been a bad year for luxury car sales. “There is a crisis in the automotive sector and it is affecting the mid-class car segment, at $25,000 to $90,000, which was the core of the business,” said Bazerji. “Does it mean the middle class is poorer? If so, it is very dangerous for the economy of the country.”

The former cars of choice for Lebanese, German luxury brands such as BMW and Mercedes, while still enjoying relatively good sales, have seen sales of used models plummet; consumers are not just downgrading to cheaper Korean compact models, but sedans and sports models as well.

“Kia can now not be viewed as solely low cost, as people are upping their budgets. Before it was only $10,000 for a Kia, now it is $20,000 to $40,000 plus,” said Dagher. “And mentalities are changing. Former Peugeot, VW and BMW drivers are now switching to Kia as the quality and design has improved.”
In a market where dealers are seeking just a slither of a pie dominated by seven brands, this has resulted in price wars between mid-range and luxury brands, even to the detriment of brand equity. “There is competition in the luxury segment and it is affecting margins. And when a car sells for $55,000 and is then reduced to $38,000, what happens to the resale value and the brand equity?” said Cesar Aoun, general manager of Gargour and Fils, distributor of Mercedes, Smart, Jeep, Chrysler and Dodge. “The other school says ‘introduce the new model at $55,000 and then increase the price, as the customer will be happier as it is more of an investment’. It is like Rolex’s policy to increase prices by 10 to 15 percent every year, and why their watches still have value.”

Sales of Mercedes are down 7.95 percent, as of October, on the previous year, with 567 units sold in 2012, and Jaguar sales are down 18.8 percent, although BMW sales are up 43 percent on last year, to 567 units, attributed primarily to the release of the new 3 Series models.

In commercial sales, it has not been as bad a year as for passenger cars, with sales up 9.29 percent on 2011, from 1,743 units to 1,905 units. Renault-Dacia is this year’s number one in this segment, collaring 23 percent of the market.
Over in the rental sector, things have been far from rosy, due to a dearth of tourists. “It was killer this summer, with no business with rental companies whereas usually it’s a boost,” said Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet, Cadillac, Hummer and Isuzu.

No-show motor show

In such a downbeat environment, dealers were putting their hopes on a successful Beirut Motor Show in November to raise the sector’s profile, sell more units and offset a lackluster summer. But at a time when the dealers needed every boost they could get, it was decided in September to cancel the show due to political instability. The move has been criticized by dealerships, and some members of the AIA internally conceded in early October that the decision was perhaps not the right one.

“The downturn could’ve been countered if the motor show had not been canceled,” said Bazerji. “My point of view is it was a big mistake. Not only a mistake, a shame because we are not respecting an agenda of having this show every two years. When you’ve an agenda you follow it, whether it is a success or a flop.”

He added that, “Unfortunately the 2010 motor show was 6 years behind the last one, and while I accept 2006 was canceled, a force majeur, but other cancellations? …It is in a period of crisis that a motor show would be of use to the sector.”

Abou Adal’s Naffi also thinks it was a bad idea to cancel in the current doom and gloom. “It was a very bad idea not have the show, as it was needed to change the mood of the people,” he said. “The public have 1,001 things to worry about so we should’ve had the motor show as it would have changed the situation for 10 days and given us a strong sales hook, as the show has the highest traffic of all exhibitions in Lebanon with over 100,000 visitors.”
But other dealers think the costs of being at the show were economically unjustifiable and worth canceling. “In the two months leading up to the show everyone is waiting for it, so people don’t buy, and for two months afterwards you sell, maybe 3 to 5 percent more, but it is expensive to be there,” said Heneine.

“October started well but definitely since the assassination [of intelligence chief Wissam al-Hassan] things have been pretty slow,” said Homsi. “You feel consumers are a bit uncomfortable; we’ve had many potential buyers postpone.  October’s sales were down by 2.21 percent on the same month in 2011, with European and Japanese brands particularly feeling the downturn, slumping by 2.97 percent and 19.63 percent respectively on October 2011.
“You can’t forecast the rest of the year and the market is very much day-to-day,” said Homsi. “I think the last few months of the year will not be that easy and the figures will not be that strong.

Rough roads ahead

The outlook for next year is as unpredictable as sales for the last two months of the year, and there is no crystal ball into which dealers can look. The AIA has projected that the number of imported and registered new and used cars will have dropped to 70,000 in 2012, from 74,000 units in 2011, and 92,000 units in 2010.

“This market is unpredictable,” said Bazerji. “If the situation doesn’t deteriorate further, 2013 will be equal to this year, but it is directly linked to politics and the regional situation.” However, the economic forecast for next year is not overly promising, and there is also not likely to be a fall in oil prices. This is likely to ensure continued strong sales of smaller vehicles and the further marginalization of brands that don’t have compact cars in their line-ups. Dealers are, however, upping marketing campaigns, offering special deals, and opening new showrooms to encourage potential buyers to stop sitting on their wallets.
Dealers are also forecasting that the current market dominance by the Koreans will fade, especially if the Korean won appreciates relative to the Japanese yen. “I think the market is cyclical, and over the next four years people will move back to the European and Japanese heritage brands,” said Heneine. “And I think the trend for buying new small cars will lead to consumers shifting upwards to new, mid-range cars in the B and C segments, between $15,000 to $17,000. But for this to happen we need stability in the country and more consumer confidence.”

In the meantime, dealerships are opposed to a government plan to reintroduce diesel passenger cars, not only because of health hazards — the World Health Organization recently listed diesel as a carcinogen — but also due to the havoc caused in the market when the state changed diesel laws a decade ago, which dealers do not want to see repeated.  Dealerships are even more opposed to a plan to raise value added tax (VAT) by 50 percent on imported cars, from 10 percent to 15 percent. According to the AIA, this will lead to a 30 percent drop in car sales and an aggregate drop of $182 million in government revenues from customs duties, VAT and car registration fees. While the government estimates the VAT rise will lead to an additional $60 million in related tax revenues from imported cars, the AIA estimates that the net loss in government revenues from the VAT rise will reach $122 million in 2013.

“It is the wrong time to do this. The luxury market is down by 10 percent, so if VAT is increased by 50 percent it will completely kill the premium and luxury market,” said Heneine. “If VAT increases, we will have to think about our future strategies, and we won’t be hiring anymore staff.”

Instead of imposing the tax, the AIA is calling for the government to enforce the collection of unpaid road-usage fees, which are estimated at $56 million a year. According to the AIA, 829,000 registered cars, or 64 percent of total registered cars in Lebanon, pay road tax every year while 36 percent, or 467,000 registered cars, do not.

Paul Cochrane

Paul Cochrane is the Middle East Correspondent for International News Services. He has lived in Beirut since 2002, and has written for some 70 publications worldwide, covering business, media, politics and culture in the Middle East, East Africa and the Indian subcontinent.

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