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Industry – Diamonds from the rough

In troubled times, Lebanon must find a way to let businesses shine

by Executive Staff

Lebanon is a country of great diversity, which has proved to be its greatest weakness and most powerful asset. Seemingly, Lebanon’s industry reflects this permanent contradiction.

Lebanon’s exports are a good indicator for the condition of its industry. According to Fadi Abboud, president of the Lebanese Industrialists Association, “electrical products contribute to a large chunk of our exports accounting for as much as $500 to $600 million. Food items come in second, while jewelry (including scrap metal) and finished products are faring quite well.” On average, jewelry figures exceed official ones as many Lebanese artisans export their precious works without declaring them to customs.
Mazen Soueid, Head Economist at Banque de la Mediterranée, underlined that manufacturing only represents about 6% of the country’s GDP. He identifies jewelry to be among the best performing segments, which interestingly enough is partly exported to Switzerland, whether under the form of scrap metal or finished products. Foodstuffs come in second, followed by machinery and chemicals in third place. “The worst performers in terms of exports are the plastic and optical instruments industries. However, it is quite interesting to note that the export value of works of art has doubled last year,” he said.
When highlighting profitable sectors economists seem to agree. Marwan Mkhael, head of research at BLOM Bank, believes that the Lebanese players should focus on those industries that are flourishing and try to understand the reasons that contribute to their growth. “Lebanon has to focus on industry segments in which it has a competitive advantage, whether in the form of know-how, or high added value. One of such examples is the agro- industry, which presents very interesting opportunities for Lebanon as our country has the right products, the proper machinery and the know-how, to which can be added excellent marketing skills,” he said.
Products can be easily exported to Europe, where items such as Conserva Chtaura (a local Lebanese brand of canned food) or high-end Patchi chocolates can be easily stocked on shelves in countries like France, Italy or England.
“Lebanon can’t compete when it comes to the production of mass items, and can only succeed with high value added product categories,” Mkhael underscored. Such products require skilled workmanship and belong to sectors such as IT, pharmaceuticals, design, fashion, any industry backed by R&D.
Abboud also said a number of industries are protected by either high custom duties or import bans — such as mineral water, cement and electrical cables — and have thus thrived inside the country. “This indicates that local industries should be protected by tariffs when they have an economic sense,” he said.

An uneven playing field
In Lebanon, as in the rest of the world, energy intensive industries are facing difficult times. Inflationary trends fueled by oil prices reaching towering heights have put a toll on energy intensive production. Many of Lebanon’s trading partners are benefiting from subsidized energy bills, mostly in oil producing countries, causing regional inequality when it comes to energy costs. “This situation creates unfair competition that contradicts the principles underlying agreements such as GAFTA or the WTO,” Abboud said. One of the new local victims of the rise in fuel costs is Uniceramic — a ceramic wall and floor tile manufacturer — whose energy costs jumped to 25 times those of Egypt, rendering the company unable to compete and forcing its closure.
Abboud envisions four possible solutions to solve the energy problem, and alleviate pressure on the Lebanese industry sector.
The first solution resides in industrialists lobbying for cutting energy subsidies in oil producing countries — an issue that cannot be realistically enforced. The second solution entails imposing additional tariffs on energy intensive goods imported. The third option is based on the creation of a fund financed by oil producing Arab countries that would subsidize industries in non-oil producing nations such as Lebanon, a proposal also suggested by Indevco’s CEO Neemat Frem. Finally, Abboud argues that in the event that the Lebanese government comes to the conclusion that energy intensive industries cannot be competitive in our current environment, it should provide players with a viable exit strategy.
In Frem’s words, “The problem of energy in Lebanon has taken the dimension of a national disaster. After all, the country is much more vulnerable to fluctuations in gas prices than other neighboring countries boasting significant oil reserves.” Indevco currently produces about 12 MW to cover part of the electricity needs of its local factories, and is thus directly affected by spikes in international oil prices.
Soueid underlined how the difficulty faced by Lebanon’s energy intensive industries is partly due to their inability to transfer cost increases — resulting from rising fuel prices — onto the final consumer.
“Lebanon has been historically considered as the Switzerland of the Middle East; maybe it is time to take this expression seriously by reproducing the Swiss model and concentrating on high-end items,” Mkhael suggested. Industries that are currently performing well belong in various fields — jewelry, fashion, or high end food items. “In this particular segment we can replicate the example of Thailand that has been successfully selling Thai microwavable food on international markets. We could easily export Lebanese food all over the region and build on the popularity of our local cuisine,” said Soueid.
The economist also explained that the IT sector, though small and somewhat fragmented, definitely holds promising opportunities for the future. According to Soueid, a project to create an IT village was under planning before it was recently abandoned.
Industrialists, on the other hand, do not share the economists’ Manichean view of Lebanon’s economy. Many believe the contrary: that growth in Lebanon’s industrial sector can only be built on a real twinning of the traditional as well as state-of-the- art niche industries. “Lebanon’s industry needs to be rebuilt on a dual approach, which preserves its existing traditional industries and develops new innovative ones, focusing on high end products” said Frem.

Economies past and present
Abboud maintains that Lebanon’s traditional industries are the backbone to the Lebanese economy. “Lebanon already does not recycle its paper or metal. Can you imagine if we have to cover all our needs in plastic bags, cups and other items by importing such items? Lebanon’s industry sector can’t be only built on niche markets,” he said, also pointing out that a balanced approach would also allow the absorption of the additional 50,000 job seekers that come on the market every year.
Frem argued that, “One has to keep in mind that any business still operating in Lebanon’s complex environment can be viable on the long term. After all, it has survived in spite of extreme and adverse conditions! ”
What is the role of the state in shaping the industrial sector and the economy? Regarding the agro-industry, Lebanon definitely needs to become more self-sufficient in terms food requirements, while also trying to cater to the newly rich who are more health-conscious and look for better, fresh produce. According to Soueid, the most urgent task faced by the government is devising a successful national strategy for reducing the deficit, while simultaneously developing industry segments that are profitable. He emphasized the importance of a clear national strategy that will effectively plan for emergency food needs. Other measures that should also be undertaken by the government include the reduction of debt levels, which will
allow interest rates to fall and promote private sector lending. As Soueid asserted, “When one has the opportunity to place [their] money in treasury bills and obtain a comfortable return on investment, one will not be motivated to open a plant or a business!”
Another essential reform identified by the economists is that of the power sector. In 2008, it will cost the Lebanese government about $1.5 billion. This situation leads to inefficiencies in the industrial sector, where most companies end up settling two different power bills instead of one, in order to cover both their generator and EDL costs. “It seems to me that the industry has been abandoned by the government as it remains, after all, one of the rare sectors in Lebanon not to be protected,” said Abboud.
Frem agrees that the political instability hinders the government’s efforts. In addition, he does not think that the various governments that came to power over the years ever “realized the industry’s essential role, one that can create powerful synergies with other sectors such as services or tourism. A salad sold in one of the capital’s many restaurants made with vegetables produced locally will have a multiplier effect that eventually reflects on various segments of the economy.”
Mohamad Choucair, CEO of Patchi, deems that former industry minister Pierre Gemayel had put in place a plan for shaping Lebanese industry, which was never implemented because he was assassinated. However, he hopes that it “will be eventually implemented by the new minister in charge of the sector.”

The way forward
Another problem plaguing the Lebanese economy, according to Mkhael, is that some businesses have not been able to adapt to changes and blame others for their failings. The fact that many businesses in Lebanon remain family owned further hinders the evolution of the industry while a modernization of the sector would attract investment as well as allowing a better application of economies of scale.
According to Frem, “The future of Lebanon’s industry lies in businesses requiring multiple skills such as IT industries, video games development or movie production or any business which is built on system integration.” In his view, Lebanon’s image, its brand, can also be efficiently put to use in a region with a trillion dollar economy.
Another opportunity lies in more exports to the Euro zone, further pushing Lebanon to look outwards, instead of inwards.
But in the end, quality is the sector cornerstone. “I believe that our company has been extremely successful because of its minute attention to quality. This, in conjunction with an original concept and good branding, has allowed us to succeed internationally,” Choucair said. Frem pointed out, however, that before being able to turn the country’s individual corporate success stories into a collective success, there is a need to fix Lebanon’s political structural issues and to build the right system for governance and decision making processes that focus on real creation of value.


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