At the end of every year, automotive dealers typically begin massive liquidation campaigns to get rid of their older stock and make way for newer models. The 2014 campaigns are set to be more drastic than usual, as distributors face tremendous challenges that are curtailing their sales and piling up the amount of inventory sitting in their stockyards.
Despite the ongoing civil strife in Syria and its spillover into Lebanon, as well as the presidential impasse — now in its sixth month — Lebanon’s shaky economy has still managed to grow slightly. Meanwhile, the automotive industry posted an 8 percent growth in sales in the first nine months of 2014 relative to the same period in 2013.
This growth is partly attributed to the resurgence of Japanese manufacturers, who have introduced competitively priced new models into the Lebanese market, supported by a 40 percent depreciation of the yen in the last two years. The growth is also led by the continued shift towards smaller cars, known as A and B segment vehicles. In fact, in the last five years there has been a paradigm shift by Lebanese consumers towards economically priced, more fuel efficient smaller cars, which has led to a large sales growth in this segment.
But in late August, Banque du Liban (BDL), Lebanon’s central bank, unexpectedly issued Circular 369, requiring a more stringent down payment on retail loans. This announcement came as a shock to most as the default rates in 2014 remained relatively low and unchanged versus the previous year at just below 3 percent. The new rules, which went into effect October 1, require a minimum down payment of 25 percent on all future retail loans, including automotive and housing loans from Lebanon’s banks and financial institutions. While this move may make sense on a macroeconomic level, it has hindered most low to medium income families, many of whom will struggle to afford such down payments and face a lack of alternative means of transportation. These families — with monthly incomes ranging from $2,000 to $4,000 — usually purchase cars that cost $10,000 to $20,000, which means that they will now have to deposit a minimum of $2,500 to $5,000, respectively.
[pullquote]This stringent circular is premature at best and will leave many Lebanese consumers struggling to commute[/pullquote]
A short sighted move
With the lack of an efficient public transportation system in the country and given Lebanon’s economic situation, this stringent circular is premature at best and will leave many Lebanese consumers struggling to commute. The last acquisition of public buses by the Lebanese government was over 16 years ago and only about a dozen are left on the streets today. The government’s plan to purchase 250 buses and have them on the roads by the end of summer 2014 unsurprisingly never took place. That is not to mention the still nonexistent train system.
From a car dealer’s perspective, at a time when the growth in the market is derived mainly through fierce competition, including price cutting by new automotive distributors, BDL’s circular has effectively curtailed sales in the most volume making — and low margin — segments. With their stocks now expected to pile up given the shock circular, distributors are now faced with two options: either contend with an increase in inventory or undertake large scale liquidation sales to deplete stock. Most will choose the latter, as huge working capital requirements, which is the minimum amount of resources dealers need to cover their operating costs, oblige automotive distributors to generate sales. To entice customers to purchase vehicles, car dealers are expected to begin lucrative campaigns, including offers ranging from lower interest rates to free registration, insurance and maintenance. Some dealers may even begin to internally finance customers who are unable to meet bank requirements, an unregulated and extremely risky financial undertaking.
Whatever method distributors adopt to enhance sales, the circular is bound to eventually provide customers with more rewarding offers in the short term as dealers will be scrambling for sales and coming up with more and more creative ways to adapt to customers’ limited payment means.
In the next year, however, dealers will most likely have to cut down on the inventory ordered to avoid such margin crushing campaigns and instead cope with lower sales volume. Customers will be faced with a stringent down payment, given the lack of other options for their daily commutes.
The BDL circular, an initiative that aims to support the economy by preventing a potential increase in consumer defaults, would have been better introduced in more economically friendly times or, even better, when the country would have finally adopted a more efficient public transport system.