Lack of consumer confidence affecting demand

Executive talks with head of the AAI, Antoine Boukather, about car sales in 2016

Illustration by Ivan Debs

Fewer new cars will drive onto Lebanon’s streets in 2016 as sales declined slightly from last year. A slower market and tighter profit margins for car dealers have worried some but, like many watchers of the country’s economy, they hope that an election of a president at the end of October will boost consumer confidence, leading to more new car sales.

Last year almost 40,000 new vehicles were sold in the country, concluding a string of small gains starting in 2012 that saw an average annual growth rate of 3.3 percent. This year new car sales are not as strong, down 12 percent year-on-year for the month of August and down eight percent in September. Until 2016, incremental growth in new car sales was driven primarily by demand at the lower spectrum of the market, those entry-segment compact cars priced $15,000 or below. But for the current year the downward trend is universally affecting the sale of compact cars and other inexpensive models. However, slower sales performance of new vehicles in 2016 is not a cause for concern, according to the head of the Association of Automobile Importers, Antoine Boukather.

Boukather says the slowdown in new vehicle sales, after acknowledging the political void, has been largely due to poor confidence of Lebanese consumers, some of whom may not have the income to buy new vehicles and maintain them, putting on hold their appetite for bigger purchases. Consumers with the financial means, Boukather told Executive, simply do not want to spend their money, preferring to wait for a president to be elected and a new government to be installed.

Despite a stagnant economy, new car sales grew incrementally from 2012 to 2015 largely because of attractive financing options. Low interest car loans, Boukather suggests, encouraged vehicle owners to scrap their old clunker for new, cheap compact cars. For the last couple years, as much as 90 percent of all car sales fall in the price segment of $15,000 and below, Boukather told Executive.

The decline in sales in 2016 might reflect a market beginning to catch up to itself, where supply outstrips demand. That aside, the slower sales could also be attributed in part to a measure meant to save the industry from itself. A decision by the central bank meant to avert a collapse of the market required a 25 percent down payment when financing a vehicle purchase. Boukather argues that sales of new vehicles this year might have been higher without the downpayment requirement, but without the more stringent lending requirements in place, some vehicle buyers would be in danger of defaulting on their loans were their incomes to be diminished or otherwise reduced to zero in such trying economic times. Requiring a 25 percent down payment makes sense because all cars depreciate some 20 to 25 percent in the first year, and so if banks were to repossess vehicles after one year because of an inability by the car buyer to make mortgage payments, banks would have a problem recouping their full investment. It could have become a vicious cycle tanking car sales, Boukather says, but instead only slowed them.

According to Boukather’s estimates, of the 1.54 million licensed cars in Lebanon 670,000 are more than 20 years old, and when counting cars that are over 15 years old, the number rises to 896,000 total. Aside from the environmental benefits of getting those older gas guzzlers off the road, replacing them with new vehicles represents a lucrative opportunity moving forward, just one that is not being planned for.

Auto dealers have to make significant investments in diagnostic equipment, tools and training to service late car models; hybrid or electric vehicles can be imported, but there is not much incentive to do so. Autonomous driving is yet a dream in Lebanon, Boukather says, the technology of which is seemingly difficult to adapt to Lebanon’s roadways.

Because sales are not very robust anyway (only 40,000 new vehicles sold last year) it does not make business sense to plan long-term, and the economic cycles simply do not seem to apply. The normal cycles of replacing the lifecycles of older vehicles – meaning the estimate that 60 percent of all cars are older than 15 years and 30 percent of all cars are older than 20 years – in which cars are renewed is disrupted. The disruption is partly happening because there is no enforcement of technical standards via traffic laws and mechanic inspections (Boukather says some 30 percent of registered vehicles forego government-mandated inspections).

An automobile importer operating in any larger market with any planning would have a five year plan of how many vehicles and of what type they’d target for sale. Instead, Lebanon’s automobile importers operate in a sort of gray zone where economic planning does not occur because predictions when cars of a certain type will be replaced cannot be accurately made.

vehicle registrations 2016

Jeremy Arbid

Jeremy is Executive's former economics and policy editor.