By all forecasts and estimates, 2015 was slated to have been a disastrous year for the automotive sector. Not just because of regional instability and sluggish economic growth, but more so the mandated increase in down payments.
Dealerships had been offering up to 100 percent financing on new cars, which had helped to keep annual vehicles sales at over 30,000 units, particularly in the compact and cheaper segments. Concerned that private debt was a potential bubble that could burst, Banque du Liban (BDL), Lebanon’s central bank, issued a circular in October 2014, requiring a minimum 25 percent down payment on vehicle and real estate purchases.
Dealers were up in arms about the decision, saying it would cause car sales to slide amidst a difficult economic environment, with some – including the Automobile Importers Association (AIA) – forecasting a drop of up to 30 percent.
But instead of a plunge in 2015, car sales were up by 2 percent, as of the end of October, with 32,811 cars sold compared to 32,084 in 2014. The sector did not return to the levels of more than a decade ago, when total year sales in 2004 were 19,100. Indeed, the sector has managed to keep sales around the benchmark set in 2008 of 35,400 units sold per year, which had been driven by easier bank financing.
Furthermore, not all sales are accounted for in the AIA’s monthly statistics. “Sales don’t really indicate the sector perfectly, as there are a lot of deals and sales without cars being registered. If you compare 2015 to 2014, revenue has grown due to record sales. Dealers have incentives: we have stock and need to sell, and so are giving larger discounts,” says Fayez Rasamny, general manager of Rymco, dealer of Nissan and Infiniti.
However, despite the lack of perfect sales statistics or the widely accepted 2 percent sales increase, this does not imply that the sector is in rude health and consumers were not fazed by the down payment. Competition has been tough since the so-called “Arab Spring” erupted in 2011, and has only gotten tougher. “The majority of us are surviving at the expense of profitability. This survival mode was supposed to last six months to a year, but has been over three years now, so it’s somehow become a new way of living,” says Marwan Naffi, general manager at Gabriel Abou Adal & Partners, distributor of Volvo.
Veteran car dealer and honorary president of the AIA, Samir Homsi, summed up the overall situation. “Everybody is shooting at everybody and all the dealers were under pressure from manufacturers to deliver. In order to deliver, marketing and advertising budgets increased over 2014, and prices were reduced tremendously, so margins are very low,” he says.
The saving grace for the sector unexpectedly came from outside – the depreciation of the euro and the Japanese yen. A more advantageous exchange rate bolstered European and Japanese car sales, partially offsetting the down payment increase, while making brands more competitive against Korea’s Kia and Hyundai, which had grabbed more than 40 percent market share for the past several years due to low pricing and growing brand equity.
“When the yen went down, there was immense pressure on Korean brands to reposition models in pricing, to reduce the gap, and by doing so, everyone else had to follow. At the end of the day, this cushioned the impact of the down payment. If the yen and euro had stayed high, then definitely the drop would easily have been 30 percent,” says Farid Homsi, general manager of IMPEX, distributor for Chevrolet, Cadillac and Isuzu.
Japanese and European brands rebound
The currency devaluation of rival brands and the down payment have hit the Korean brands, despite the Korean won retaining its export competitiveness. Comparing last year with 2015, Kia and Hyundai have lost 8 percent market share, going from 13,535 models sold at the end of October 2014, with 42 percent market share, to 11,310 units, or 34 percent of the market.
Kia has retained the top sales spot, but Hyundai was bumped from second position by Toyota, with sales up 50 percent (BUMC, the Toyota dealership, did not respond to interview requests).
“It’s been a real comeback for the Japanese and Europeans, despite the Koreans having built up a reputation,” says Antoine Boukather, chief executive officer & manager of ANB Holding, dealer for Mazda, which had a 10 percent sales increase this year.
Suzuki had a particularly good year. “Suzuki is now back to third position in Japanese sales, right behind Nissan and Toyota, grossing 250 percent versus 2014. The yen helped a lot and secondly, Suzuki launched a lot of new models the past year and is supposed to launch six models within three years, to 2017,” says Nabil Bazerji, managing director of G.A Bazerji & Sons, distributor of Suzuki and Maserati.
Dealerships attribute the drop in Korean brand sales and the rebound of Japanese and European brands to the cyclical nature of the car market. American and European cars had long dominated sales in the country, but market share started to be chipped away at by the rise of competitive Japanese models in the 1980s and 1990s. In the late 2000s, it was Korean brands’ turn to muscle in on the market through low-priced models and increased brand equity. Then a few years ago, newcomer Chinese brands started selling well, riding on the back of the shift to smaller cars and easier bank financing. Indeed, in 2013, Chinese brands were forecast to start gaining market share at the expense of the Koreans, much as Korean brands had elbowed out the Japanese and European brands.
Local dealerships entered into import exclusivity deals with Chinese brands, anticipating growth in a market that was increasingly dominated by small car sales. However, as the Koreans are experiencing, albeit to a lesser degree than the Chinese, brand heritage and a track history is hard to challenge over the long-term. This year, sales of Chinese brands plunged by more than 50 percent, from 469 in 2014, to 224 units. “It is very easy to sell cars, but it’s difficult to sustain sales (in the long-term). We will see brands peak and go down, but they could rebound if they manage to sustain sales for another 10 years,” says Rasamny.
The extra competition affected the Korean brands’ drive to bolster sales of larger and more premium models. “For the past three to four years there’s been a shift to smaller cars. Last year we were trying to enhance sales of larger cars, but this year, the yen dropped and made Japanese brands more price competitive, so we’ve shifted the focus again to small cars. So far, we’re targeted to remain at around 15 percent market share. We’re still number three in retail and aiming for number two by year end, given years of successive growth. Hyundai doesn’t want to be number one as it lacks the capacity to do so, but to be what it calls ‘the most beloved car company’,” says Rachid Rasamny, general manager at Century Motor Company, distributor of Hyundai and newly launched luxury brand Genesis.
Down payment impact
The wider impact of the down payment on car sales has yet to be fully felt. In part this is due to what one dealer called “greater creativity by the banks”, which have been providing consumers with two loans, one a standard car loan, and the second a private loan at the same conditions as a car loan.
What is clear is that the down payment increase impacted lower end car sales, which had been dominated by sales in the A and B segments – compact and small cars. “The A segment is very crowded today, and $100 can break a deal, which is why there’s massive competition and price fluctuations,” says Farid Homsi.
Retaining sales in the lower end segment, and the sector overall, is the need for a car due to the dearth of reliable public transport (see box). “The fact that a vehicle is a necessity to commute gives importance to small car sales and why overall sales are doing OK. But it’s extremely tough to operate in this segment, as nearly all brands have small models,” adds Homsi.
Of greater concern for the sector is the pinch in sales in the medium segment, which had dominated the market prior to the rise of the Korean brands and provided dealerships with higher margins than smaller models. “The market is moving in two directions. The middle size segment is fading away, to the benefit of the smaller cars and bigger sports utility vehicles (SUVs),” says Cesar Aoun, general manager of Mercedes at T. Gargour & Fils, which also sells Smart, Jeep and Chrysler.
Such a move follows a global trend for SUVs instead of hatchbacks or sedans, with SUVs 23 percent of the market’s sales compared to 18 percent in 2014, says Pierre Heneine, financial manager at Bassoul-Heneine, dealer for BMW, Mini, Renault, Dacia and Rolls Royce.
“The C and D (mid-size) segment is somehow weak, leaving us with two categories today, cars going for $8,000-$20,000 and above $40,000-$200,000,” says Nagy Heneine, general manager at Bassoul-Heneine.
But due to the demand for a variety of car models, from the small A segment car all the way to the large vehicle G segment, competition is set to rise further, while impacting on dealership margins to provide services and after-sales for a wide range of models.
“This is a challenge for distributors in terms of stock inventory, marketing, training, tools and spare parts, as more investment is required, so there’s more and more pressure on margins and profitability. That’s why we have to be more creative in up-selling and cross-selling additional services and features,” says Aoun.
New models
High end, premium car sales account for 3 percent of the overall market, according to the AIA. Sales in the premium category are considered stable, although down by half a percentage on 2014. “If you look at Bentley and Lamborghini sales, they’ve not moved on last year,” says Michel Trad, general manager of Saad & Trad, dealer of Fiat, Jaguar, Bentley, Lamborghini and Abarth. As with the whole sector, it is new models that are keeping sales buoyant. “When there are new models in the market people go crazy, and we get more interest from consumers,” he adds.
New models and good exchange rates led to some major increases in sales for certain brands. Land Rover is enjoying particular popularity, with 477 sold in 2015, while Porsche sales were up on 2014, to 270 units. Going beyond expectations, IMPEX had its best ever yearly sales of the Chevrolet Escalade, and Volvo sold out its new XC90.
“For BMW we had our best ever year in 60 years, up 89.5 percent, to 874 models, and Mini sales up 66.4 percent” says Nagy Heneine. Key models pushed other brands, with sales at Dacia up 15 percent due to an automatic model of its popular Sandero model.
Outlook for 2016
Dealerships are forecasting a slow sales year ahead with even more competition. “We project a flat year ahead. Anything positive, like a solution tomorrow for the trash crisis, might help in the short term, for one or two months, to work on consumer confidence,” says Aoun.
Such a confidence boost could also come from the appointment of a president to fill the void since Michel Sleiman left office in May 2014. “What we urgently need is to have confidence back, and the strongest way for this to happen is by electing a president. The day this happens, it will automatically trigger confidence and more sales,” says Boukather.
However, some think a new president would provide more of a boost to higher end cars as the purchasing power of consumers in the lower segments remains weak. “For mass brands having a president or not doesn’t make much of a difference, but for luxury brands it has an effect; the whole mood is crucial for luxury sales,” says Abou Adal & Partners’ Gabriel Naffi.
All in all, 2016 is expected to be another challenging year. “At this stage, it is definitely looking challenging, and we’re not sure what to expect. We’ll give our maximum wherever we can,” says IMPEX’s Farid Homsi.
