Every month the Automobile Importers Association of Lebanon (AIA) sends out its Registration Report, showing the year-to-date breakdown of new car sales per brand. Over the course of 2014, the attached president’s letter has ended with: “We hope that Lebanon soon finds peace, stability and prosperity.”
Such a repeated aspiration is indicative of what is missing in the country for the automotive sector to thrive. Not that car sales are in the gutter though, despite the lack of peace, stability and prosperity.
As of the end of October 2014, 34,002 new cars had been sold compared to 31,092 units in the same period in 2013, although the month’s sales were down 5.2 percent compared to September, and year-on-year sales of new and used models had dropped by 7 percent and 12 percent respectively, compared to 2012 and 2011.
Overall sales are projected to surpass 35,000 units, similar to previous years and over one-third above the figures from a decade ago. What is keeping sales buoyant are smaller cars priced at less than $15,000, which account for 90 percent of sales, according to the AIA.
[pullquote]To dealers, the market in 2014 was not overly different compared to previous years, with the country experiencing the same struggles[/pullquote]
However, cars in the smaller segment range have lower profit margins for dealers, and sales of medium to larger models are being hit by lower purchasing power and weak consumer confidence; those that can spend are sitting on their wallets, awaiting some good news before parting with $30,000 plus for a new set of wheels. As Michel Trad, general manager of Saad & Trad, dealer of Fiat, Jaguar, Bentley, Lamborghini and Abarth, puts it: “People may buy a $20,000 watch instead of a car as it would be easier to move [it out of the country if the security situation deteriorates].”
That said, to dealers, the market in 2014 was not overly different compared to previous years, with the country experiencing the same struggles, albeit this year the political-security situation was worse than before. “I’d say it’s been a couple of years that we’ve been facing the same challenges, and this year with the escalation in the [political] situation, it doesn’t allow you to have a clear plan, to set your forecast and targets,” says Farid Homsi, General Manager of IMPEX, distributor for Chevrolet, Cadillac and Isuzu. “Small cars are still the best sellers, and that is what’s allowing the industry to have some small portion of increases.”
Across the board, dealerships have had to market heavily to draw customers in, offering zero percent interest, five year warranties and even the chance to win trips abroad. “It was the automotive year for consumers. They were getting the best deals since all dealers lowered their prices and were fighting a price war,” says Rachid Rasamny, general manager at Century Motor Company, distributor of Hyundai and Genesis. “At one point there were so many offers we were close to doing a campaign joking about free giveaways, but decided against it.”
Such deals have kept sales moving, and are what have driven people away from the used car market in favor of new cars instead. “The overall sector trend is continuing compared to 2013. People are still shifting to the new from the old car market, and all distributors are being aggressive in offering services, warranties and good financing. This has driven sales,” says Cesar Aoun, general manager of Mercedes at T. Gargour & Fils, which also sells Smart, Jeep, and Chrysler.
However, to some, low prices and easy bank financing have artificially stimulated sales over the past few years, masking the underlying malaise in the economy and the fact that the worst may be yet to come. “Everyone is switching to survival mode, which is to only spend on what is a necessity,” says Marwan Naffi, general manager at Gabriel Abou Adal & Partners, distributor of Volvo. “We thought 2013 was a difficult year, but 2014 proved to be even more difficult, so we don’t want to think too long term, as when you think you’ve seen the worst, there is often worse to come.”
[pullquote]The BDL circular certainly came out of left field for dealerships, who have generally opposed the measure and believe it will lead to a drop in sales[/pullquote]
Reining in lending
What may be worse for the sector’s health is not the political situation, the lack of a president, the neighboring Syrian conflict, or the threat of the Islamic State. While all of the aforementioned are major concerns that have a deleterious effect on car sales, what is slated to have the biggest impact — unless things get really out of hand — is a new Banque du Liban (BDL) circular, number 369, inked in August 2014, that requires down payments for loans to be a minimum of 25 percent.
“In 2015 I don’t think the market will grow. It will at best be stable. Why? BDL wants to control consumer credit. Until October you could have 85 percent, sometimes even 100 percent credit,” says Pierre Heneine, financial manager at Bassoul-Heneine, dealer for BMW, Mini, Renault, Dacia and Rolls Royce.
The BDL circular certainly came out of left field for dealerships, who have generally opposed the measure and believe it will lead to a drop in sales, particularly for cheaper cars, with the president of the AIA telling Executive in the November edition that sales could drop by up to 30 percent. The move is considered a preventative measure, prompted by what a Bank Byblos reported noted was “a relatively high ratio of household debt to disposable personal income,” and that according to the BDL, “An average of 50 percent of household income is going towards debt servicing.”
“I am surprised at this resolution, as even during the Civil War, BDL was never so cautious about lending. I see it as a preventative action, because when meeting with banks, the rate of default is almost zero. In our case, at Mercedes, we used to [require] a minimum 25 percent down payment, so for us we don’t see a negative. But for smaller cars, maybe [it is],” says Aoun.
With small cars dominating overall sales, it is the sales of volume cars that are slated to be the most hit. This is expected to be a particular concern for Korean brands Kia and Hyundai, currently number one and two respectively, with 42 percent of the market. The circular will certainly take out one of the three advantages of buying a new car that enabled people to go beyond their budget.
“In our marketing we were saying to customers they can buy a premium car and pay approximately the same price as a volume car because of three things: low interest, good after-sales and thirdly, fuel consumption,” says Anthony Boukather, CEO of A.N. Boukather Group Holding, dealer for Mazda.
Such an approach led to a 25 percent spike in sales at Mazda as of the end of September. Nonetheless, Boukather thinks that despite low interest being taken out of the equation, the BDL diktat will have less impact on the premium sector. “It is going to impact volume but not the premium brands. Banks will become pickier, and only lend to those that can afford it,” he says. Other dealers think the requirement will have a broader impact as there is also an economic correlation between income and luxury brands. For instance, consumers buying the cheaper models of a luxury brand often require financing, and will consequently have to down-shift to a more affordable vehicle instead. Furthermore, more affluent consumers may hold off buying to better balance cash flow.
“The BDL circular can have a negative impact on the upper luxury segment, as there are buyers that don’t have a trade-in, yet want to buy a third or a fourth car for their household, so an extra say 5 percent on payments can have a nasty impact. While they can afford it, they don’t necessarily want to pay a lot of cash upfront in the current situation,” says Homsi.
Time will tell the impact of the BDL circular on all levels of the market, as ultra luxury cars, at above $100,000, did remarkably well in 2014, albeit representing only 3.5 percent of the overall sector with two Rolls-Royce, two Lamborghinis, three Ferraris and 10 Bentleys sold, while in the luxury segment, 54 Maserati, 411 Land Rover, 243 Porsche, 678 Mercedes, 461 BMW, 96 Cadillac and 607 Audi cars were sold by the end of October. Indeed, in many ways the sector has muddled through the year despite the challenges, and will continue to do so, driven by the lack of public transport.
“I am not surprised the market has done so well, as the Lebanese have always found solutions to difficult conditions. On the other side, don’t forget that we need cars because there’s no public transportation, so a car is not a luxury but a need,” says Nabil Bazerji, managing director of G.A Bazerji & Sons, distributor of Suzuki, Lancia and Maserati.
Despite such a constrained market, dealerships continued to invest in 2014. A new Volvo showroom was launched in September, and in October, Bassoul-Heneine opened a new Renault showroom, both pioneer facilities for the Middle East. However, one dealership intending to expand by introducing a new Chinese brand to the market recently changed its mind, despite signing a memorandum of understanding, due to national and regional instability. With it taking at least two years for a return on investment on the showroom, inventory, marketing costs and the like, concentrating on core business seems a prudent move.
Dealerships are also continuing to market heavily, evidenced by the plethora of billboard and TV adverts for cars. “In general the industry is struggling. So to keep on doing the same volume as before, you have to invest even though you don’t want to spend too many marketing dollars as you’re not doing well on profits. But you still have to fight for market share and remain present in the market, otherwise consumers forget about you; it is harder to restart if you are out [of the public eye] for some time,” says Homsi.
The BDL circular and the constrained economic environment is making for even more competition among dealers. There is also growing pressure to offer a wide segment of vehicles that cater to all demands, with Lebanon reflecting the global move towards smaller vehicles in the A, B and C segments, instead of larger cars. What has really heated up the competition is the Japanese brands which have become more cost competitive due to the devaluation of the yen.
“The Japanese brands are recapturing some market share, [and] reducing the gap with the Koreans with new models and better prices, but the Koreans are quite competitive and have new models, which helps them,” says Homsi.
[pullquote]”People are looking at cars differently, as people are now talking more about safety and fuel consumption”[/pullquote]
In the past, the high value of the yen had been advantageous for the Korean brands and gave the nascent Chinese brands a boost. In 2014, the Korean brands have felt the competition — with their market share down 4 percent compared to 2013 — while Chinese brands have not continued to make the inroads they were making in 2013, when sales jumped by 60 percent on 2012. In 2014 they grew by less than 5 percent.
“Basically the Koreans are being downgraded to the A and B segments, with low margins and a lot of competition, whereas the C segment and upwards have healthy margins, and that is the shift in the market going forward,” says Fayez Rasamny, CEO of Rymco, dealer of Nissan and Infiniti.
While dealers are clearly keen to push C segment and above sales, outside of the cheaper brands, it is higher end small models that are also doing well, such as the Mini and the Fiat 500.
“People are looking at cars differently, as people are now talking more about safety and fuel consumption. So for example, the top of the range smaller models are selling well and are a way to differentiate from cheap smaller cars,” says Trad.
Given such market trends, dealerships are banking on strong offerings in the smaller sized segments to carry sales forward. “Suzuki only exists in the A, B and C segments. This is to our advantage, as our sales increased this year. And we are looking to double in 2015, because there is demand in the market for these segments and the yen depreciated,” says Bazerji.